The reality is there is nothing like “Best Property” – I have clients who have money in every type of property despite if all the downsides of that type of property. What is comes down to is how much risk do you want to take (because risk is directly proportional to return!) and what do you want to achieve from that particular investment.
It is more important not to get the wrong type of property then to get the ‘best type’ of property.
Most people make great choices when they are buying their family home because they are going to live in it and they understand the street, the suburb and the town. Having made such great decision fills them with too much confidence and they drive to an unfamiliar place and buy property riding on the over-confidence – sometimes it does work; but most time it doesn’t.
In this email I want to share some of the different property investing options available to you and their pros and cons, so that you develop a wealth creation strategy that WORKS FOR YOU!
Direct Versus Indirect Property – Owing a residential property in your own name (direct property) which you control 100% is generally the safest way to buy property because you can value it, tenant it, mortgage it and control it – so only a limited amount of things can go wrong.
Property Trusts – The main form of investing in indirect property is listed property trusts, which is similar to investing in shares except the underlying asset is commercial/industrial/retail property rather than a company. When buying into a property trust you have to trust that the fund manager is making good decisions and fully acting in your interests.
Residential Versus commercial/industrial/retail – The reason I prefer residential property rather than commercial, industrial and retail is that non-residential properties fluctuate with the economy so you have got to be quite skilled to predict the future trends.
Positive cash flow versus capital gains – There is an ongoing debate in property circles as to whether you are better off investing in positive cash flow property, which gives you a high rental yield or negatively cash flow property, which typically gives you a high capital growth. I believe you should have a mix of both – start with high capital growth properties and then later on look at buying positive cash flow properties.
House versus Unit – The saying ‘ land appreciates and building depreciates’ gives people the impression they should always buy houses over units, but you should always take into consideration the rental yield of the property – as it may turn out that the unit may perform better in long term
Home state versus interstate – The advantage of buying locally is that you are less likely to get ripped off because you understand the market and you roughly know the property values. The disadvantage is that you might lose out on a high capital growth area, if you want to invest locally. Also, you need to consider the land tax which will come into play after you have a couple of properties in the same state.
New versus second hand – The two advantages of new properties are – possible tax benefits by using depreciation allowance and the possibility of buying off-the-plan. You need to exercise extreme caution in order to get these benefits, as they can backfire and cost you a lot more. Second hand properties are usually not so attractive, but if you can see past these and maybe look at renovating them, this can create substantial value.
Holiday homes – Many high-income earners purchase holiday homes as investments thinking that they will get benefit of the property when it’s not in use. I think of holiday homes as luxuries rather than investments.