Ready to invest in property but not sure what type of property to buy?
When buying an investment property the type of property you buy impacts the long and short term returns on your investment. In this article I will discuss 5 types of residential investment properties and how they affect your bottom line when you choose them as your investment: rural properties, vacant land, units, houses and finally duplexes and townhouses. An early tip though, keep in mind that overall it is the land that goes up in value while buildings depreciate over time.
The 5 Types of Residential Investment Properties
1. Rural Properties
When considering rural properties as an investment you have to keep in mind the maintenance of the property. Who is mowing the lawns and maintaining the grounds? Getting tenants to look after a large rural property can often be a nightmare for the property manager. The costs for maintenance often have to be carried by the landlord which can decrease the cash flow and return of the property. And while rural properties have large land content, due to the cost of land, the income from the property compared to the value of the property is often low.
Rural land can be a great investment strategy if you get the location and the zoning right. But this often requires specialist knowledge and can be above the understanding of most residential investors.
2. Vacant Land
On the premise that land goes up in value and buildings goes down, land banking in the right area may seem an excellent investment strategy. After all it’s often half the price of a completed property. However, in most cases land does not provide an income. Furthermore under Australian Tax Rules, generally if an asset does not provide income then the costs are not tax deductible and therefore all the expenses are met with after tax earnings. Many banks will also loan a lesser percentage than on homes. Overall, holding land can be an excellent investment for those with very high incomes or equity positions but are not for most property investors.
Units, Apartments and Condos are all names used in different areas for essentially what we would describe as a multi home complex. These have typically four or more, sometimes up to 100 residences. In these complexes you typically own a share of the land according to the number of units in the complex. As such, often a greater percentage of the purchase price of your investment is made up of the building as opposed to the land.
On the positive side, units often have lower council rates or land tax where applicable. They are generally well located to facilities, city centres and public transport. It is for this reason that units can be good investments and can go up in value.
Multi complexes usually have a body corporate or owner’s committee that supervise the rules, maintenance, repairs of the outside of the building and the grounds. The control of your investment is partly governed by the committee. In our experience there is always one owner in these committees that is a dickhead. We highly suggest you invest in complexes with 6 or less units (less owners, less chance of a dickhead). And finally I suggest staying away from complexes with lifts and swimming pools. Both can be costly items to maintain, increasing body corporate fees and decreasing your income. In general, we don’t recommend investing in multi home complexes.
Houses are best described as a freestanding building on a freehold block of land. I personally prefer homes between $350-500,000 based on the combination of future capital growth, rental returns, and capital (deposit) required. In general the demand for these types of properties both for renting and selling is high. This is provided they are located in areas that have a diverse employment base with ample facilities and infrastructure nearby. By this I mean a town or village centre, local shops, schools and easy road access in and out, government facilities, beaches and parks.
One of the advantages of houses is you own 100% of the land. We prefer land parcels with a minimum size of 400m2 and no bigger than 1000m2. We think the best configuration is 3-4 bedrooms, 2 bathrooms, and ideally a double car accommodation. A fenced enclosed yard for children and pets can be highly desirable for tenants. Finally, the flatter the block the better.
We always suggest clients buy homes that are new or near new, at least built post 1990. This is to take advantage of the government depreciation changes at that time. (More details on this in later articles). Always consider the maintenance costs in your first five years of ownership when buying. Houses are our preferred method of property investment.
5. Duplexes and Townhouses
We saved this for last because these are a mix of units and houses. A duplex is best described as two homes built on one freehold block of land sometimes with their own titles. Often they share a common wall, also known as a party wall. The most attractive duplexes however are two independent freestanding homes on one title. Preferred configuration is again: 3 bedrooms, 2 bathrooms, double garage.
Duplexes can be attractive because you own 50% of the land, usually with an identified yard that is fenced and secure. Entry level prices for a duplex can often be two thirds of the price of a house in the same area because of the reduced land component. They do however typically provide better percentage rental returns than houses and are eligible to receive the same tax incentives as houses.
Small townhouse complexes, 6 or less, can offer similar outcomes but with reduced overall values based on owning a lesser percentage of land. We do not recommend investments in townhouse complexes with more than 6 units.
In conclusion we suggest that freestanding houses or duplexes are the best residential property investments. They provide the highest % of land ownership, while considering overall income and capital growth as well as the ongoing maintenance. And you don’t have to deal with a difficult body corporate.
Now don’t forget we have already prepared a property criteria sheet for you that will help you select the right property. You can download that sheet by clicking on the link below, enter your name and email and you should find it in your inbox straight away.