Before you trawl property websites, have you taken this first step?
Before deciding which type of property to buy, it can help to first outline your investment objectives and then understand how these work in conjunction with the different types of properties available.
For example, do you want to grow your personal wealth or do you want an additional stream of income? If it’s the former, then you might want to consider properties that are more likely to grow in value. If it’s the latter, then you might be better to consider properties that will provide higher rental returns. Do you have a high risk tolerance or are you more risk averse? If you’re more comfortable with risk, then you might consider a higher budget or look at investing in regional locations, for example.
Determining your goals is important because it can help you find a property that is better suited to your needs and circumstances.
If you’re investing for capital growth, then it’s important to look for properties in areas that are in high demand but supply is limited, as this will help lift property values.
Looking at major capital cities, established houses on large plots of land in inner-suburban areas can be one example of this.
Land is usually scarce in these areas as it’s generally utilised with existing housing, schools, parks and shopping centres. Therefore, as the populations in these capital cities grow over time, demand will rise but supply of houses in these inner-suburban areas is constrained.
Conversely, areas where supply can meet demand may not provide the best capital growth prospects, such as apartments in high-density areas (i.e. city CBDs) and houses nearby large areas of developable land (i.e. suburban fringes).
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For property investors seeking stronger rental returns, brand new houses and apartments can be the better option.
This is because, like-for-like, brand new houses will generally attract a rental premium over older housing stock, simply because they’re more modern.
Brand new houses and apartments can also provide tax benefits through depreciation and may require less maintenance costs. The downside of brand new properties is that they will typically cost more, like-for-like, and you’ll be paying more for the building component of the property.
Apartments can provide stronger rental returns, compared to houses, as these are typically located in close proximity to desirable amenities, such as cafes, train stations and employment hubs, and are typically at a lower price point. However, it’s important to be mindful of strata fees, which can be a big expense for investors. Strata fees are typically higher in apartment complexes with more shared facilities, such as gyms, pools, saunas and lifts.
To gauge the potential rental yield of a particular type of property in a specific area, visit online real estate portals to see the advertised rental and sales prices. You can then calculate the potential yield. It’s important to note that these are simply the advertised prices and the final rental or sales price can be different, however it will give you an indication.
It’s very rare to find properties that provide the best of both worlds – good capital growth prospects and high rental returns.
However, some types of properties can provide a more balanced mix of returns, including villas and townhouses, which can have a decent land component and can be less expensive than a standalone house.
But the capital growth and rental returns from these medium-density properties may not be as high as that of an established house or an apartment, respectively.
Like apartments, villas and townhouses can also have strata fees, which can reduce overall rental returns.
It’s also important to understand what is deemed common property in a villa or townhouse complex. For example, in some circumstances you may not own the exterior of the building, meaning there could be restrictions on making cosmetic changes, such as painting the façade, or installing external objects, such as air-conditioning units and antennas.
Learn more about investing for capital growth and rental returns.
As a rule of thumb, properties in regional locations can deliver higher rental returns, compared to similar properties in the major cities. Established properties in regional locations can also be cheaper.
However, regional towns can be more risky because they’re often highly dependent on just one or two industries, which makes these property markets more susceptible to ebbs and flows in the local economy.
Think of towns in the past where there has been one dominant industry, whether it be tourism, mining, fishing or logging for example. When this industry is strong, property prices can rise quickly, however if there is a major downturn in that industry then property prices can stagnate or fall.
Not all properties are created equal and every property needs to be assessed on its merits to determine the potential benefits and risks on offer.
Therefore, it’s crucial to understand how different properties fit into your unique needs and circumstances to help find the right investment property for you.