Location or type of property – which should you choose first?
Two of the most important decisions you can make when buying an investment property are (1) where to buy, and (2) what type of property to choose. But which decision should come first?
Some investors choose a specific location and then find a property in that location that meets their budget and criteria. Others will have a specific property type in mind and will be far more flexible with regard to the location. Let’s have a look at whether any of these approaches is better than the other.
There are many types of property an investor can choose including houses, villas, townhouses, and apartments. Plus, you could easily divide each of those categories further, such as new houses and old houses, which can offer very different things to an investor.
It’s understandable why an investor might decide on a property type before choosing a location because of the inherent benefits and burdens associated with each type. Certain types of property, such as apartments for instance, can provide excellent rental returns but they may also come with additional costs (e.g. strata fees). Houses, on the other hand, might cost more to buy and hold but could provide better capital appreciation.
Similarly, new property can provide impressive depreciation allowances, but buying this type of property can mean choosing locations on the outskirts of the city that are likely to offer less in terms of capital growth potential.
Buying an established villa might be a great option for an investor as it offers a good balance between land value and rental return. But a villa might not be a good choice in certain suburbs where the demand heavily favours another type of property.
It would seem therefore that a location should be chosen first. However, choosing a location first could also be problematic. For example, an investor might not be able to afford the right type of property in a chosen location and end up buying a sub-standard asset that is either inappropriate for the market or that has fundamental issues associated with it (e.g. being on a main road).
In the end, the choice of location is arguably more important in determining the long term success of an investment, though it’s difficult to separate it entirely from the decision of property type. Both decisions need to happen in unison and ultimately be based on the investors goals, budget and appetite for risk.