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The strategy To lower the risk of investing in property.

The strategy To lower the risk of investing in property.

Do I need to do that? If you still believe property is a capital-growth game and the high growth of the past couple of decades will continue, perhaps not. But despite what the spruikers will tell you, capital growth has never been a sure thing. There are plenty of examples of property investors who have lost money and the uncertain economic outlook has many observers predicting, at best, weak capital growth for at least the medium term.

The principal of Smart Property Adviser, Kevin Lee, is one of the growing band of people who believe the old strategy of gearing up to your eyeballs and investing for growth is no longer the best way to go. He says he has seen many investors borrow too much, hang on for three to five years, then sell at a loss.

All they have really succeeded in doing is fund the lifestyle of their tenants thanks to the low yields available on many types of residential property.

So, what's the alternative? Lee says the focus on capital growth has led property investors to chase the best properties they think they can afford. But a $500,000 unit in a good suburb might attract about $450 a week in rent - a gross yield of about 4.6 per cent, which is soon whittled down by costs such as body corporate fees and insurance. Lee says buyers are better borrowing less to buy properties that might not have the same growth potential but 80 per cent of the population can afford to rent.

He says two-bedroom units in lower socio-economic areas can be found for less than $200,000 but can be rented for $280 to $290 a week - a gross yield of more than 7 per cent.

"You can get a three-year fixed rate on your loan at about 6.34 per cent, so you're neutrally geared," he says. "You can benefit by using the rent to cover some of your costs and make principal and interest repayments to build equity in the property. It's what owner-occupiers have been doing for years."

But surely I can still lose money in these areas. As with any other investment, there are no guarantees. But because these properties are affordable, Lee believes they are less likely to go through the big price swings seen at the upper end of the market.

And because you're not relying on capital growth to justify your investment, you should be better able to weather any market downturn.

He says this approach also allows you to become a more substantial property investor - building a portfolio of properties over time to give you an income, rather than putting all your eggs in one basket with a more expensive property and chasing capital growth.

As rents increase over time, he says you can use the extra money to pay off your mortgage so you end up with unencumbered properties that can provide an income in retirement.

Although all geared investors feel the pain if interest rates rise (which they inevitably do at some stage of the borrowing cycle), if you started with a neutrally geared strategy (or close to it), you should be better able to afford those increased loan repayments.

Lee says that although capital growth might be lower in the good times with this type of strategy, it is lower risk. He says investors should also be wary of assuming capital growth will simply go back to where it was. Australian property markets don't have many of the problems that led to the US market collapse but we are still influenced by the global economic environment.

He says the ageing of the baby boomers has implications for parts of the market, as they move out of their big suburban houses, leaving a shortage of buyers for those types of properties.


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