Property investment a safe bet

It's often asked why New Zealanders keep investing in residential property when the returns apparently aren't that good.

Tuesday, July 24th 2012, 12:00AM 1 Comment

by The Landlord

The conviction this week of two directors and the chief executive of failed finance company Capital + Merchant provides a good answer.

As we know, 7000 people placed close to $200 million of their hard-earned savings with this company.

Following its rather spectacular failure, they aren't going to get anything back.

Their only, belated, return is that they will see these men go to jail. That may give some comfort but it does nothing to help pay the bills.

One of the lessons of the global financial crisis has been the importance of understanding what happens with your money when you invest it.

As the corpse of the failed finance company sector is picked over we are learning that the most rotten ones, the ones where directors and managers end up in court and then jail, generally were doing things with investors' money contrary to what they were given it for.

Some of the other collapses were more systemic and a result of market conditions.

With companies like Capital + Merchant, investors were giving money to do one thing, but the company was doing something else with those funds.

This lesson about knowing what happens to your money doesn't just relate to finance companies. There are many other examples including "engineered" financial products like collateral debt obligations (CDOs). Very few people, including highly-qualified investment gurus, could understand how these contraptions worked.

Ultimately many of them didn't work. Investors lost their money.

This is where the simplicity of residential property investment shines through.

It's a cliche that investors can touch, feel and see their investments. Sure there may be unpleasant aspects like dealing with recalcitrant tenants and the like. But these are problems they can see, understand and fix.

When money is put into some of these other things, like finance companies on a fixed term, it can be difficult, or impossible, to get money out quickly.

The answer to my original question - why property? - is simple. Property investors aren't likely to lose all their investment buying a house. And for people invested in this sector at the moment the returns aren't too bad.