Not all types of Investment Property Suit All Investors
Understanding the different types of property could save you from a disaster. Investing is new to most people so it's worth taking the time to learn about some of the fundamentals.
Residential property can be seen as one of the many different types (or as they say, class of investment assets) available in the investment space today.
Understanding this family structure of different investment types, is actually a very important first step in beginning to understand why comparing different types of investments is difficult - as they all perform differently at different times of the investment cycle.
Pro Tip: To make things more difficult, most real estate agents, property agents, and investment property spruikers are not financial advisers and simply don't have the ability to discuss the performance of different asset classes to help you see the bigger picture. That's why you should work with us.
Another way to say it nicely is: 'If all you sell is a hammer, you'll see everything as a nail'
We can advise you on all different classes of investment, including the asset class residential property.
When it comes to investing in residential property, (often referred to as direct property), there are a broad variety of types of property.
- Each of those types may also perform differently at different times in the property cycle and therefore are difficult to compare without a detailed conversation about your interests, needs, and expectations.
- For example, a serviced apartment may perform differently than a typical house and land package in the traditional suburbs.
It's a big subject and we've been helping our clients learn about it and step into the property market from a more informed position.
Below is a summary of different types of property.
Remember each different type of residential investment property can have a very different effect on your investment plans, so it pays to know the differences and your options.
Investing in New or Established property
New residential property enjoys many advantages over the established residential property market, including reduced maintenance costs, greater tax and depreciation advantages, and usually reduced tenancy problems.
The reason for investing in new property is to enable the investor to capitalise on opportunities and profit from increased demand, greater capital growth and strong depreciation opportunities. Historically, new property and its tax advantages saw the typical buyer come from the ranks of the time-poor and high tax bracket, but with the ever-increasing exposure to education and lifestyle programming, today’s mums and dads have now entered the market and are vocal about their needs, expectations, and demands.
The Traditional House & Land package
The backbone of the Australian dream is the house and land package. House and land packages, or more accurately property with a land component, represent an often more stable and consistent capacity for capital growth. Reducing the land component may often attract a specific renter demographic so its suitability to the individual investor is dependent upon many issues including the traditional and emerging rental demographic of the area where the property is.
As real value is often tagged to land size, its supply and demand, the greater the land component the more capital growth it may draw. This grab for land approach must also be tempered with an accurate understanding of a prospective renter’s willingness to maintain vast amounts of land and garden in a residential dwelling. The practical suitability of varying sizes of land content is dependent upon a property investor’s time horizon, cash flow, precise needs, and expectations.
Townhouses & Cluster homes
Townhouses and cluster homes are emerging as an available option to the standard house and land package with 500m2 land component. These townhouses may often have an internal floor space equivalent to a small house but rely on a reduced land component as their desirable feature as a low-maintenance rental accommodation investment.
Whilst becoming more popular in areas experiencing a land squeeze,(such as the inner city) these types of homes may suit an investor seeking a more complete investment offering, including purchase and on-site management. The on-site management does incur an additional fee, whilst providing an additional level of service.
Buying Off the Plan
In a rising market, many off-the-plan purchasers expect to purchase at a lower price than those people wishing to purchase a completed property in the same development. This is based on an assumption that the market is rising, or that the initial purchase price is significantly less than the end purchase price.
Buying off the plan is often the primary domain of high-rise apartments and boutique developments with a typical time frame of 12 – 18 months under construction. Understanding a client’s needs and time horizon is critical to success in this subclass of property. Be aware many marketing companies only sell high-rise and medium-rise units and justify the limitation of their offering with a veiled suggestion that strata property is the only form of direct property investment that should be considered today
Buying a House & Land Package - Under Construction
The appeal of purchasing a house and land package under construction appeals to some investors looking to reduce their purchase costs. Given the traditional building time frame of between 15-18 weeks, an investor may purchase a land component and pay stamp duty on that amount only then utilise a construction contract for the purchase of the dwelling negating the need for additional stamp duty. The savings in stamp duty are then used as the holding costs during the construction phase. Many investors like the ability to have more control over the construction phase and the opportunity to have the quality of work assessed at more regular time intervals.
Serviced Apartments, Furnished Apartments, and Holiday Resorts
Traditionally the domain of inner-city apartment living, some serviced and managed apartments are fully furnished and suit an investor who might be looking for a higher degree of depreciation and tax detectability and is willing to receive an increase in rent from a more specialised rental demographic for this privilege.
A furniture package may cost an investor between $15,000 - $35,000 on interior furnishings and may be worthwhile if an appropriately higher rental income and greater tax savings are achieved. We consider this subclass usually only appropriate for the financially planned and more sophisticated investor.
An extension to this subclass of investment property is the serviced apartment. This is where an investor purchases an apartment with a furniture package and management rights – usually for holiday letting and corporate rentals. Whilst a higher rental may be achieved, a higher management fee is usually also required.
- The inherent dangers of this sophisticated type of investment are normally dormant within the management contract and cloaked from the traditional investor and layman.
Our position is that this style of investment is unusual and required a higher degree of investor understanding and sophistication.
Insight: The level of risk-to-return for this class of investment is traditionally not as strong as the glossy brochures, marketers and real estate agents would have you believe.
How we can help
Investing in property is one of the asset classes available to investors. Whether it's suitable for you, your time horizon and your expectations is a conversation that needs to occur with a professional.
Call us today for a confidential chat about your personal circumstances.
