Unless you're rich or love risk, property's door is closed

Discussions about residential property often descend into a debate about values. Fans tell us that demand outstrips supply and prices will continue to rise. Detractors point to lofty valuations, a history of property crashes and experiences overseas.

For the record, I think property is overvalued and it's all down to mortgage volumes as to whether we have a long, slow return to reality or a fast, painful, ugly one. But before you even get to valuation, the question you should ask yourself is: do I have enough money to invest in property?

I'm not talking about buying your own home. That's mostly a consumption decision, and one we make for emotional, not financial, reasons. But it's a critical question when considering an investment property.

Let's say you're not the gambling type. You want some diversification, with your savings allocated across a range of asset classes and individual investments so you're not overly exposed to any one of them.

If you had $200,000 in super, it might be invested in cash, bonds, Australian and foreign shares, property and infrastructure. You might even have a small allocation to private equity, absolute return funds and market-neutral strategies (check your next statement if you don't know what these are).

Say you've also got $50,000 outside super and are looking at apartments in Sydney. Unfortunately, Sydney properties trade in $500,000-plus parcels, not $5000 lots. So, rather than spreading your $50,000 across a portfolio of properties, you have to take out a big mortgage and swing from the rafters.

If you've got $250,000 of net wealth and buy a $500,000 apartment, that's too much exposure to property and way too much exposure to a single investment. You've put yourself in the position where it doesn't matter what your shares, bonds and managed funds do; your financial future will be determined by the outcome on the property.

You might make 8 per cent a year on your super, but it will be quickly chewed up by transaction costs, interest payments and expenses if your property value goes nowhere. If property prices fall, you'll go backwards. Of course, if your property value goes up, you'll be a winner.

However, most of us don't have the stomach for the risk involved in laying it all on the line in a single investment. For now, unless you're rolling in millions, or a risk seeker, you can't afford to invest in property.

This article contains general investment advice only (under AFSL 282288).