How to gain the benefits of investing in property without the hassle of an investment property.
If the Great Australian Dream is to buy your own home, then surely second place would go to owning an investment property. You buy a house or unit, or multiple houses and units, and rent them out until you’re ready to retire and move in yourself. Or sell the property to self-fund your retirement. A nice little nest egg to secure your future.
But what happens if you don’t have the funds available to buy an investment property? Or do you like the idea of investing in property but don’t really want the decades-long hassles that come along with having tenants? And with Australian house prices soaring, buying an investment property may simply now be out of your financial reach.
What if we told you there’s another way? A way to invest in Australian property without having to actually buy a property. There is a way, and it’s called pooled mortgage funds. It might just be the answer you’re looking for.
Investing in Australian property
Even the most casual observer can see what’s happening to the Australian housing market as we move into the post-pandemic period.
Interest rates remain low and demand from buyers is high. The problem with soaring property prices is more and more people are being locked out of the property market. This means that many people who have been saving the deposit for an investment property are finding that housing prices are rising faster than their savings. It also means that they have a large amount of cash sitting in their bank accounts earning next to nothing in interest.
Challenges when buying an investment property
Even if you have the capital available, buying an investment property is a big commitment and requires a considerable amount of research and time to ensure you feel comfortable with your investment choices.
Unless you’re an experienced investor, this takes a bit more than just browsing the ‘for sale’ pages on your preferred real estate website. Some of the challenges to consider if you opt for the traditional path of buying an investment property include:
- Needing to be really clear about your goals. Are you looking to grow wealth, create a retirement nest egg, make passive income etc.
- Having the time and space to do a lot of research into different property markets.
- Understanding market vacancy rates in the area you are looking to buy. As empty properties can cause cash flow challenges for property investors.
- Ensuring your credit history is in good shape to get finance approval. As well as making sure you get finance that is within your budget.
- Being aware of the hidden costs in owning a property. These can include costs such as property maintenance, repair costs, insurance and management fees.
- Recognising good rental yields.
Investing in property doesn’t have to be this difficult
It really is a lot of work becoming a property investor. It may be worth it but it’s one reason why many people stumble at the first hurdle or, if they do buy a property, that’s as far as they ever go. Just the one investment property that fails to live up to their financial expectations.
But what if there was an option allowing you to reap all the benefits of investing in the Australian property market, such as wealth creation and passive income, without all the work?
Investing in a pooled mortgage fund can give you all the good stuff you want and expect from investing in property, without the hassle and risk.
What’s a pooled mortgage fund?
A pooled mortgage fund is managed by a fund manager that pools investors’ funds and that money is loaned out to borrowers as registered mortgages. The loans are secured by a physical property and the fund manager looks after all the nitty-gritty.
Your fund manager will:
- source the borrowers
- conduct due diligence
- manage the loan, ensuring the loan and interest is paid back on time.
Once your investment is made, you’re paid interest as regular distributions and at the moment, most pooled mortgage funds are paying between five and ten percent per annum.
CoreLogic recently wrote about increased Australian rental yields due to the shortage of homes to rent but, even then, they don’t compare to the yield you can typically expect from a pooled mortgage fund.
Benefits of investing in a pooled mortgage fund
Investing in property
You’re still investing in the Australian property market but without all the hassle and ongoing costs. Your investment is secured against real estate and often diversified across an entire portfolio of loans.
Shorter investment period
Rather than take out a 30-year loan for an investment property a pooled mortgage fund allows investors to invest for a period of time that suits them and if they require their capital then they can request a redemption.
Smaller capital requirements
You can invest in a pooled mortgage fund for as little as $10,000. No need to save up $100,000+ to put down a deposit. This makes this kind of investing accessible to many more people.
Diversify your investment portfolio
Ever heard horror stories about someone who has purchased an investment property that’s turned out to be a complete dud and ends up costing more than it makes? Unfortunately, it’s all too common. Meanwhile, If you invest in a pooled mortgage fund you are invested across a range of mortgages. This gives you not just a diversified portfolio, it also mitigates the risk. Even if one borrower defaults, hopefully, all the other borrowers are making repayments and you’re still receiving a return. The old adage of ‘don’t put all your eggs in one basket holds true.
Loan-to- value ratio (LVR)
To protect investors and borrowers, your fund manager will apply a maximum LVR of 75 percent. What this means is the borrower can only borrow up to a maximum of 75 percent of the value of the security property. If the borrower defaults and the fund manager has to sell the property to recuperate the loan then there’s a better chance of getting back everything owed if the LVR is lower. With an LVR of 75%, the property value would have to drop by 25% before a loss is incurred.
While investing in the Australian property market isn’t the easiest thing to do right now, savvy investors are finding other ways to reach their investment goals without the huge up-front costs and hassles of investing in property the traditional way.
If you’re interested in learning more about investing in APG’s pooled mortgage fund, please contact [email protected]
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