real estate

What Should You Invest In?

Choosing the right type of investment property involves much more than choosing the right home loan. There are several factors you must consider before coming to a decision.

| | 9 minute read

Planning is always the first step for a real estate investor. You’ll outline your overall goals, the strategy you will use to reach them and the budget you have to get started.

With that information at hand, you can start looking for good investment properties. But what should you look for? Here, we offer up three questions you might consider.

Should I Get an Established or Brand New Property?

Some investors swear that buying new properties will open the door to higher returns. Others prefer the security offered by established properties.

Which should you go for? Here are the things you need to consider with each.

Established Properties

Established properties tend to offer more security because they don’t experience the same level of price fluctuations as newer properties do. You can also make improvements to an established property, which increases its value. Real estate agents also understand the prices of established properties. They’ll have seen what similar properties have sold for and may even have a price history for the property you’re looking to buy. There’s less chance of you buying something that doesn’t suit your needs.

Furthermore, you often gain access to a portion of land when you buy an established property. This land offers another opportunity to make money. In fact, some people have managed to reduce the cost of their investments through subdivision of the land they receive with their properties. This is when they sell off a portion of the land, often to a property developer.

It’s not all good news, though. Established properties suffer wear and tear, which you’re going to have to spend money on fixing. You may also find it’s more difficult to rent such properties out to tenants who want all the mod-cons. Finally, you often can’t claim as much depreciation because of the age of the property’s assets.

New Properties

A new property offers an instant advantage with regard to maintenance. As long as the builders do their jobs well, you shouldn’t have to worry about getting things fixed up. Furthermore, the builder’s insurance should cover any structural issues you discover after making the purchase.

You may enjoy higher tenant demand, especially because new properties have modern design features. They usually offer more light and space, which means you can charge higher rents to tenants. There’s a tax advantage as well. You’ll be able to claim depreciation for the property’s assets from the beginning of their lifecycle. This can have a major effect on your cash flow.

However, you have to deal with price fluctuations. There’s a chance that you’ll pay more than the property is worth. This is because real estate agents don’t have enough information available to them. This will affect capital growth, often making it more difficult to develop a positive cash flow.

Also, you may find demand is not as high as you’d like it to be if you buy a new property that is part of a larger development. An abundance of similar types of property going on the market at the same time could lower the property value.

Off the Plan

You have a third option. Buying off the plan means you buy the property before it’s been built. You receive the same benefits you get with a new property, plus a few others besides. However, there’s also more risk involved with an off the plan purchase.

Let’s look at the benefits first. You’ll usually pay less stamp duty on the property, with some states even waiving the fee entirely. Off the plan may also prove useful to overseas investors who can’t buy established properties. This is because the Foreign Investment Review Board (FIRB) allows off the plan purchases for overseas buyers.

You can also avoid having to pay the deposit straight away. However, this requires the developer to be okay with accepting a deposit bond. As it may take several years for construction to conclude, the use of a deposit bond offers you time to save money. Or, you could use your money for something else in the short term.

Unfortunately, that long waiting period can also have negative effects. If the property market falters after you make your purchase, you may find the property is worth less than you paid for it. Remember that you can’t carry out a valuation on a property that doesn’t exist yet. This means you’re using estimates to make your decisions.

Finally, you have to consider the possibility that construction won’t start at all. Many real estate developers won’t move forward with a project if they don’t make enough off the plan sales before they begin building. You’ll get your money back, but you’ll have wasted your time and may have missed out on other opportunities.

Should I Buy a Regional or City Property?

Once you know the age of the property you want to buy, you have to start thinking about location. Rural properties tend to provide little value for investors, unless they’re moving into the agricultural space.

This means your choice boils down to regional or city properties.

Regional Properties

A lot of investors avoid regional properties. They see them as too reliant on the presence of local industry, which means they can only attract tenants who can work in the region.

Data also shows that it’s harder to attract tenants. Plus, you will usually experience a slower rate of capital growth.

However, there are some advantages. For one, you’ll usually spend much less on a regional property than you would a city property. The only exception to this is if the property is near a beach.

You could also do well if you manage to buy a regional property just before an influx of people into an area. This requires knowledge of population flows, so you may need to consult with a real estate agent who understands the area.

City Properties

Current data suggests that over two-thirds of Australians live in a city, which makes city properties an attractive proposition for investors. Demand tends to be high, especially when you take immigration into account. You’ll also usually enjoy a faster and more consistent rate of capital growth.

However, that doesn’t come without its problems. High capital growth means your property will cost tenants more. As a result, you may alienate part of the market without intending to. Apartment blocks and other high-density options lower costs, but may not provide the biggest return on investment.

Furthermore, you’ll need to understand negative gearing, as this is an issue for the majority of city properties. You may not enjoy a positive cash flow for a long time. Speak to a tax advisor to discover how this will affect you.

Should I Buy a Unit or a House?

Once you have a location nailed down, you need to think about the type of property you want to invest in.

Usually, your choice will come down to an apartment unit or a house.

Units

Increasingly popular in city areas, units have the advantage of generating high rental income for a lower investment than houses. In fact, the rent you can command may equal that for a house, assuming your unit is in a desirable location.

You’ll also find that demand stays consistent for units, as young people prefer them to houses. Those looking to rent for the first time often look toward units, especially if they offer access to the city. Furthermore, many tenants prefer the added amenities you can provide with the right unit. If your apartment block has a gym or swimming pool, you can ask for more rent.

However, the situation changes when you buy units in regional areas. Capital growth slows down, and demand may decrease.

You’ll also have to become part of the “body corporate” that oversees the apartment block. This means making regular financial contributions, which usually go toward the upkeep of the block’s communal areas. This also means you have less control over the property. You’ll often need approval from the body corporate if you want to make changes to your unit.

Finally, you may find it difficult to secure a home loan for a unit. As a result, they’re often the domain of real estate investors who have built their portfolios and have strong asset positions.

Houses

Reliability is the most important thing you receive when you invest in a house. They tend to enjoy long-term capital growth, especially in areas of high demand.

This makes lenders more likely to offer home loan products to house buyers when compared to those who want to buy units. Furthermore, you’ll have more control over a house than you will with a unit. You won’t have to answer to a body corporate if you want to do something with the property.

They are not without their downsides, though. Houses are usually larger than units, which means you may find yourself spending more on maintenance. Also, you have to take the age of the property into account. An old house may require extensive renovation work before it can attract tenants.

What to Do Next

There’s a lot you need to consider before you invest in a property. Take your time with the decision as rushing could lead to a bad investment. We also recommend you:

This information is general in nature and you should always seek professional advice when making financial decisions.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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