When searching for your first investment property, investors are spoilt for choice, whether it be a house, apartment or villa. But what’s the best type of investment property to buy?
The answer to this question will largely depend on your own unique circumstances because the different types of properties offer different pros and cons. Smart investors understand that they must acquire properties that work in tandem with their own investment goals, financial capacity, life circumstances and risk profile.
What are your property goals?
Are you looking for long-term capital growth? Is regular income your primary goal? Or are you looking for a mixture of both?
Different types of property can be better suited to each of these goals. Residential property has a track record for long-term capital gains. On the other hand, commercial property can deliver healthy ongoing income driven by regular rents. And there are plenty of varying strategies in between. What matters is that you can match the property and your overall investment strategy to your personal goals and needs.
How much risk are you willing to take on?
Deciding how you feel about risk calls for an honest self-appraisal. The level of experience you have with property investing, and the debt you are happy to take on, are also important factors that come into play.
We often see television programs showing property ‘flippers’ who achieve a high increase in the property’s value (often through renovations) in a short period of time. These don’t always reflect reality. Nonetheless, it is important to consider how quickly you’re aiming to achieve a certain equity position. This can shape the type of property investment strategy that will help you achieve this goal.
If you are comfortable with a high level of risk, strategies such as property development may be suitable for you personally. But this is an option where plenty can go wrong, and expert advice is essential.
What is your financial capacity?
Even if you have a high tolerance for risk, some investment strategies, such as extensive renovations or property development, can demand considerable cash resources before you see a return. Here too, you need to be realistic about what you can – and can’t – achieve, with the resources you have. Your future circumstances should also be weighed up. You may have the funds needed to invest in a value-add property today, but what of the future? Could your cash flow change as a result of shifting personal circumstances, such as dialling down from a dual income to a single income household?
These are all important considerations in determining the best type of investment property for your unique requirements.
Advantages and disadvantages of different types of investment properties
Here’s a quick overview of the different benefits and disadvantages that are typically offered by houses, apartments and villas.
Houses
Benefits
- Usually better capital growth prospects compared to apartments and villas
- Relatively easy to add-value to through renovations/redevelopment
- Greater control over the asset
Disadvantages
- Lower rental yields compared to apartments and villas
- Greater maintenance required, which often means higher expenses
- Higher price point
Apartments
Benefits
- Higher rental yields compared to houses
- Often better rental returns, meaning lower or no holding costs
- Less maintenance required
Disadvantages
- Usually lower capital growth prospects compared to houses and villas
- Strata fees can be high, particularly if the complex has large common areas, such as pools and lifts
- Less control over the property with limitations for renovations due to strata bylaws
- More competition for tenants and buyers, particularly in large complexes and in areas where apartments are highly prevalent (i.e. CBDs)
Villas/townhouses
Benefits
- Relatively good capital growth prospects (not as good as houses though)
- Relatively good rental yields (not as good as apartments though)
- Ability to renovate the property (unless it’s restricted in the bylaws),
- Lower price point than houses
Disadvantages
- Strata restrictions can limit what you can do with the property
- Less control in terms of renovation options
- Fairly homogenous, similar to apartments, meaning there can be more competition when selling or leasing
The bottom line
The best type of investment property for you will vary according to your individual circumstances. There is no ‘one size fits all.’
Time taken to establish your property strategy is a wise investment. It helps you narrow down how to choose an investment property, and provides a clear blueprint for the future.
Most importantly, in establishing the property types that are right for you, a well-devised plan helps you identify and avoid investments that aren’t right for you, ensuring you have the best chance at successfully achieving your long-term goals.
If you’re starting out in property investment and are wondering what type of rental property you should buy, you first need to establish a strategy. For help identifying the property strategies best suited to you, or for more information on our range of services, request an obligation-free chat with our property experts.