Different property types deliver different results.
The property type you choose will depend upon a number of factors.:
- Your personal risk profile – how much risk you’re comfortable with
- Your financial capacity
- What stage of growth you’re in
- When you expect or need to retire
Investing in houses offers the prospect of capital growth to increase our wealth rather than through rental returns. Land increases in value, whereas buildings depreciate, so typically properties with more land are well placed for growth.
Investors also have the option, when conditions are right, to increase their capital growth through strategic improvements to their investment properties.
Depreciation of the structures on the property can really help offset your tax bill, as can all of the other tax benefits investing in houses can deliver.
Typically, a large share of a house’s value is tied up in the land. This means that often, the rental yield won’t reflect that value.
Maintenance costs can be higher in houses than units because you’re responsible for the entire structure whereas the body corporate in units maintains common areas, eliminating some of your financial burden.
When to purchase
Purchased at the right time of the market cycle and in the right location, investing in houses is a good strategy for investors in the early and middle stages of their lives.
The concept of investing in houses has to do with capturing as many growth cycles as possible. If you buy when the market cycle is at it’s lowest, then hold, you’ll gain the most benefit.
As rents grow, and as your debt is reduced, your investment will soon begin to pay for itself. Until such time, you’ll gain tax benefits either through a cash neutral or tax negative position.
When you’re ready to retire, the house should ideally provide positive cash flow to fund your lifestyle.
While investing in houses offers great capital growth, units in good locations can provide the capital you’ll need to build up your investment property portfolio and build real wealth.
As apartments can often be either positively or neutrally geared, they are a good option for investors who need to be cash-flow positive.
They’re also easy to hold as the strata manager is responsible for the upkeep of the building, leaving you with less maintenance than is required for investors who are investing in houses.
Of course there’s no perfect investment, and units’ lack of intrinsic land value impedes their capital growth.
While the building’s value rises the land doesn’t necessarily follow. The building and all of the improvements that go with it is where the value lies.
Unlike houses, units also incur strata fees which can add onto the ownership costs. Owners are also limited by the strata bylaws in the renovations they’re able to do.
If you buy in the wrong location where the market is oversupplied with units you’ll also experience both limited capital growth and rental yields, so it’s important to choose units based on demand, desirability, supply, etc.
When to purchase
Investors who are further along in their property investing journey and those nearing retirement would do well to buy units as they can be a good income source.
If purchased in a highly desirable location, this type of property can deliver both capital growth and a relatively high yield.
Townhouses can deliver capital growth that rivals houses and rental yields similar to units.
They also offer the potential to renovate, provided the by-laws allow it, which can increase both your property’s value and your rents.
Lower entry and maintenance costs compared to a house also make this a good opportunity for beginning investors with limited financial capacity.
Strata restrictions are the biggest impediment to a townhouse or villa’s profitability. Over time, a property can become outdated…if the by-laws are too restrictive this can impact an investor’s ability to update a property either through renovation or even as far as demolition.
Also, a group of villas or townhouses might face competition from similar properties, offering investment property owners little opportunity to make their property stand out amongst the crowd.
When to purchase
Villas or townhouses are suitable for many different investment property portfolios.
This property style offers individuals who are in the beginning stages of growing their investment property portfolios a lower price point than houses. Also, the capital growth prospects provide access to leverage that can help them continue to grow their wealth.
Which property type is right for me?
The right property type for you depends upon a number of factors; your financial situation, how long you’ve been a property investor, the state of your current investment property portfolio, when you expect to retire, your capacity for risk and much, much more.
If you’ve been searching the markets but still aren’t sure where or what to buy, consult with a professional property advisor. Find someone who is a seasoned investor with a proven track record of delivering quality advice that you can count on!
If you’re after more tips related to Property Investment, you should join us at our next Property Investor Night and meet with our wonderful Coaches. You’ll be able to ask them any question you want and it’s a free event! Book your seat here.
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