When purchasing residential property for investment purposes, asset selection is fundamental in ensuring the property purchased has the highest return on investment (ROI). Over time, certain types of properties have outperformed others while some properties should be avoided. Each type of property can come with a list of advantages and disadvantages which an investor may want to consider. The three main types of property construction can be seen as the following:
Established Houses
Established housing is the most common form of real estate and entails a detached dwelling with a land component. These types of properties are scattered across the country in both metropolitan and regional areas.
Advantages
- On average, houses tend to outperform other property types.
- The most common form of housing (78% according to the Australian Bureau of Statistics).
- Higher rent from tenants compared to other types of property.
- Potential to add value internally and externally.
- Potential to develop, sub-divide or add auxiliary dwelling.
- Comes with a land component.
- Gives tenants greater privacy.
Disadvantages
- Most expensive type of property.
- Can have more maintenance issues.
- Lower rental yields than other types of property.
Established Apartment/units
Established apartments or units are built within a complex that is comprised of as little as three to four units or hundreds. This type of property is usually seen in close proximity to major infrastructure, cities, and coastal areas.
Advantages
- More affordable type of property.
- On average have higher yields.
- Can have excellent locality to infrastructure, jobs, and amenities.
- Generally, have lower maintenance costs.
- Can outperform houses when in the right location.
Disadvantages
- Has no individual land component.
- Hard to distinguish between other properties in the same complex.
- Usually are strata-titled which results in body corporate fees which can eat into cash flow.
- Can readily be developed leading to an over-supply in certain areas.
- When over-supplied can lead to poor performance in capital growth.
Townhouses
Townhouses have become increasingly popular as they aim to demonstrate a blend between the density of houses and apartments. These types of properties can be built within a complex which is comprised of a house and land component.
Advantages
- More affordable type of housing, in contrast, to stand-alone houses.
- Has a house and land component.
- Better yield than houses.
Disadvantages
- Usually, strata-titled meaning body corporate fees or levies.
- Can have numerous similar styled homes making it hard to differentiate from other properties in the same complex.
Summary
These three types of properties comprise nearly the entirety of the residential property market. Each of these construction types aims to provide a range of housing through different levels of density. For investors, it is important to understand the value in which each of these dwellings will bring and how they may work towards assisting the investor in achieving their financial goals.
New vs Existing
While the type of property purchased is important, there is also a vast difference between new and existing property. New vs existing property can pose numerous advantages vs disadvantages across all property types. There are varying opinions on this subject which are usually based on an individual’s experience and agenda within property investing. The differences can be seen as the following:
New property
A new property is any dwelling that has yet to be occupied and is usually purchased prior to construction.
Advantages
- Usually has minimal maintenance costs in the first few years as the building is brand-new.
- Has greater depreciation benefits as new construction.
- Can have government incentives for first home buyers.
- Can achieve greater rent in contrast to an existing property.
- Has better tax implications.
Disadvantages
- Usually, lower growth when compared to established property.
- Usually located in new estates further away from existing infrastructure.
- Takes longer to rent if the property needs to be constructed.
- Can demand a premium to purchase as construction costs are based on current building costs.
- Generally sold by property developers who sell at a higher price to increase their margin of profits.
- If built poorly can lead to structural issues.
- Limited options unless willing to pay additional funds to alter the design.
- Less room for negotiation
- Usually has a smaller land component compared to existing properties.
- Has a lower land to asset ratio.
Existing property
Advantages
- Has generally outperformed new dwellings over the long term.
- Better locality to already established infrastructure, jobs, and amenities.
- Has value add potential through renovations.
- Generally, has a larger land component.
- Has the ability to subdivide, develop or build auxiliary dwellings.
- Can have development potential.
- Can be negotiated more easily.
- Ability to purchase below market value.
- Ability to reconfigure existing property.
- Doesn’t cost a premium to purchase.
- Doesn’t need construction time to build.
Disadvantages
- Higher maintenance costs
- Potentially lower rents
- Less depreciation and tax incentives.
Summary
There are no two ways about it, existing property has been seen time and time again to outperform new property. When purchasing a new property the investor is essentially paying for the labor, materials, and developers’ profits of construction. The developer’s aim is to turn the highest profit possible despite the investor’s intention of purchasing a quality investment. If the developer is working against you how can you expect to succeed in your purchase? Do not be fooled by their savvy sales tactics as they continue to suggest tax depreciation benefits are what justifies the purchase. Tax depreciation is NOT the main reason to invest in property and anyone who is suggesting so either is ignorant or taking advantage of you.
What property to avoid?
There are some types of properties that likely show less value for investors and in turn, may not perform to the investor’s expectation. These types of properties which fall into this category can be the following:
Off the plan and new property
Off-the-plan or new houses or apartments can appeal to home buyers and novice investors as they are flashed with tax and government incentives. However, these types of properties pose a great risk as they are almost always purchased at a premium in order to cater to the developer’s profit margin on top of the construction cost. This exceeds any advantage to the prospective buyer and can take a long period of time for the market to meet the original purchase price. Moreover, the dwelling on a property is inherently decreasing in value over time given it is physical in nature. Therefore, the dwelling of a property is a liability and the land is the true asset. Fundamentally, new property has extremely low land to asset values meaning the purchase price of the property reflects a larger proportion of liability.
Large apartment/townhouse complex’s with amenities
Large complexes which boast pools, gyms, and other additional amenities are usually at the expense of large body corporate fees. This can chew into an investor’s cash flow when holding a property. Moreover, large complexes can have poor locality and are generally built before there is a high demand for this product. These types of properties can see a significant decline when the construction of new complexes in a similar location is built. In turn, this degrades existing complexes that are no longer considered new leading to a lack of demand and over-supply.
The Verdict
The type of property outlined is those which make up the majority of the property market. Please note, that not all asset types are listed, and other types of property include: Duplexes, retirement living, blocks of units, villas, student accommodation, dual occupancy, axillary dwellings, and commercial property.
There is a wide variety of asset classes within the property market. Each with its own unique advantages and disadvantages. Encompassed within each asset class are even more variables to consider as all houses aren’t the same nor are all apartments. Existing property, both houses, and apartments (in smaller complexes) in high-demand areas will always have the best prospects for short-term capital growth. However, the asset class which is best to purchase is likely the asset that will work best for the investor and their investment objectives. Specific investment advice needs to be tailored towards the investor’s circumstances which takes into consideration numerous variables. Hopefully, understanding the pros vs cons of each asset type outlined will help to make more informed and educated investment decisions.
