Investing in property is seen by many as being a safe bet, being less volatile compared to say, the stock market. The proverb of ‘safe as houses’ leads some to direct a substantial portion of their potential investment capital into a property-heavy financial strategy. The idea of flipping a rundown shack into a million dollar cash cow is far from a risk-free proposition, however.
Of course, no investment should be looked at in isolation. Before barrelling into real estate, it’s important to be clear about your long-term financial goals and how property might fit into your strategy. For example, deciding on whether you need a hands-off or slightly more involved investment will determine the kind of assets you should be searching for.
A house or an apartment?
Apartments are in demand for young professionals and empty-nesters, often being located in highly desirable inner-city locations. You may have lower maintenance costs than a house, but as an owner you’ll need to factor in the fees paid to the body corporate.
A well-placed apartment usually provides a high rental income comparative to the cost of purchase. Some complexes may also have the shared benefits of a pool or gym to further add to the rental appeal.
Before investing in a unit, it’s wise to check if there are proposed or approved applications to raise the density level or building height restrictions in the area. If you’re buying an existing apartment, where newer nearby developments are planned in the next few years, it could slow your investment growth and impair the ease of resale.
On the other side of the fence, the benefits of a house include owning the square-meterage below your property. This gives you the opportunity for subdivision and development (pending council approval, of course).
A freestanding house has the drawbacks of higher rates, lower rental returns compared to the purchase price, and possibly higher maintenance costs. But as a long term investment it may be wise to follow the proverb: buy land, they’re not making any more of it.
A new home, an old home, or something off the plan?
If you’re unsure whether you should be looking at a fixer-upper or buying off the plan, there are a few important considerations.
New homes typically attract investors looking for passive income, who are too time poor to deal with the maintenance that usually comes with older homes. If there happens to be a defect with a new home, the builder’s insurance should cover the costs of rectifying it.
Newer buildings are also attractive to high-income tenants who are happy to pay a higher level of rent for all the modern conveniences.
While you’re likely to find longer depreciation benefits with a new home build, they are not without some drawbacks. You’ll probably pay a higher price compared to an existing home in the same area, which means it will take longer to realise capital growth.
If you’re required to pay a deposit on an off-the-plan apartment purchase, remember that there is no guarantee that all the units will be sold, meaning you may miss out on other opportunities. If the developer accepts deposit bonds instead of using your own money, do it!
Just remember, even if the project does go ahead, there is a chance the value may drop by the time the property is completed due to oversupply or market changes.
For faster (hands on) growth, you might want to look at flipping an older property. Setting a renovation budget with your investment is a way to add instant value. You can also be more certain that the property you’re purchasing has a ‘true’ market value, free from the profit margins of a developer.
It’s also worth noting, older homes in established areas also usually have larger block sizes, should you choose to develop or subdivide in the future. Given the right strategy (and zoning), it could be possible to subdivide and sell at a large profit, even to effectively get your land for free.
In part two next week, we’ll be putting more property investment considerations under the microscope, including some potentially costly mistakes and how to avoid them.