There’s a lot of hype about property investment, and even among investment advisors there are conflicting views. Some advisors say if you already own a home you shouldn’t put more money into property because you’re not diversifying enough, while others say that property is a safe investment that keeps up with inflation. The truth is, that everyone has a different level of risk and return with which they are comfortable. Many people make money in property, while others find out that it’s really not for them – much depends on your individual situation.
Here are some basic facts on investing, things to consider when looking at property investment, and evaluating potential returns on your investment.
Property investment can provide both income (through rent) and growth (if the value rises). The wise approach to investing in property is to ensure all your start-up and ongoing costs are covered - and to invest for the long term so there’s a reasonable chance of capital gain.
A key to property investment is making sure that the income and any tax advantages you get from the property cover the cost of ownership – the loan, rates, repairs, mortgage repayments and other costs. You also need to have the means to cope financially if something goes wrong, for instance if the place is empty for a period of time or needs urgent repairs.
If you get the balance right, you could end up owning several properties paid off over time, without it costing you any extra yourself. And if the property rises in value, that's an added bonus.
But you cannot rely on getting a capital gain. Property can go up and down in value and at times it can be hard to sell – so you could make a loss if you need to sell in a hurry or at the wrong time. However, if the income covers the costs, you could ride out the rough times and wait for better times to sell.
The risks and returns are different for commercial and residential properties. Most investors start with residential property because it’s more familiar, and easier to enter the market. Learn more about some of the key differences between residential and commercial property investment, and what to look for when buying.
The minimum investment amounts are higher for commercial property, so it's not usually the area where first time property investors start. Rather, most investors start with residential property because it's much easier to enter the market.
The following table outlines some of the main differences to consider between residential and commercial property investment
Residential property investment
* Lower entry costs ie. $100,000 - $200,000+
* You can generally borrow most of the money – up to 90-95% for 30 years
* Lower expected returns – but less risk
* Less affected by economic conditions
* Tenants may change frequently
* Landlord pays costs and repairs
Commercial property investment
* Higher entry costs ie. $250,000 - $500,000+
* You need good equity – maximum loan of 60-70% WWW* Higher expected returns – but more risk
* Strongly affected by economic conditions
* Leases are usually long-term
What should you look for when buying commercial or residential property?
With both commercial and residential properties, location is very important. But what are some of the other things should you look for?
Commercial property investment
As highlighted above, the right commercial building needs to be in a good location that is attractive to businesses. For instance, is it in a secure, well-lit area near main roads, with good parking and similar buildings around it? And the building should be in good condition with modern facilities.
Another priority is to find a building that has a long-term lease with an established business. In many ways, the quality of the tenant is more important than the building itself - because you are really investing in the success of the tenant's business.
Residential property investment
For a residential rental property, you should consider the type of tenant you want to attract – the needs of a family will differ from those of a professional couple or students. This can make a big difference to the type of property and area you should look in to invest.
As a general guide, some things to look for include...
* property in a good safe area with good facilities nearby, such as transport and shops
* a 2-3 bedroom place in good condition with modern kitchen, bathroom and laundry facilities
* parking, fencing, decks, and outdoor areas all add appeal
* make sure it's sunny, sheltered and zoned residential
* If you're looking at an apartment check for noise, smells and safety features and remember old converted buildings can cause problems eg. higher maintenance costs. In all cases, you should get a building inspection.
* Try to think like a tenant, and ask yourself - would I live here if I were renting?
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