Buying an investment property

Land appreciates, buildings depreciate

An apartment may be more affordable than a house and produce higher rental returns. But there’s a reason why property experts generally recommend a house and land over an apartment for investors in the early stages of their property portfolio: You’re likely to earn higher long-term capital growth.

The supply of land is limited, so well-located land rises in value over time. By contrast, buildings decline in value. In fact, as they age, buildings can demand increasing levels of maintenance.

Bottom line, if your budget allows it, a house on land in an established location will grow more in value than an apartment.

Diversify your location

Some of the best property advice is to diversify the locations of your investment properties. As a first-time investor, it’s often your first instinct to buy a rental property in your own suburb. After all, you know the area well – and that’s a plus for informed investing. But if you’re a home owner, you already have a financial interest in the suburb. Buying in your own backyard means you don’t get the benefit of diversity.

Diversifying is one of the golden rules of investing and when it comes to property, diversifying means spreading your risk across different locations. This can seem counterintuitive because we usually know our local area better than anywhere else. But if anything happens that could negatively impact property values in your own neighbourhood – such as council re-zonings, changes to flight paths or a major demographic shift – the value of an investment property located elsewhere is less likely to be affected.

Think long-term

Forget reality TV shows that suggest you can make a bundle with a quick property flip. There are good reasons to commit to holding onto your investment property for the long term – at least five years plus. CoreLogic research shows that when it comes to making a profit on the sale of a property, home owners tend to do far better than investors. A factor behind this, says CoreLogic, is that homeowners typically hold onto their home for longer. That means they get the lion’s share of long-term capital growth. Property can come with significant upfront expenses, most notably stamp duty. It can take time for your property to rise in value to the point where you have recouped these costs. Holding onto your rental property for more than 12 months also means you’ll be entitled to a 50% capital gains tax discount on any profit when you choose to sell.

Choose a location with your head, not your heart

Your choice of location is important, and it calls for considerable research. It can be easy to pick an area that appeals to you personally. But as an investor, you need to think differently – and buy with your head, not your heart. The four main factors that can help to pinpoint suitable investment locations:

• Population growth – areas experiencing steady population growth mean a decent supply of tenants and potentially lower vacancy rates.
• Infrastructure development – good transport links are attractive to both businesses and tenants, and that fuels rising property values.
• Employment opportunities – areas where the local economy has a mix of industries often experience solid employment growth, supporting stronger tenant and buyer demand.
• Supply – be sure to look at the supply side of the market you’re buying in. Areas with limited oncoming supply of new properties will likely benefit from increased competition among tenants and future buyers. This generates healthy rental yields, low vacancy rates and a stronger re-sale value.

It’s important to do your due diligence and research the current market trends, as well as future forecasts, before choosing which location to invest in.