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What’s the best type of investment property to buy?

Thursday, 12th Jan 2017

When searching for your first investment property, investors are spoilt for choice, whether it be a house, apartment or villa. But what’s the best type of investment property to buy?

The answer to this question will largely depend on your own unique circumstances because the different types of properties offer different pros and cons.

Smart investors understand that they must acquire properties that work in tandem with their own investment goals, financial capacity, life circumstances and risk profile.

For example, if you have a high risk tolerance you may prefer a development site. If you don’t have a high disposable income, a villa that is neutrally geared might suit you better, and so on.

So what are the advantages and disadvantages of different types of investment properties?

Here’s a quick overview of the different benefits and disadvantages that are typically offered by houses, apartments and villas.

Houses

Benefits

  • Usually better capital growth prospects compared to apartments and villas
  • Relatively easy to add-value to through renovations/redevelopment
  • Greater control over the asset

Disadvantages

  • Lower rental yields compared to apartments and villas
  • Greater maintenance required, which often means higher expenses
  • Higher price point

Apartments

Benefits

  • Higher rental yields compared to houses
  • Often better rental returns, meaning lower or no holding costs
  • Less maintenance required

Disadvantages

  • Usually lower capital growth prospects compared to houses and villas
  • Strata fees can be high, particularly if the complex has large common areas, such as pools and lifts
  • Less control over the property with limitations for renovations due to strata bylaws
  • More competition for tenants and buyers, particularly in large complexes and in areas where apartments are highly prevalent (i.e. CBDs)

Villas/townhouses

Benefits

  • Relatively good capital growth prospects (not as good as houses though)
  • Relatively good rental yields (not as good as apartments though)
  • Ability to renovate the property (unless it’s restricted in the bylaws),
  • Lower price point than houses

Disadvantages

  • Strata restrictions can limit what you can do with the property
  • Less control in terms of renovation options
  • Fairly homogenous, similar to apartments, meaning there can be more competition when selling or leasing

Investors should also consider other investment options like development sites, commercial property as well as development and commercial syndicates in their investment plans, which are often part of the portfolio for more experienced investors. First time investors should generally start by looking at houses, villas or apartments, but again, individual risk appetites and circumstances apply.