Whats makes the best type of residential property to invest in?


Different types of properties – be it a house, villa/unit or apartment – offer varying benefits and drawbacks for investors. So what makes the best type of property as an investment?

The answer is not necessarily clear cut, as every property is unique and needs to suit the investor’s individual circumstances, such as their risk profile, financial capacity, life situation and overall goals.

To determine the best strategy for you, it’s important to seek the advice of a reputable and investment strategist, who can help create an investment plan suited to your needs. However, while every property and investor is unique, there are some general ‘rules of thumb’, that investors need to be aware of for different types of property.

Houses as investment properties

Pros

  • Typically provide higher rates of capital growth, particularly established dwellings in areas of limited supply. As a general rule of thumb, land appreciates while buildings depreciate so older houses with a greater proportion of land value are better placed for capital growth.
  • Investors have greater control over houses and can more easily add-value to them, whether through renovations or redevelopment.

Cons

  • Rental yields are typically lower (generally negative cash flow meaning the rental income won’t be enough to cover the cost of mortgage repayment).
  • Generally require more maintenance, particularly older stock, as landlords need to replace aging and broken items, such as rusted gutters.


Apartments as investment properties

Pros

  • Higher rental yields and may be neutrally or positively geared, meaning there are lower holding costs and they may deliver surplus income.
  • Less maintenance as the buildings are generally managed by a strata manager

Cons

  • Generally lower rates of capital growth as apartments typically have a lower amount of intrinsic land value (i.e. more of the purchase price is in the dwelling) and are more often located in high supply areas.
  • Strata fees can be a drain on rental income, particularly if the complex has many features, such as lifts, a pool, a sauna or other common areas.
  • Little opportunity for add-value initiatives with limitations for renovations due to strata bylaws.


Villas or Units as investment properties

Pros

  • Typically provide a relatively good balance between good rental yields and capital growth.
  • Generally lower price point and less maintenance expenses compared to a house.

Cons

  • Strata restrictions can impede the ability for add-value initiatives.
  • Villas can be fairly homogenous and grouped together, which can result in more competition for a tenant or a buyer (when selling). The same goes with apartments.
The above pros and cons for houses, apartments and villas aren’t necessarily a given but more of a general guide, so every property needs to be examined on its merits.

The type of residential property that makes the best investment will depend on each investor’s individual circumstances. For example, do you want high capital growth or high rental income, do you have a higher risk tolerance or are you risk averse, will your financial position allow you to own a property with high holdings costs or do you need a property that has no holding costs, and so forth.

Again, to determine the best strategy for you, it’s important to speak to a reputable buyer’s agent and investment strategist, who can help create an investment plan suited to your needs.


Author bio

Damian Collins is the founder and managing director of property investment consultancy . Offering market leading research and advice on the Australian property market, the company helps clients accelerate their wealth through property investment by assisting them in the strategic planning, financing, acquisition, management and development of their commercial and residential investment properties. Damian has completed a Bachelor of Business at RMIT University and a Graduate Diploma in Property at Curtin University. Damian is a board member of the Property Investment Professionals of Australia (PIPA) and is the Deputy President of the Real Estate Institute of Western Australia (REIWA).