Choosing the Best Investment Property
Investing in property can be an excellent strategy to build wealth. And in Australia, it’s such a major market. Right now there are over 2.2 million property investors in the country, with at least 71.5% of these individuals holding just one property.
Is property a good investment? Yes! Even with inflation impacting the housing market, the property industry still outperformed stocks when contributing to one’s wealth. Stats show that housing has brought higher returns over the past 30 years than stock market investments – rental income plus equity makes for an excellent option for long-term growth.
Deciding which investment property to buy? In this article, we’ll explore these factors to help you make an informed decision when choosing an investment property.
Which type of property investor are you?
When entering the investment property market, you first want to identify what type of strategy you aim for. Some investors prefer to have a steady flow of rental income, while some want to get hands-on with a renovation project:
- Landlords
Landlords are individuals or entities who purchase properties to rent them out to tenants. They are passive investors whose primary goal is to generate rental income and build long-term wealth through owning the property.
Landlords typically hold onto properties for an extended period, taking care of property management tasks such as tenant screening, maintenance, and rent collection. With reliable tenants and long-term occupancy arrangements, these property investors benefit from capital appreciation, tax offsets, and steady rental income.
- Flippers or renovators
Flippers or property developers/renovators buy properties to quickly renovate them to then sell for a profit. Flippers capitalize on short-term gains by timing the sale according to demand and market fluctuations.
If you’re aiming to flip homes, you have to achieve a quick turnaround to minimize ongoing costs and to make better ROI. Flippers improve on aesthetic appeal and value of a property by adding in-demand features that will appeal to their target clients.
Flipping properties can involve higher financial risks because of the construction involved. Prospective investors require a good understanding of the property market, renovation costs, and potential resale value.
- Commercial property investors
Commercial property investors focus on purchasing assets that are for commercial use, such as retail spaces, offices, warehouses, and industrial facilities.
These property investors diversify their portfolios by acquiring various commercial properties across different sectors and locations. Their objective is to generate income through high-rental yields compared to residential properties, although they may involve higher costs and risks.
Whether you are buying a house, apartment, retail or office space, the type of property you purchase will determine the amount of passive income you receive as well as the capital growth. Of course, your capacity to handle being a certain type of investor depends on what you could take on.
If you want to discuss your investment property plans, our advisors are here to lay out your options according to what’s best for your goals and situation.
Investing in residential property
By far residential investment property is the most accessible way of entering the market. Today, most working age Australians are dipping their toes in property investment.
Let’s try to break down what are the potential pros and cons of investing through residential dwellings:
Advantages of Residential Property
Continuous rental income – Residential properties provide the opportunity to generate rental income by leasing out the property to tenants. Rental income can offer a steady cash flow and contribute to the investor’s overall income stream.
Capital appreciation – Historically, residential properties have shown the potential for long-term capital appreciation. Property values may increase over time, allowing investors to build wealth through property ownership.
Tangible assets – Unlike other investment vehicles, residential properties allow a physical presence that an owner can see and touch. This is preferred by other investors over bonds and stocks.
Tax benefits – Depending on your state’s tax laws, there are tax benefits associated when investing in residential property. From negative gearing, federal incentives, to depreciation claims, you could offset costs through these incentives.
Diversification – Residential properties serve as a diversification strategy within an investment portfolio. It’s an asset class that can spread risk and provide something different from stocks and bonds.
Pitfalls of Residential Property
Financial and time commitment – Purchasing a residential property typically requires a significant financial commitment, including the down payment, mortgage repayments, maintenance costs, and other ongoing expenses. It’s crucial to assess your financial readiness and ensure you can afford the investment.
Market fluctuations – Property markets can experience fluctuations in value, influenced by factors such as economic conditions, interest rates, and local market dynamics. Property values may not always increase, and there is a risk of potential losses if the market declines.
Maintenance – Unlike stocks, being a landlord entails responsibilities such as property maintenance, tenant management, and compliance with legal requirements. It’s not only time-consuming but expensive as well with ongoing costs.
Not as liquid as other assets – Compared to other investments like stocks or bonds, residential properties are relatively illiquid. Selling a property can take time, and the process may involve transaction costs and fees. It’s important to consider the potential impact on your liquidity needs and overall investment strategy.
Market saturation – If your property isn’t in a high-demand area, there may be competition and saturation of rental properties, leading to increased vacancies or potential difficulty in finding reliable tenants. Vacancies will impact rental income and cash flow.
Regulatory and legal factors – Residential property investment is subject to various regulatory and legal considerations, including landlord-tenant laws, property taxes, zoning regulations, and compliance requirements. You must remain compliant of these regulations.
Should I buy a house or apartment?
Buying a commercial property means looking at where are the areas with likely long-term tenants and with the most potential for cashflow.
Your decisions would be a little different than when purchasing a home because there are no government grants to support investment property loans, but the payoff can be far greater – finding a high capital location and a strong tenant mix enables you to charge higher rents and doubling your gains with income and equity.
Residential property has different motivations (e.g., negative gearing, capital growth) but here are the pros and cons of choosing a house vs. an apartment:
Investing in a house pros:
- Generally offer bigger capital growth because they appreciate better in the long-term.
- Houses generally attract reliable renters, especially in areas that have a high owner-occupier residence because they drive up the sale prices and make the location established as a residential spot.
- Allows for renovations that could further increase the property value.
But the cons include:
- More expensive upfront investment property loan because of the land value
- Houses may bring lower rental income than apartments, but it will bring higher capital growth
- Fees in pest control, building inspections, and property upkeep will be more expensive
- Maintaining the home is the owner’s responsibility
Investing in an apartment pros:
- Units located in high-demand areas bring in high rental income
- More affordable than a detached house
- Upkeep costs like insurance and maintenance are charged among all the owners in the form of a strata title.
- Less chores; the work of maintaining the common areas of the property is on the corporate developer.
But the cons include:
- Risk of oversupply when several apartment buildings are built in your area means lower rental yield and less capital growth.
- You’re at the mercy of the body corporate; investors have limited control over renovations or alterations, because you have to play by the rules of the corporate.
- Body corporate fees can be quite high, especially for premium apartments with lots of amenities.
- Lower capital growth than a detached home.
What about off-the-plan properties?
Buying off-the-plan involves buying a house or an apartment unit that is still in the process of being constructed. It allows investors to prepare for repayments financially, if you can provide 10% deposit.
Off-the-plan is attractive because of discounted rates – you could gain higher capital once the residence is completed.
However, there’s the risk that the developer might have delays or even become bankrupt, which will cost your deposit and time.
Buying off-the-plan could also be costlier than it should if the market takes a downturn and your property valuation drops after a few years.
Off-the-plan financing may be harder to secure than other types of loans.
Consult here for investment property loans
For financial savvy experts, the question is not if you should invest, but when.
Ultimately, the decision about which investment property to choose depends on several factors, including your personal preferences, what you can commit to (being a landlord versus a flipper), financial and investment purpose, and housing market insights. A careful consideration of these brings you a more informed choice.
You can always talk to us here – our investment brokers could break down your needs and what the best investment move would be that checks your boxes. We don’t just focus on deals and discounts; we could keep investment property due diligence more straightforward and seamless. Get started today.
