Our new blog series is going to take a look at answering some of the most frequently asked questions I get from my clients in our initial property investment strategy meetings. To kick us off:
What type of property should I invest in?
And the answer isn’t a straightforward one, as there are multiple things that we need to take into consideration when we’re looking at the different types of residential asset classes available. It’s not only the size of the property and the area that it’s in, but also the serviceability of the property – can you afford to run that type of property?
The traditional, or most commonly built, residential asset classes in Australia are:
- Townhouses, both community titled and torrens titled
- Standalone homes
- Dual keys
And not to forget the old versus new debate!
Let’s go through each of the main property types you can invest in, and look at the pros and cons of each on face value:
Should I invest in an apartment?
Apartments tend to be CBD-based as this type of high density living is in demand where the population tends to centre itself, so they are generally well-located, and the rental yields can be good if you can get the property rented.
As an investment however, apartments often raise a few concerns for us. All apartments are under strata management, which can be good in some ways, but it does affect cashflow as there is a constant cost for the landlord here. More apartments are rented out than lived in by their actual owners, and the Equidel Property Analysis Matrix generally looks for locations where the ratio of owner-occupiers is higher. An area with higher owner occupiers generally means ‘demand’, which in short leads to capital gains. And finally, capital growth can be questionable, as you never know when a brand new high-rise apartment building is going to be built nearby, thereby affecting your investment. Having said this, while there have been ups and downs in the Gold Coast apartment markets over the last 10 years, Sydney and Melbourne may have a different argument.
Should I invest in a townhouse?
Townhouses are traditionally a lower price point than a house and usually offer a better yield, so they are good for entry-level investors. This type of medium to higher-density living is also more likely to be closer to a CBD, so these property types are attractive to renters such as young professionals.
Some townhouses are strata (community) titled, while some are torrens titled. While the strata title does mean that there are extra fees coming out of your cashflow as the owner, the added benefit is that the common areas of your property – often common yards, driveways etc – are maintained more than once a quarter, which is what happens if you’re relying on only traditional Property Management.
Should I invest in a house?
Houses are attractive to property investors because they traditionally attract higher rents. However that means they also come with a higher purchase price! In an area or suburb of mainly standalone houses, you’ll often find a higher proportion of owner-occupiers which means that you may be able to attract a higher income tenant.
If our client’s financial situation allows, this tends to be the most desired asset class or type of property to invest in.
Should I invest in a dual key?
Well first maybe we should start with what a dual key is! It’s a single titled home with two incomes. For example, a house with a connected granny flat, but all under one roof. These two can be rented out separately, and through the introduction of sub-meters, things like water usage can be monitored separately to allow for separate billing.
The real up side to a dual key is the yields. We have had one client receive $800 rent per week from handover, while only having a purchase price of $570,000. This is a strong argument for investors to consider a dual key. However they do come at a higher purchase price, making the dual key option too expensive in most cases.
The capital growth of your dual key investment property is of course dependent on its location. There are quite a high number of councils that will not approve dual keys to be built, and while there are some that do – these areas may not be ideal for capital growth.
Ultimately, a dual key in a growth location is a win-win.
Should I invest in a duplex?
A duplex is two properties built on the one title which can be subdivided. This is often seen as two units with a shared wall.
Like the dual keys, a duplex carries a high purchase price, in fact generally even higher than a dual key, which can put it out of the reach of most investors.
This is where the downfalls of investing in a duplex ends. The yields can again be extremely good from a property like this, because the builder is building two properties at the same time which means the overall cost of construction per unit is generally lower. After subdividing has occurred (upon completion), each individual property is generally valued higher after being titled separately when compared to being half the value of a duplex that hasn’t been subdivided. This is great for investors who use this strategy to fabricate instant equity.
Should I invest in a new or existing property?
And finally, should you invest in something new, or something that’s already built?
If you invest in a new property, the benefits are that it is more desirable from a rental point of view so it may be easier to tenant and command a good price. You’ll also experience the maximum tax write-offs when you buy new, as you can depreciate everything on the build of your investment. If minimising your tax payable is a reason that you’re investing in property, this is something to keep in mind!
An existing or ‘old’ property is often attractive to some property investors though, as they don’t have to wait for a property to be built and therefore wait to see some rental returns! However older properties can come with unforeseen maintenance issues that are the landlord’s responsibility, and this brings uncertainty for us in forecasting your cashflow (what you’ll earn from investing in the property). Brand new dwellings come with a builder’s warranty that will cover any tricky issues that may arise.
Not to mention, buying new also means that you save on stamp duty, and in most cases this counteracts the rent you might be missing out on if you invested in something existing.
Older properties are great for value-adding strategies and for those who have time to complete these upgrades. Simply buy an old gem at a low price…. throw in a new kitchen, bathroom, maybe some new flooring, cosmetics throughout, and fix up the landscaping and *BOOM* – you have a great property to sell at a great profit…. Or will you??
Be warned, understanding the numbers (or feasibility) on this type of project at the beginning will be the big difference between laughing all the way to the bank and sitting back, scratching your head while wondering why you haven’t made any money after 12 months of hard work!!
So there you have it – a breakdown of the most popular types of residential properties available for property investors to invest in!
It’s important to remember that different asset types stand up differently against the Equidel Property Analysis Matrix for a number of reasons, including things like:
- The location of the asset
- Your individual financial situation
- What your personal property investment goals are
- Whether you already own property and are therefore looking to diversify your property investment portfolio
At Equidel, we always start with coffee. I like to sit down and understand your individual situation and help to tailor a property investment strategy that’s going to suit your current life stage, and help to take you where you want to be!
If you’d like to have a chat about what might work best for you, give me a call on 1300 EQUIDEL, or simply fill out our contact form.