NEWS

Your Money & You

August 2011

Overseas property investing

As ADF members there’s a good chance that you’ve done your fair share of overseas travel. When abroad there are different rules and laws you need to abide by no matter what you’re doing, including investing.

US property market
ASIC has recently received a number of complaints about promoters who are encouraging Australians to invest in the United States property market.

The distressed property market in the United States means you can buy a house much more cheaply than in Australia. However investing in overseas property is a lot more risky than investing in property in Australia.  It’s much more difficult to make sure the investment suits your needs if you don’t have local knowledge and you can’t regularly inspect the property.

We’ve heard some horror stories about people who have lost a lot of money in the US property market.  Investors are sold properties that need extensive renovations and repairs, or that are in neighbourhoods which are prone to squatters and vandalism, making it almost impossible for owners to find reliable tenants or property managers.

While you might think investing in property in the US is a cheap way to enter the property market, it can actually end up being very expensive.  You must also factor in Australian tax laws, local property taxes, insurance, management costs, and ongoing repairs. There are lots of hidden costs that the promoter may not tell you about at first.

If you’ve been ‘invited’ to invest in a supposedly ‘cheap’ overseas property, ask yourself why they need someone in Australia to invest. Why aren’t savvy locals investing? Chances are it’s a dud investment.

If it sounds too good to be true, it probably is.

Australian property market
Smart investing means making rational decisions based on what’s appropriate for you and your circumstances. Investing in the domestic property market might be an approach you are considering.

Buying a property to rent out is a popular form of investment. But before you enter the property market, check if this type of long-term investment would suit you.

Benefits of property investments
Property can be less volatile than shares or other investments and you can earn rental income as well as benefit from capital growth if your property increases in value over time.

If you take out a loan to purchase an investment property the interest on the loan is generally tax deductible. Though you should never invest in something purely because there is a tax benefit, it pays to know what tax rules apply to your investments before you jump in.

One of the big benefits of investing in property is that the physical property is something you can see and touch. You can add value by making physical improvements to the property.

Pitfalls with property investments
Take some time to work out exactly what it will cost you, because rental income does not usually cover your mortgage payments or other expenses so you may have to use your regular income to cover these costs. Also, a jump in interest rates will affect your return and decrease your disposable income. There are also very high entry and exit costs associated with property (e.g. agent, legal and conveyance fees).

There may be periods of time where you don’t have a tenant and will have to cover all costs yourself. Unlike some other investments where you can offload some of the investments, you can’t sell off a bedroom if you need to access some cash in a hurry.

If your property investment is your major investment then you may have little or no diversification. If the property market goes down so does your whole investment. For example if you invest in the North Sydney apartment market and own your home nearby, you will have all of your wealth concentrated in the residential property market. This is poor diversification and increases your risk.

Investments such as managed funds allow you to invest in both shares and properties across several markets which reduces market risk factors. Always consider putting your money into a range of investments.

For more information visit www.moneysmart.gov.au or email me your articles suggestions at ADFcolumn@asic.gov.au.

Greg Medcraft
Chairman
Australian Securities and Investments Commission

The Importance of Dividends

There are two types of investment returns – income and capital.

Some investments (such as cash at bank) only pay income whilst other investments only pay capital (for example, collectibles).

Most investments pay a mix of income and capital.  For example share investors will hopefully receive dividends (income) and also have an increasing share price (the capital return).

When a company declares a profit, the directors can either pay most of that out to shareholders as dividends or can elect to retain the profits and invest it in the business.

Some companies never paying dividends.  For example, Berkshire Hathaway, headed by Warren Buffet, has never paid a dividend.

Shareholder surveys generally show that most investors like dividends.  Some investors need the income.  Others don’t trust company directors to invest the companies profits.  These investors prefer to choose where to invest their money.

In relation to share investors most people fail to understand that dividends are very important.  Over the long term, about half the average return on Australian shares has come from dividends.

According to research by Perpetual Investments the average dividend paid by Australian companies has tracked the increase in economic growth (as measured by Gross Domestic Product).

Over short periods of time there can be big swings in dividends paid.  For example in the worst days of the Global Financial Crisis in late 2008 and early 2009 many companies cut their profits and dividends paid.  Share prices fell as a result.

Often dividends are quoted in pre-tax terms.  Australia’s tax system enhances these returns for local investors via franking credits.  It’s often claimed that franking credits provide a tax break.  This is incorrect.  The purpose of franking credits is to alter the tax paid on dividends to the investor’s actual tax rate.

Sometimes companies are able to distribute profits and franking credits via share buybacks in which part of the price paid to shareholders takes the form of a franking credit.  These share buybacks often offered for a lower price than the share price on the stock exchange.

Free Seminars anywhere in Australia

The ADF Consumer Council provides financial education at Initial Training, Force Preparation, Post Deployment, Leadership Training, During Career and Transition, many of which are components of ADF training programs. The Consumer Council is happy to provide expert speakers free of charge on a range of financial topics to any ADF unit in Australia.

For more information contact us via our website (www.adfconsumer.gov.au).