Property investors in Australia can select from a wide range of different properties. But with each carrying different benefits and drawbacks, how do you know which type of property is right for you? We consider the three questions you need to ask…
An investment property is a major commitment – one that can represent a big step towards a healthy and secure financial future.
Yet a common pitfall for many investors is failing to choose the right property to suit their needs. It’s an oversight that can hold investors back over the long term, and even prevent them from achieving their financial goals altogether.
So, how do you determine which property types are best suited to you – both today, tomorrow and well into the future?
Here are the three questions you need to ask:
1. What are your property goals?
A key starting point to investing in property is thinking about what matters most to you.
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 has a proven reputation for delivering 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.
2. How much risk are you willing to take on?
All investors want to earn healthy returns. But high returns often come at the cost of higher risk. And not everyone is comfortable taking that 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. 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 and 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.
3. 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 type and condition of property you invest in.
Case Study: Finding the right fit
To see how property investing is very much about the right ‘fit’, let’s take a look at a hypothetical young investor Nick.
Nick is keen to build a portfolio of 2-3 properties over time. He watches his cash flow carefully, but on the personal front, he and his partner are looking to start a family in the next few years.
Given Nick’s short-term goal of having children, we would advise him to stay away from property development or investments that carry higher risk in the immediate future.
This may change as his situation evolves, and in the years to come Nick may look towards income-producing assets such as commercial property funds to balance his property portfolio.
Right now, however, Nick should focus on acquiring houses that are in good condition, with strong land value. Such properties present well to tenants, and typically have manageable maintenance costs, which will be important for Nick when he starts a family and his disposable income falls.
To help even out his risk and exposure, Nick could target a mix of property types.
As a guide, if his first property is an older house on a larger block, it may make sense for his next investment property to be a more conservative option such as a newer townhouse situated closer to the CBD that presents a more yield-focused alternative.
The bottom line
Time taken to establish your property strategy is a wise investment. It helps you narrow down the types and styles of properties you should be looking at, 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 want to identify the property strategies best suited to you, request an obligation-free chat with our property experts to learn more about our property strategy services.