The importance of asset selection

Asset selection within property investing refers to the numerous types of property (construction type) on the market. There are numerous types of properties within the property market including but not limited to houses, apartments, or townhouses. A key consideration to purchasing a quality property is to focus on the demand and location of a property. However, asset selection is also an important consideration as it influences capital growth. If you are wanting to compare asset types further you want to read my previous article: what type of property should I buy?

Types of properties:

Residential property is not exclusively limited to houses. There are numerous forms of residential property that can be broken down into different subcategories. Forms of the property include:

  • High-density properties such as apartments and units.
  • Medium-density property such as semi-attached townhouses.
  • Low-density property such as houses with a land component.

This list covers the majority of residential dwellings. Although it is important to note, the type of asset you purchase will influence your investing performance (level of capital growth). This is because different property types have varying levels of growth. In fact, even the same property type being either established or new can impact its performance. Looking at the demand and location for purchasing a property is not the only consideration that needs to be taken into account, asset selection is just as imperative.

Best asset type

The best performing asset class (in property) can be extremely debatable depending on who you talk to, their experience within property investment, and any hidden agendas they may have. The mixed messages portrayed can become quite confusing for investors who don’t know who to trust. Therefore, when making these claims historical data should be used to silence opinion and highlight the facts.

Across the long-term established houses have historically outperformed units and townhouses. This might be explained by the fact houses occupy a greater size of land and therefore are harder to increase supply. While the demand for larger properties (houses) may better meet the needs of more property buyers. On a case-by-case basis, you will find units within an area outperforming houses in another suburb. However, when comparing property types in the same location, on average houses have outperformed other asset types over the long term.

New vs old

Established properties will always outperform new properties in the short term. Many developers selling new properties flaunt tax incentives to rationalise the purchase of a newly constructed property. However, numerically new properties can’t outperform established properties. This is because new dwellings are made up of a greater percentage of liability (the new dwelling). Not to mention, you will pay a premium for the construction of the property whilst obtaining a smaller and less valuable land component. Factor in the developer’s profit margins on top of this and in most cases the investor is sitting on their hands waiting for growth to occur.

Asset vs liability

When looking at asset selection take into consideration the land to asset ratio of a property. In most cases, when only looking at asset selection, purchasing a property with a higher land-to-asset ratio will give you a greater likelihood of growth. This is because the land component of an asset is what appreciates whilst the property being physical in nature depreciates. This is why you can claim deductions on the construction cost of a property. As the demand for a location of a property increases the land becomes more valuable to own, hence “the power is in the land”. Purchasing a property with a higher land-to-asset will result in owning more assets (the land) and less liability (the dwelling).

The verdict

Asset selection is an important variable when looking at the property level. By this time, you should have already identified the state, area (LGA), a pocket of suburbs, and even a street. Though, taking into consideration the type of asset should be a factor you consider when purchasing a property. Meanwhile, don’t be put off by older established houses as these have shown to historically outperform other asset types.