With comparatively low risk and long-term value growth through equity, real estate is a popular choice among investors, but not all real estate is the same. If you’re weighing up your options, it can be good to assess the different types that are available. To avoid common pitfalls and ensure your investment property is generating the highest possible return, there are a few things you need to know.
Before purchasing an investment property of any kind, you have to do your homework, get professional advice, and understand the risks. In this article, we take a look at which kinds of properties are suited to differing investors, as well as some industry tips to help you maximise returns.
It’s worth noting that while the team at McDonald Real Estate are experts in property management, we are not financial advisers and the contents of this article should not be seen as financial advice. Seek professional financial guidance before undertaking any financial decisions.
Investing in real estate
Compared to other types of investment, like shares or bonds, real estate is a relatively predictable and reliable investment. It’s not a short-term investment, but for those willing to wait years, or even decades, it can be very rewarding. People will always need somewhere to live, so provided the property is in a desirable location and has appealing features, its value is highly likely to grow.
An investment property has a number of ways to generate a return and grow your initial investment.
Capital gains on residential property
While short-term factors, such as inflation, challenging lending, and economic uncertainty cause fluctuations in house prices, there is a general long-term trend. Depending on demand, infrastructure, and zoning, the value of a property, in general, will usually grow over time – creating capital gains. However, keep in mind that there are some tax implications involved when selling a property within a certain timeframe.
Renting an investment property
By renting out your investment property, you generate a regular income stream for some, or all, of the time you own it. When calculating the returns on your property it’s worth factoring in periods between occupations and ensuring that any costs of owning that property can be covered.
Calculating all of the expenses associated with the property can help you work out the level of income needed to cover these outgoings and make some profit. Your local market may dictate the price range your property falls in, and it’s important to do your research before buying the property in question.
Generating an optimal return can help cover any interest on the mortgage as well as pay for rates, repairs, and maintenance. Before you find a tenant, consider the following pros and cons:
The pros of rental properties
- Regular income stream
- Capital gains over time
- Many tax-deductible expenses
The cons of rental properties
- Potential damage to the property
- Vacancies between tenants
- Tenancy disputes
- Time-consuming property management
Types of investment properties
Before deciding to invest in a property, you need to know the advantages and disadvantages of each type. Let’s explore each in a little more detail.
Houses
Houses are standalone residential dwellings and are perhaps the most common type of investment property. They are often popular with both first-time investors and those with an established property portfolio as they’re accessible, familiar, and highly desirable.
Houses are especially popular with families living in suburban areas as they typically have more space than inner-city dwellings and while this often means a slightly longer commute they are often closer to schools, parks, and a more relaxed lifestyle.
The pros of houses as investment properties
- Good capital growth
- Relatively easy to add value with renovations or redevelopment
- Consistent asset control
The cons of houses as investment properties
- 3-5% rental yields
- Maintenance is required
- Greater checks needed on tenants
- Competitive local market
Apartments
Apartments refer to self-contained dwellings within another building, usually located in towns and cities. Apartments are often popular with people working in the city looking for an easy commute to work and proximity to appealing urban focal points.The pros of apartments as investment properties
- High rental yields
- Good rental returns, with lower or no holding costs
- Lower levels of maintenance required
The cons of apartments as investment properties
- Lower capital growth prospects
- Expensive body corp fees
- Less control over the property
- More competition for tenants and buyers
Townhouses
Townhouses are tall, narrow terraced houses, generally with three or more floors. Often referred to as medium-density housing, they are seen as the best of both worlds for many. These are commonly located in suburban and central city areas, where there is high demand and limited space.
Townhouses usually have two to three bedrooms, one to two bathrooms, and a kitchen, dining, and living area. They are popular with those looking for all the entertainment and amenities of the city, but also a little more space and a slower pace of life.
The pros of townhouses as investment properties
- Relatively good capital growth
- Relatively high rental yields
- Ability to renovate
- Lower price point than houses
The cons of townhouses as investment properties
- Body corp restrictions can limit your renovation options
- More competition when selling or leasing
- Commercial property
- Lifestyle and holiday homes
- Managed apartments
To help you decide which type of property suits your investment criteria, it could be worth speaking with a property management expert in your local area. They will be able to outline the real estate market in your local area and your options. This can be done with your investment goals and management needs in mind to help you find the right property.
Is hiring a property manager worth it?
Regardless of the avenue you take and the type of property you choose to invest in, you will need to find suitable tenants. Before putting yourself through the complicated process of finding tenants, vetting dozens of applications, and drafting a tenancy agreement, it could be worth hiring a property manager.
A property manager will find and assess the suitability of the tenants, ensure your property is fully compliant with all rental legislation, and keep you informed of maintenance needs. If you’re hoping to gain an easy income from your rental home, here’s what you need to know:
Managing your rental property
In an effort to save money, a lot of real estate investors choose to manage their own rental property. However, while you won’t have to pay the property manager's commission, there are a lot of expenses and responsibilities involved in the process, and some of these can be significant if mistakes are made.As a self-managing landlord, you will be responsible for the following:
- Healthy Homes compliance
- Inspection logs and correspondence collation
- Maintenance and repairs
- Finding, vetting, and assessing new tenants
- Budgeting and collecting payments
- Regular inspections
- Resolving disputes with tenants including unpaid rent and even going to court
- Lodging bonds
On top of all of that, you also need to be available at all times, in case something in the house needs to be repaired.
For most landlords hoping to gain a passive income, the stress of managing a property, dealing with tenants, and being available 24/7 is counterproductive to their desire for independence. Therefore, outsourcing to a professional not only provides peace of mind but can even pay for itself in increased rental returns and guaranteed compliance. It is worth noting that property management fees are tax deductible.
Hiring a property manager
If buying an investment property in Taranaki sounds like a decision you’d like to make, a free no-obligation discussion with an expert is a wise next step. A property manager handles everything for you, so you’re free to enjoy the fruits of your labour.If you’re looking for a reliable, trusted, and professional property manager in Taranaki, the team at McDonald Real Estate can help. With hundreds of properties in our rental portfolio, our property managers know a thing or two about the local market, current property law, and how to protect your investment. The advantages of partnering with us include the following:
- Reduced vacancy periods
- A quality pool of potential tenants
- Expertise in rental legislation
- A network of reliable contractors for repairs
- Negotiation skills
- Honest and accurate rental appraisals
To request a free appraisal on your potential, or current investment property, contact us today. We’ll assess your property against the current rental market to determine the realistic rental yield. That way, you can decide the next steps for your investment – and how to make the most of it with the least amount of stress.
