Can’t afford a house? There’s another way to get into the property market

With another interest rate rise coming our way, the spiky topic of Australia’s property market has been on my mind a lot this week, especially how to get your foot in the door when home ownership might not be in your immediate future.

For those with mortgages, the Reserve Bank’s announcement on Tuesday that it would lift rates by 0.25 of a percentage point was an unwelcome one. On an average mortgage of $600,000, that rise will translate to about $100 extra a month.

That might not sound like much in the grand scheme of things, but when petrol prices are jumping, health insurance premiums are about to go up and other cost-of-living pressures remain, well … you know the rest.

But what if you’re among the one-third of Australians who don’t own a home? As tempting as it might be to assume the news has no impact, I can tell you from years of experience that people who aren’t yet on the property ladder spend just as much time – if not more – thinking about it.

There’s already a mountain of evidence to show that it’s so much harder for working-age Australians to buy a house today than it was 50 years ago. Back in 1976, properties in Melbourne and Sydney cost about three or four times an annual salary.

Today, that’s ballooned out to about 13 times. For wage growth to have kept up with property prices, the average salary today would have to be $190,000.

REITs won’t give you the keys to your own front door, but it is a different way of getting into the property market.

What’s interesting to me is that even though so much has changed since then, our relationship to property is still overwhelmingly the same as it was in 1976, even though there are other ways to invest in the market without taking on a giant mortgage. Enter: REITs.

Real estate investment trusts – or REITs as they’re more commonly known – are in many ways a lot like shares. But because REITs are a trust, you buy units instead of shares.

At a very basic level, the difference between the two is that where shares are issued by a company to essentially allow you to own a tiny piece of them and get a portion of their profit and growth via dividends, REITs make you a beneficiary of the trust you’ve invested with. This means you hold a stake in the trust’s assets and are entitled to a portion of the income that the trust generates – which is known as a distribution.

The trusts own and manage major commercial properties like office buildings, shopping centres, warehouses, storage facilities, supermarket buildings and large-scale residential house and land developments, and distributions are generally made from the rent charged to whoever is in the properties, like Coles or Woolworths, for example. And because of their structure, REITs are built to generate income for trustees and are required to pay most of what they earn to investors.

Also, just like shares, there are domestic and international REITs you can invest in, and they can be accessed via the Australian stock exchange, where they trade in the same way as shares.

This makes it no more complex for you as a buyer, but like all investments, it’s still important to research what you’re buying into, and any potential risks associated before you make any final decisions.

While many people choose to directly buy into specific REITs, there are also a number of REIT ETFs (exchange-traded funds) that offer you a basket of companies instead of just one.

A simple way to think about ETFs versus shares or units is like this: where stocks in a single company or units in a single REIT are like a tube of toothpaste, an ETF is like your whole toiletries bag carrying your toothbrush, deodorant, moisturiser and hairbands, as well as that tube of toothpaste.

ETFs are an excellent way to have diversification in your investment portfolio because you’re hedging your bets. Where investing in a singular REIT buys you the whole pie of that trust, an REIT ETF buys you a slice of that pie, as well as slices from a few other different pies. No one option is necessarily better than the other, it’s all about what’s best for you and what you want to achieve.

Like all investments, there are pros and cons to REITs. The first and most obvious pro is that the price point of getting your foot in the door is incredibly accessible. With median house prices tipped to hit $1.17 million in Melbourne and $1.92 in Sydney this year, you would need a deposit of between $234,000 and $384,000 to sign on the dotted line and take ownership.

With REITs, on the other hand, you can access the property market with as little as $10, and you don’t need that hefty deposit or an even heftier mortgage. There’s also no stamp duty, no building inspections, no moving costs, no renovations required, no weekends painting or gardening or chasing plumbing quotes.

And just like a house or apartment you might buy and live in, REITs have the same potential for capital growth because over time, the value of properties within an REIT can rise, which means the unit price on the sharemarket also goes up. So an REIT you bought for $10 a decade ago might be worth $15 today.

Also, just like buying a residential property, REITs take on a lot of debt because they buy and run properties. So when interest rates fall and money is cheaper, borrowing gets cheaper and that boosts their profits.

But when interest rates go up like they did this week, and the cash rate goes from 3.85 to 4.1 per cent, the difference in the trust’s returns will be a lot more than $100 a month because they’re dealing in hundreds of millions, if not billions, of dollars’ worth of property. And that means your distributions will probably take a dive until things improve.

But one enormous positive difference is that unlike buying an apartment or house, REITs are much better for liquidity. If you wanted to offload an REIT, you would be able to sell them and access the money within a handful of days. But if you want to offload a property you own, you will generally be waiting at least three months before you see any cash hit your account.

At the end of the day, though, the most important thing when it comes to investing is to understand what you’re putting your money towards and any potential risks associated.

No, REITs won’t give you the keys to your own front door, but by considering options from a new perspective to how we did 50 years ago, it is a different way of getting into the property market.

Victoria Devine is an award-winning retired financial adviser, a bestselling author and host of Australia’s No.1 finance podcast, She’s on the Money. She is also founder and director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.

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