Income investing: How to make your investments work for you

HENRY ELGOOD
27 May 2021
Would you like to build an investment portfolio that generates income? Whether you’re a young investor just starting out or a retiree, income investing is the practice of building up a diverse collection of investments that can help fund your lifestyle.

Income investing can include real estate, stocks, bonds and unit trust funds. Here’s how it works and what to consider before investing for income.

Property

What are the benefits of investing in property?

Property investment has been a reliable wealth and income creator for many generations of Australians, so it’s no surprise we love talking about it so much. In fact, research by HSBC Bank found we spend more hours preoccupied with the property market than we do at the gym or speaking to our parents.

Two million Australians who own rental properties rely on the regular incomes they can generate. And while cryptocurrencies might hog the investing headlines these days, there’s something really reassuring about a tangible nest egg like property that you can see and touch.

Thanks to the current low borrowing rates, recent economic stimulus measures by governments and a shortage of rental accommodation, it’s no wonder interest in property investment remains high.

What to consider when investing in property

However, buying an investment property can be extremely complex as it involves weighing up factors such as rates of return, capital growth projections, maintenance and borrowing costs, negative gearing and other tax considerations.

It can also be a costly exercise up front thanks to fees, duties and charges, and as any landlord will tell you, managing a rental property can be time-consuming.

Another important consideration is investing in a single property means all your eggs are in one basket, increasing your investment risk. The good news is there are ways to participate in the property market without directly buying one that can make property investment quicker, cheaper and easier.


Compare Home Loans with Canstar

Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically).Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below displays some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by comparison rate (lowest to highest), then by provider name (alphabetically).Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loans comparison selector to view a wider range of home loan products. Canstar may earn a fee for referrals.

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.


 

Exchange-traded funds (ETFs)

What are the benefits of investing in ETFs?

Exchange-traded funds are a low-cost, easy way to diversify your portfolio. There are more than 200 listed on the ASX that typically track the prices of assets such as shares, bonds, commodities and precious metals like gold.

Income investors can benefit from ETFs that may be designed to provide regular income streams. Some may track bonds and other fixed-income products, while others offer investors exposure to dividend-paying shares.

Owning bonds or bond ETFs can be thought of as extending a loan to the bond issuer, which is usually a company or a government, for an agreed period. They pay interest at regular intervals.

ETFs targeting shares with high dividends provide their investors with regular payments which are their share of company profits.

What to consider before investing in ETFs?

There are many apps available that make buying and selling ETFs easy. But don’t be tempted to treat it as a game, as there are real risks of losing some or all of your investment.

ETFs can enable you to reduce your risk by adding diversification (variety) into your investments if used well, but be careful not to over-invest in a single ETF or ETF type, for example ETFs based only on tech stocks.

Bonds are generally considered more defensive than shares, which means they are safer although they may deliver lower returns. But no ETF can guarantee it will make regular payouts or won’t decrease in value from time to time.

As with any investment decision, it pays to do your homework. Read the fine print on the ETF issuer’s website and their product disclosure statement.

Managed funds

What are the benefits of investing in managed funds?

The aim of a managed fund is to deliver a competitive income for their investors over long periods.
Managed funds give investors easy access to a wide range of investment opportunities and asset types. They pool your money together with that of other investors and entrust it to professional fund managers.

Some managed funds invest in an assortment of assets like shares and bonds, while others are more specialised. For example property trusts are a type of managed fund that provide investors with an opportunity to invest in types of properties that may not necessarily be available to individuals. Many property trusts aim to provide investors with regular income.

Mortgage trusts are another form of a property-based managed fund. When you invest in a mortgage trust, your money is usually pooled with the money contributed by other investors. This pool of funds is then used to provide loans to borrowers, with the loan secured by a registered first mortgages against property provided by the borrower.

Mortgage trusts aim to provide regular income without the same level of exposure to volatility that equities can entail. Mortgage trusts are medium-term investments according to Moneysmart, which means investors’ funds aren’t available at call, but neither are they locked up for a set term, with most trusts permitting partial or full withdrawals after a specified notice period.


Compare Exchange Traded Funds (ETFs) with Canstar

The table below displays some of the International Broad Based ETFs available on Canstar’s database with the highest three-year returns (sorted highest to lowest by three-year returns and then alphabetically by provider name). Use Canstar’s ETFs comparison selector to view a wider range of products. Canstar may earn a fee for referrals.


What to consider when investing in managed funds?

Most managed funds are not as easy to buy and sell as ETFs. To invest you must apply to join the fund and many place restrictions on when you can withdraw your money.

It’s important for investors to be aware that all investments carry risk, including the risk of losing part or all of their capital or diminishing returns. Managed funds don’t offer the same level of capital security as some traditional deposit options, but the higher risk profile is reflected in the competitive returns offered by many managed funds.

Cover image source: Andrey_Popov/Shutterstock.com


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This content was reviewed by Content Producer Marissa Hayden as part of our fact-checking process.


Henry leverages his experience in the financial services sector, and separately as a company director of several private companies, to oversee the governance, compliance and risk framework implemented across the Trilogy group.

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