There are many things to consider when purchasing an investment property. The right location, type, design, level of fixtures and fittings, property manager, rent …the list goes on!
There are also risks involved as not every property increases in value nor has 100% occupancy, nor do they always obtain the rent you first expected. That’s why making a well-informed decision about which investment property and how to mitigate your risks starts with having the right property AND finance strategies.
Everyone has general goals about financial freedom, but what do you actually want to achieve from buying an investment property? To retire and live off the rental income? For the mortgage and current rental to balance out? To make enough to secure another deposit? Knowing what your long term goals are will be hugely beneficial to knowing how and where to start.
Obviously there are advantages and disadvantages to buying either a home or apartment as an investment property. Houses in growing areas do experience higher value increases over time due to their land component, however the downside is that the percentage of rental profit (yield) is often lower than a unit.
Having a backyard can be attractive to families, as can the extra space being offered in a house can be conducive to students sharing. There is also the possibility of you being able to increase the property’s value by renovating, however houses are more difficult and expensive to maintain, both for the tenant and the landlord.
Apartments make desirable investment properties because they’re often less expensive to purchase and maintain than houses, with less upkeep required (for both the tenant and you the landlord). It’s also important to consider what facilities are being offered in common areas of the apartment building itself. Whilst pools and BBQ areas and rooftop terraces are great facilities that can attract tenants, they can also increase the body corporate fees, so it’s always a good idea to obtain the latest Strata Report from your real estate agent, to understand what the current and future fees might be.
What also needs to be kept in mind is that houses are rarer than apartments in city areas – so demand and supply rules apply. To that end, an apartment in a smaller boutique building can be a better option, and sometimes easier to finance.
The higher demand for homes in an inner city or suburban location can make buying there feel like a safer choice, however properties in some regional areas obtain higher rents proportionate to the purchase price. Covid-19 is also having an impact. With more people working remotely from home, some are moving to the more affordable regional areas, which will have a flow-on impact on supply and demand, with the potential for increased property prices.
When you build a home you get everything new and to your specifications – location, design, number of bedrooms, kitchen, bathrooms, plumbing, electricals, appliances, and so on. If you can afford to, it’s also a good idea for the fixtures and fittings to be commercial grade as they are more robust and longer lasting than domestic grade equivalents.
On the other hand, building will take considerably longer than simply purchasing an existing property. Whilst many builders offer fixed price contracts with build-time guarantees, council approvals can take time and inclement weather can cause unwanted delays. It’s also important to choose a reputable builder to mitigate defects. If you build a house, you also need to landscape, so it’s important to landscape with a tenant in mind – something easy and low maintenance, or pay for someone to come in and provide regular garden maintenance.
If you build, you won’t receive any rent until it is completely finished even though you will be paying mortgage repayments on the land purchase and then ongoing after construction draw-down payments.
On the plus side, you can claim depreciation on a new property (whether you have built it or simply purchased it as a new property).
We can provide a desktop valuation for an existing property as it is easier to find comparable sales in the area which can help you make a more informed decision.
The older the property, the higher the likelihood of something requiring an upgrade, eg plumbing, electricals, new bathroom, new kitchen which means you may need to accept a lower rent and higher maintenance costs until such time as you complete these improvements.
Most people looking into investment properties have probably only considered residential, but up until this year with Covid-19, there had been a growing number of people recognising the potential of commercial real estate investment.
Residential investment properties are certainly more common because there are more of them – bigger supply and bigger demand.
Commercial properties have been a highly attractive option for investors for many years, and has proven to be especially popular for businesses who find it beneficial to rent these properties from themselves, using a third party vehicle such as a SMSF. A good Accountant can be a great resource for advice and guidance as to best options. Commercial leases also tend to be longer as they are leasing to businesses, typically three to ten years. However, as with all investments, the higher the return, the higher the risk.
Commercial property can also be far less predictable than residential, as it is more vulnerable to economic impacts such as employment rates and consumer confidence. Covid-19 has also had a huge impact on commercial leasing, which may be felt for some time to come and more broadly across the entire economy due to more and more people working from home.
It’s fair to say that commercial property investment requires a higher, if not just a different level of understanding of the property market. For more information, click here.
By taking the time to properly consider all of your options and speaking to us first, buying your next home can be an exciting and financially stress-free experience (as it should be).
If you would like to get some advice on purchasing an investment property, please feel free to call us on 8004 2222 or book in a time to chat with George.
PS This article is prepared based on general information. It does not take into account individual financial or property objectives or needs and is not financial product or investment advice.