3 Things You Need To Know Before Investing in Property

Co-authored by Rodney Walt and Kandy Wang.

As EG’s Private Wealth division continues to expand our offerings, we have had the pleasure to welcome a multitude of new investors – smart and savvy wholesale investors who recognise the value of property returns.

But with each introduction and subsequent conversation, we’ve begun to notice a pattern – experience in sophisticated investing does not always mean experience in property investing.

If it’s your first time investing in property, the first trick of the trade you need to know is that a dollar invested does not immediately equate to a dollar of value. You should expect that your first report on an investment might show the value of a unit is closer to 85c for example, instead of a dollar. There are three main reasons for this.

1. The Gearing of the Property and Establishment of the Fund

Generally speaking, if a property is geared at 50% debt and 50% equity, then in order to depict an accurate evaluation of your investment, you must account for the costs that have been incurred in establishing the property trust. These might include the stamp duty, legal fees, due diligence, debt origination fee and fund establishment costs. These costs have to be covered upfront from the equity, rather than the debt, and this causes the equity to be less than $1 per unit price on day one.

Some fund managers choose not to indicate this in their early investor reporting but that is, at best, a misrepresentation of the facts and, at worst, a demonstration that your fund manager does not have faith in your intelligence as a sophisticated investor.

Remember, this not so much a case of starting on the back foot as it is a sign that you’re investing with a transparent fund manager who can be trusted to keep you informed.

2. Location Matters

The location of the property will significantly impact the stamp duty it incurs and therefore, the initial impact of that upfront value fall.

For example, if you bought industrial properties with similar capitalisation rates in any number of Australian states – you could expect the stamp duty to range from 4.5%-5.95%. Taking into account this upfront cost alone, your initial dollar could be worth 95 cents on a Tasmanian property, or 92 cents on a property in the Northern Territory.

Rest assured, it is the responsibility of your fund manager to account for this in your expected return on investment.

3. Returns…

One key metric that investors need to pay close attention to when comparing real estate deals is the amount of leverage used in the capital structure. Consider how much debt is being used to finance the property and generate the returns. Simply put: more leverage means more risk. Leverage can amplify the magnitude of returns, but it also works in reverse.

Highly levered projects shouldn’t necessarily be altogether avoided; investors should ensure that they understand the amount of leverage used and are adequately compensated for the level of risk. A simple comparison of two deals may be to look at the ungeared returns.

EG’s PRISMS risk assessment was built to compare two deals, breaking down the base case IRR into risk points so you can reveal a true and accurate comparison.

At the end of the day, it comes down to this – if you have any questions about your property investment, the return it delivers or the way the process works, sponsor fees etc., ask your fund manager. If you’re not satisfied with their response, chances are you deserve a better one.

At EG, we’ll always make time for a call, a conversation or a quick email. We understand the value in personalised and hands on service at every stage. A dollar invested at EG, is also an investment in a relationship – and there are no hidden tricks or costs that should depreciate that in value.

*Disclaimer: This blog does not constitute financial advice. Any numbers provided are illustrative only, and readers should seek their own financial, accounting and tax advice to quantify numbers based on the specific terms and geographic location of each property deal.