You may know whether cash flow or capital growth is your aim and the strategy you’re going to undertake, but then you have to start looking at properties. What should you be looking for?
New vs old (inc off-the plan)
Some investors swear by brand new properties; others prefer established dwellings. Each has pros and cons.
New properties are typically attractive to passive investors, who are time-poor and would like to have a property that requires little effort on their behalf. There is usually lower maintenance, and if there happens to be any defects after completion, the builder or builder’s insurance should cover any cost involved.
New properties are also appealing to tenants, as they usually have lots of light and space. Tenants with good incomes are often prepared to pay higher rent for new properties, particularly if they are situated close to their work. From a tax point of view, new properties usually offer higher or longer depreciation benefits, not only from the fixtures and fittings but also from capital works. It is possible for investors to use these tax benefits to assist with monthly cash flow.
However, the cost to purchase new purchases may be higher than an old property in the same area, as developers have to cover their costs and profit margins. This can mean it takes longer to realise capital growth.
Growth may also be affected by there being a few very similar properties being sold at the same time, such as in a brand new development – a few hasty re-sales can affect the values of all the properties in the immediate area. Brand new properties also don’t allow much room to add value by renovating as all the work has already been done by the developer.
One of the biggest advantages of old properties is the fact that there is less price fluctuation than new properties in the same area. You also gain the ability to add instant value through renovations, subdivision and development. Some investors have even managed to get their property for “free” by subdividing a large block and selling off a portion of the land. Older properties generally have a bigger land component, which usually drives property value upwards. Investors can also be more certain that the property they are purchasing has a ‘true’ market value, with no profit margin set by the seller. They are usually found in well established suburbs which can demonstrate consistent growth.
High maintenance costs are probably the biggest disadvantage of old properties, and there may be a loss of rental income if renovations need to be done. It may be also harder to attract good quality tenants to an old property, unless it has had some renovations done to it to modernise it. Rental may not be as high if the property is very run down, which could impact on your monthly cash flow. Finally, tax benefits may not be as significant, due to lower depreciation values.
Off-the-plan purchases have a lot of the advantages already touched on with new properties. The stamp duty payable on the purchase is also often reduced because the property is not yet completed, with NSW currently waiving stamp duty entirely for off-the-plan purchases under $600,000. The Foreign Investment Review Board will also allow an overseas investor to purchase an ‘off the plan’ property, where they can’t purchase an established property.
Perhaps one of the biggest advantages is that there is the potential to secure the property without putting any of your money down. Some developers accept deposit bonds to cover the deposit instead of you having to use your own cash. If the property is not completed for a couple of years, this is a much cheaper option and allows you the flexibility of using your cash for something else.
Be warned, though: there have been occasions where properties purchased off the plan may have dropped in value by the time the property is completed and ready to settle, therefore investors may find themselves out of pocket.
Houses or units?
The arguments over whether houses or units are a better bet is a thorny one, and one that is often tied to demographic changes, particularly in Australian cities.
Houses have typically shown more consistent growth over the long term in established areas. Most property experts also agree that purchasing properties with high land content is a one way to increase your chances of securing better future growth if it is in an established area. You also usually own the land, and so you also have greater control over what you want to do with it. This means there are more options open to you to modify the property and add value.
On the flip side, sometimes houses do lower rental returns as a percentage of their value. There can also be higher maintenance costs.
One of the main advantages with units is that they tend to provide a higher rental return as a percentage of their price. Moreover, apartments frequently achieve just as good returns as houses in areas that are fully built up with height limit restrictions on further development. It’s quite often the case that prestige city locations will be largely populated with units, and so investors may have little choice but to opt for units if they want to access the consistent capital growth in these locations – both in terms of property availability and entry costs.
Units are also increasingly popular with the younger generations and empty nesters. They meet the needs of these demographics as they are less labour intensive in terms of maintenance and they also have potential benefits over houses because of the shared benefits of many apartment complexes from community/group services e.g. pool, tennis court, gym, activities, and so on.
The main disadvantage is that apartments typically show less consistent growth in areas that are not fully built up. Owners of apartments also typically have less control over their asset, as any changes they want to make to their property usually requires approval from a body corporate. Owners also have to contribute to the running of the body corporate, so compulsory fees are generally higher.
City vs regional
Where to buy your property is equally important. Historically, investors have tended towards city properties, particularly in the eastern capitals of Sydney, Melbourne and Brisbane. However, the resources boom has energised regional markets, particularly in Western Australia in Queensland. Which one is right for you?
Urban properties have historically been favoured by investors seeking capital growth returns. Around 70% of Australians live in cities, and population inflows – interstate and overseas – are typically concentrated on urban areas. Thus, demand is high from both property purchaser and renters.
Capital growth is typically more consistent in urban areas, due to high demand for properties – particularly in ’blue chip’ suburbs within easy reach of the CBD. In several capitals – such as Darwin, Canberra and increasingly Sydney – this is exacerbated by supply issues. While this also drives capital growth higher, it does present affordability issues and entry costs can be higher – especially for suburbs closer to the CBD. This has been mitigated by the appearance of more high-density housing, alth
Due to their higher capital growth, city properties are usually negatively geared – indeed, positively-geared city properties are something of a rarity. On the flip side, vacancy rates are usually extremely low due to high demand for properties, and there is usually little trouble letting well-positioned properties.
Regional areas have been seen as the poor cousin to cities. However, the resources boom has seen investors take more interest in regional areas, as population inflows energise formerly sleepy rural towns.
Areas that have experienced significant capital growth are typically located near mining and energy projects, such as the Pilbara region in Western Australia, Roxby Downs in South Australia, and the Surat and Bowen Basins in Queensland. However, these are not without risk: often, these areas are dependent on industry, and if there is a slowdown in demand – such as during the GFC – the local markets can suffer. Coastal areas are also the other regional markets that prove most popular, due to holiday letting and sea-changers. Again, these can be volatile depending on economic circumstances.
Regional housing is usually much more affordable than urban property, and is often cash flow positive. Capital growth is often much lower, however, and vacancy rates can be higher.