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Investment Property – What to Buy

What to buy, what to buy?

Picking the right type of investment property is the key to success.

Commercial

commercial property

Commercial property includes things like shops, offices and warehouses and parking spaces.  The upside of commercial is they can get much higher returns then residential property, sometimes two or three times the amount.  Plus the tenant is often required to pay all the expenses of owning the property like rates and taxes and so on which makes the return even higher still.

The right commercial property can grow very well.  Premium commercial property can go through bursts of very high growth and assets like shopping centres can grow very well too.

Commercial Property can be high risk though.

During downturns in the business cycle commercial property, even good commercial property can be vacant for extended periods of time.  And, you’re competing with the ‘big boys’.

Those big players often offer huge incentives like extended rent free periods, fit out allowances, as much as 40% to 50% of the rent.  And these incentives are often paid out up front.  That means that if you owned an office you wouldn’t get any rent for months or years, plus you would have to pay for the tenant’s fit out costs, which can be huge.

And, these incentives are paid out during the down times to get tenants, just when it’s the worst possible environment for business so you have the double edged sword of watching your tenant go broke just as they were about to start paying the rent.  Remember 80% of businesses go broke in their first 5 years.  You don’t have nearly that same risk with somebody renting a house.

On top of that, in order to rent commercial property it has to be refurbished regularly.  Good for the depreciation allowances, not so good for the cash flow.

Really, successful commercial property investment is beyond most people until they have substantial other assets.

Industrial Property

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Very similar to commercial in a way.  The good thing with Industrial Property is that it is usually cheap because that is the only way the land can be used.

That’s why the return is high.  Less maintenance than commercial but industrial property can still be vacant for extended periods of time and so there’s the risk.  Because it is low grade land there is very little opportunity for growth because of zoning changes and little opportunity to value add, so personally, I stay away from it.

Holiday Homes

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Good for recreation, not so good for investment.

Prices fluctuate widely in holiday areas, so do rentals.

When you do rent the property during peak times the prices are high but generally the properties can remain vacant for long periods during the quiet times.

And who wants to own a holiday home when the only time you can use it is when nobody wants to?  So you have a choice of either renting the property when you can for the high rents and not using it yourself or taking the peak periods and losing your shirt during the other times.

Also, because of the high wear and tear you are constantly replacing the furniture and fittings.  Again, good for the depreciation, lousy for the cash flow.

Holiday homes are an indulgence, not an investment.  There’s lots of very nice hotels in the world for holidays and they will cost you a LOT less than a holiday home.

Rural

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People own rural properties for the love of it, because it’s in their blood.  Only the biggest and the best can make money out of rural pursuits these days.  You’ve got to admire farmers in this country, after all their efforts built this nation, but in terms of investment, farms are bull!  And they cost a fortune – owning a farm is a good way to get poor – not a good way to get rich!

The only time rural land can be useful to an investor is when there is a genuine opportunity to change its zoning to a higher and better use and by doing so profit but these opportunities are rare, require excellent research and even better planning and negotiation.

Land

Only land goes up in value, so doesn’t it make sense to buy land and not bother with tenants?

Maybe, but it’s those tenants who pay your bills.  Land doesn’t earn anything.  Which means no income and no tax deductions.  You could own 2 or 3 houses for the same repayments on land.

Residential Property

pmg-rental-properties

For most people residential property offers the best mix of return, growth and low risk.  Most wealthy people have substantial portfolios of residential property.

Houses or apartments?

Good question.  Well, remember we said that it is the land that goes up in value?   That would indicate that houses and town houses would have the best growth and this is true.  But there are other factors that can come into it as well.

Firstly, many people starting off can’t afford to buy a house, especially in the major capitals where it is best to buy, so their only option is to buy an apartment.

“You’ve gotta be in it to win it”.  So you’re better off buying something you can afford now than waiting around for the ‘perfect’ house that you might be able to afford later.

That way you are at least making money.  Statistics are on the side of owners of apartments as well, because about 70% of all renters rent apartments.  And rental returns can be higher for a good quality apartment in the right area.  In areas where land is very scare, for example on Sydney Harbour, apartments can grow at the same rate as houses.

So, if you can afford a good house buy a good house, but other wise get into the game and buy the best apartment you can afford.

#1 Rule of Property Investing

More important than any of that though is to remember the primary rule of buying investment property…

Buy what is going to suit the tenants in the area.

This is SO obvious that many people over look it.

They are searching for a property and suddenly they find a ‘bargain’.  Casting aside all common sense the buy it only to find it’s not what the tenants who want to live in that area want to live in and they can’t rent it.

They have to lower and lower the rent to get a tenant and so all of a sudden it’s not looking like much of a bargain after all, and then when they come to sell it, they find there’ little capital growth.

I once had somebody come to ask me my advice on why they were unable to rent a house they owned in Paddington, Sydney.  The type of tenant rents in that area are Trendy types, Yuppies and Dinks, the ‘Pink’ market.

So what do you think they would want to rent?

Something straight out of the pages of ‘Belle’ magazine.

Belle-April-May-2013

This person said they had bought a great place, and fully renovated it but couldn’t get a tenant even though they had dropped the rent by half.

“But it was such a bargain!”, they said.

Turns out they had bought a red brick modern house and renovated it suburban style.  Nobody wanted it.  And there was nothing I could suggest.  That house would have rented for a tidy sum in a family suburb, but in this suburb it was a dog.

If you were to buy a house in a young, trendy, inner city area, you probably wouldn’t rent it.  If you were to buy a flat in a family suburb, same deal.

The top rule of buying investment property is buy what suits the tenant.

If you can’t afford that, find another suburb.

 

 

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Written by Peter Spann

Peter Spann – Film Maker | Director | Business Coach | Writer | Public Speaking Coach | Presenter | Investor.

 

 

© Copyright: 2014 Peter Spann – All rights reserved

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