Discover the best type of property to invest in.
Purchasing an investment property can be a very lucrative decision if it’s done correctly. So, how do you know what type of property is the best to purchase?
Here’s Real Estate Investing Australia’s top tips on what to look for when deciding on an investment property.
WHAT TYPE OF PROPERTY IS THE BEST INVESTMENT?
Before you start investing in property you need to think about the type of property you wish to buy.
Different types of properties have varying advantages and disadvantages.
Let’s first consider vacant land; people buy blocks of land in the hope its value will increase enough to cover the cost of holding the land (interest, rates etc) and provide a sufficient return, on the amount of money invested, knowing there is no regular income from a vacant block.
Some people have made lots of money purchasing large tracts of land on the urban fringes of major cities. As the fringes of suburbia have expanded, they have been able to sell their land and the price escalation of the land can be huge.
Successful land speculation needs much investigation and analysis. Investors need to know the growth trends in the community in which they are considering purchasing. They also need to know how quickly there will be spending on infrastructure. Considered land speculation can be very profitable but you must also be aware of the risks.
If you buy a large area of land on the urban fringes, you’re taking a gamble that the growth of the city will continue and it will reach your purchase in the near future. You are also gambling that the government will not change its infrastructure plans or zoning for the area.
A further downside to investing in vacant land is that it doesn’t provide any regular income. With a typical income producing property you would expect a gross rental return of anywhere from 5% to 10% per annum. If you invest in vacant land you’ll need to make significant capital growth to match the returns of an income producing property.
An additional negative to consider if thinking about buying vacant land is the lack of finance that is typically available. Many lenders are reluctant to lend on property that doesn’t produce income. Consequently they may only lend up to 60% of the value. This is considerably less than can be secured on an income producing property.
Another type of property you could consider investing in is commercial property. This encompasses a wide variety of properties that aren’t classified as residential, including offices, retail and industrial properties and hotels.
Commercial property usually achieves a higher rental yield than residential property. It also has an added advantage of usually being a net return to the owner. The tenant generally pays the outgoings on the property, such as rates and taxes, as well as rent. Commercial property also receives the same tax benefits as residential property.
However, there are a number of downsides to commercial property. Firstly the risk your property could be vacant for a period of time is greater than that of residential property. Commercial property is often designed and constructed to be user specific for your tenant. If the property becomes vacant, it may take many months or even years to find the right tenant again. Residential property is usually rented again when a tenant moves on within a short period of time, even if the economy is in recession.
Another less desirable aspect to commercial property is the amount of leverage available compared to that of residential property. Although you can get finance on residential property of 80% or even even higher, on commercial property the maximum financial institutions will usually lend is around 70%.
Let’s now consider investing in residential property. It has a number of benefits over other types of property. To start with, the risk of vacancy is low compared to that of commercial property. Even if the residential vacancy rate moves higher, it is still much easier to get tenants for a residential property than a commercial property.
Residential property also has the added benefit of attracting a higher level of finance. Lenders love the security residential properties provide and will often lend to 90% or more of the value.
While residential property obviously provides better income than vacant land (which provides no income) the income from a residential property is usually less than that provided by commercial properties. However, you should also keep in mind is the government is determined to keep housing prices from falling too far which is an important factor that reduces the risks associated with residential property investment.
For the majority of investors, residential property is probably the best investment when starting out on a property investment career. The lower risk of vacancy and the improved ability to leverage gives the average Australian investor enough opportunity to get established as a property investor without incurring excessive risk.
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