What suburb and type of property should I invest in?
When you're comparing investment properties, it's important to keep the properties tenant appeal top of mind. You should always ask yourself - can you attract good, long-term tenants to this property?
The type of property and where it's located are important things to consider when you're comparing investment properties. Here are some of the main things to consider when choosing an area and property type:
Where to buy
The location you buy your investment property should have appeal for a range of prospective tenants. You'll want to make sure your investment property is in close proximity to essential services.
A quality property is typically complemented by well-developed local infrastructure that is easily accessed via major road networks.
Consider a suburbs access to:
- public transport
- entertainment complexes
- proximity to areas such as CBD's or employment areas.
Enquire about plans for development in the area. If there are improvements to infrastructure scheduled for the near future, demand could grow among tenants and spur price rises.
Historical growth trends can be a good indicator of the future capital growth prospects of a suburb and property, and can help you to determine whether or not it is a good long-term investment.
What type of property should I buy?
There's four basic decisions to make when you're picking the type of property to buy - will it be a house or unit and will it be an existing or new property. Here are some of the advantages and disadvantages of each for property investment.
Buying a house as a property investment
Houses tend to cost more to maintain than apartments, because owners are responsible for the cost of repairs inside and out.
The upside of owning a house from an investor's perspective is that you can make improvements to your property without approval from another party, such as an owners' corporation.
- Houses have greater potential to grow in value
- Tenants pay higher rent to live in a property
- Attractive features for renters such as backyards, car parking and multiple rooms and bathrooms
- Can have lots of scope to improve the value and appeal of the property through renovations, additions and landscaping
- Multiple parking spots may be available
- Houses are more expensive than units
- Rental repayments may not cover monthly loan and other expenses
Buying a unit as a property investment
Many people love the ease that apartment living provides but it's important you know what you're investing in when it comes to apartments and townhouses. Buying a property that's strata titled is very different to purchasing one that isn't.
What is a strata scheme?
A strata scheme is a building or collection of buildings, where individuals each own a small portion (a lot) but where there is also common property which every owner shares ownership over.
The strata scheme is managed by a body corporate (a body representing all the owners of the lots) and the owner's corporation will engage the services of a professional strata managing agent to administer the day-to-day running of the scheme.
What do I own?
One of the major differences between owning a house and owning a unit or townhouse in a strata scheme is that the external walls, the floor and roof do not usually belong to the lot owner. These areas are usually common property and the maintenance and repair of these parts of the building is the responsibility of the owners corporation.
In most strata schemes, the lot owner owns the inside of the unit but not the main structure of the building. Usually the four main walls, the ceiling, roof and the floor are common property. The floor coverings such as carpet and fixtures are all the property of the lot owner. A lot owner effectively owns the airspace (and anything included in the airspace) inside the boundary walls, floor and ceiling of the lot.
What are levies?
The role of the owners corporation is to run the strata scheme. To carry out this role, they must set up and manage an administrative fund (for day-to-day operational expenses) and a sinking fund (for long-term future expenditure).
The owners corporation must estimate how much money is needed each year for the funds to cover all the expenses and needs of the strata scheme. This amount is then divided between the lot owners and becomes known as the levies and are usually paid every quarter.
What meetings will I have to attend?
While it is not compulsory for any lot owner to attend owners corporation meetings, you may want to take an interest in the building's affairs. There would usually be several meetings of the owners corporation each year, although the annual general meeting is the only meeting required by law, and probably the most important meeting you should attend.
- Most units are more affordable than houses
- Easier to achieve positive rental returns and higher rental yields
- You can claim depreciation deductions for shared facilities of the property such as lifts and security
- Units can be located in denser areas with convenient public transport and nearby shops
- Can have secure, underground parking
- Older units or building can incur high maintenance costs
- Units may not have all the amenities prospective tenants want - multiple bathrooms, internal laundry, parking
Buying a new property as an investment
- The property is going to be brand new and free of any defects or areas that need to be repaired
- New properties can be very attractive for tenants and you may be able to charge more in rent
- There are several depreciation benefits available for new properties, especially in the first few years of occupancy
- Depending on your state and if you're willing to live in the property for a short period after you purchase it, there are generous government concessions available for new-home buyers
- Newer buildings may have secure underground parking
- If you purchase the property before it's completed you may not know exactly what it will look like
- New properties can be more expensive than established or older ones
- New properties do not have a history of rent and it can be difficult to estimate rental returns
- New properties can be located in suburbs or locations that are also newly established and are further travel times for most
Buying an existing property as an investment
- Existing properties have known rental histories and you may even be able to purchase a property with existing renters
- It's easier to find ways to add value or tenant appeal to an established property
- You can thoroughly inspect the features, financials and history of the property/building and make a fully informed decision before purchasing
- Established properties may require repairs or upgrades so that they're more appealing to prospective tenants
- Depreciation deductions are not as high as new properties
- Maintenance costs can be higher for older buildings
- There are no stamp duty exemptions for buying existing properties
Investment Properties - Construction and Vacant Land Loans
If you’re looking at building or buying off the plan things get a bit more complex. See Construction and vacant land loans for more information or talk to a LoanMarket Expert. It's likely you’re going to need help sorting through the complex processes of purchasing the property and getting the right loan.
Define your ideal tenant
Before you even start looking for properties, sit down and list the characteristics of what you would define as the ideal tenant.
Now obviously, at the top of the list will be "pays rent on time" and "looks after the place".
However, try to delve a little bit deeper. From where will your ideal tenant derive their income? Are you okay with contract workers or freelancers, or would you prefer someone with a steady nine-to-five job? What about students?
If your future tenants have a party, would you prefer it to be of the 'house', 'dinner', or 'birthday' variety? For various reasons, you may prefer a group of students, a professional couple, a young family, retirees or indeed a single occupant.
Put yourself in their shoes
Now that you have a clear idea of the sort of tenants that you'd like to attract, you can start to look for properties that are likely to appeal to them.
If you hope to take advantage of the regular demand for student accommodation, that may mean looking for investment opportunities in the vicinity of education institutions, or at least close to main transport corridors.
Young professionals often look for places close to bars, cafes and other entertainment and culinary hotspots.
As for families who rent, they are more likely to prioritise the proximity of schools and the child-friendliness of neighbourhoods.
Take that perspective to market
Just as you have your own set of must-haves when it comes to buying your own house, incorporate those of your ideal tenant when selecting a property to invest in.
Location will be a big factor, but so will appearance. Uni students may not mind a bit of wear and tear around the place, but professional couples have often reached a stage where they want - and can afford - to live in a bit more luxury.
That could mean that in order to attract the type of renters you seek, minor - or not so minor - renovations may be required.
It should also steer you in the direction of the sorts of properties to look at purchasing.
Relatively low-maintenance inner-city townhouses can be popular with professionals in their 20's, for example, while fully detached houses in the suburbs with their own backyard and garage will likely appeal more to families.
Avoiding the property traps
The Australian real estate market offers many options for the budding property investor, but they are far from equal. Many new investors fall into the trap of chasing rental guarantees, stamp duty savings, developer discounts and seemingly high rental returns. However, more often than not these offers are used to disguise what is typically an investment associated with poor long-term growth potential that deteriorates any perceived short-term gain.
In helping investors navigate the potential minefield, here are some of the most common real estate investments that catch even some of the most experienced buyers unaware.
Off the plan:
On the surface, buying off the plan may appeal to the novice investor due to tax benefits and the need for only a small deposit. But further investigation reveals much greater risks that leave many investors exposed and out of pocket.
Off the plan property prices typically include a developer profit margin of 25 to 35 per cent, in addition to high commissions for the selling agent. On a $400,000 property buyers can pay a premium of $100,000 or more above market value. This is a non-transferable cost that far exceeds any stamp duty savings and can take years to recoup in capital growth terms.
Serviced apartments and student accommodation:
These types of real estate are built and zoned for specific purposes and are often associated with seasonal demand and occupant restrictions that significantly reduce the property's marketability to potential buyers at resale. These assets are also typically viewed by lenders as higher risk and therefore obtaining finance can be difficult, with further implications for resale.
As local and US currencies teeter on parity many Australians are investing in foreign property in hopes of making a quick buck. But as many investors have discovered, buying foreign property is as much a strategy of currency investment as it is property investment, particularly for those financing the purchase of property with their own money. Investing in foreign property is also tricky due to different taxation, investment and property management laws and practices, which makes it particularly risky for novice investors.
With the mining boom in the headlines again, there has been a rush of investors purchasing property in mining towns. Historical trends show rapid growth in the values of properties in mining towns in anticipation of mining activity and equally rapid decline when activity winds down. This is because mining town properties are underpinned by local employment and a transient workforce, making them volatile long-term investments. A growing tendency of developers to construct smaller motel-style properties for fly-in, fly-out workers is an emerging issue for property investors and mining town economies.
Investing in property should be viewed as a long-term commitment reliant upon a strong measurable history of capital growth, rather than rental returns and tax breaks. When investing hundreds of thousand of dollars it pays to do conduct research and obtain professional advice from independent qualified professionals