What Type of Investment Property Is Right for You?
Are you ready to invest in property, but aren’t sure what type of property to buy? The type of investment property you choose has the ability to impact your returns and your overall investment goals, so it’s important to choose the right one to suit your needs.
There’s also the distinction between residential and commercial investment properties to consider. While there are definite pros and cons for both options, this article will look at only residential investment property options.
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The types of residential investment properties:
Land appreciates in value over time, while properties depreciate in value. With this thought in mind, some investors are happy to use the option of ‘land banking’ or investing in vacant land in the hopes of on-selling it at a profit at some point in the future.
While there is the possibility of land gaining in value over time, it’s uncommon for investors to generate income from the property. According to the Australian Tax Office, if the asset isn’t earning an income then the costs associated with owning the land are not tax deductible. The investor is responsible for covering all expenses with after-tax earnings.
Units, apartments or condos
Units, apartments or condos are various names used to describe individual properties within a multi-home complex. In most cases, these are built in blocks of 4 or more, although they can span up to 100 residences in the same building or complex in some instances.
A property investor who buys one residence within a multi-dwelling complex usually owns the corresponding portion of land according to the number of units in the complex. So if there are 10 dwellings in the complex, the owner of one residence owns the equivalent of 1/10th of the land component. The result is that the investment is comprised predominantly of the building, rather than the land.
Many property investors like the fact that units or apartments often have lower land tax costs and council rates, but they also come with body corporate or strata management fees. The more common services provided to the complex, such as elevators or swimming pools, the higher the body corporate fees are likely to be as they are costly to maintain.
A residential house is perhaps best described as being a freestanding building on a freehold block of land. Residential freehold properties are in high demand with both tenants and prospective buyers, so they can provide relatively stable returns to property investors.
Established houses are those that are already built and ready to move in to right from settlement day. Many property investors like the option of an established home, as they’re able to generate rental income right from day one. However, older homes may have higher maintenance or repair costs or additional costs associated with renovating or updating older fixtures and fittings.
By comparison, a newly-built home shouldn’t require as much maintenance or repairs, as everything is still new. There is also the advantage of only paying stamp duty on the land component and not on the entire property value, as you would if you bought an established property. Property investors can also maximise returns on newly-built properties, as the depreciation on a newer home may provide more advantageous tax benefits.
Townhouses aren’t technically units or apartments and they’re not freestanding houses. They’re a combination of the two. Generally, townhouses are built on their own titles, but they may share a common wall with other townhouses built on the same land.
Duplex or dual-key homes
A duplex home is one with two properties on the same freehold block of land on the same title, although some may have been created with their own individual titles.
By comparison a dual-key home is one that is specifically built with two premises on the same block of land. In many cases, a dual-key home might be a freestanding house in the front of the property with a separate, self-contained ‘granny flat’ at the rear of the block. In other cases, dual-key properties may have been purpose-built to incorporate a full 3-bedroom home downstairs with a completely separated, self-contained unit upstairs.
Investing in a holiday home can make sense for some property investors, especially those who intend on using the property for their own personal use throughout some parts of the year. The objective is to purchase a home in a desirable holiday location that is available to lease for holiday makers coming into the area, but is also a great place to enjoy your own vacation time.
Holiday homes are generally made available for lease fully furnished, so property investors need to take into consideration the cost of providing furnishings, electronics, appliances, linen and bedding, and even crockery and cutlery for holiday makers to use while they’re staying in the home.
The rental returns aren’t always stable with holiday homes. There is the potential to generate higher-than-average rental income during holiday seasons and long weekends. However, there is also a higher risk of the property standing empty during quiet times of the year. There are also additional costs of managing, maintaining and insuring a holiday home to take into account.
On the flip side, a property investor has the potential to take advantage of not only depreciating the building, but also depreciating all the furnishings and other items provided as part of the rental.
There are definite pros and cons to investing in each type of property listed in this article. The key to determining which one will be right for your investment goals is to understand how each of them have the potential to affect your cash flow, your ongoing costs, and the goals you hope to achieve.
For more information on how each type of investment property could work for you, call (08) 8360 0279 and speak to an experienced Assured Property consultant.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.