Property investment is a popular way to diversify any portfolio, adding the potential for long-term capital appreciation without the same instability as other asset classes.
Still, as with any investment, there are risks to do with property investing that you need to be aware of before taking the leap.
To help in your research, we’ve outlined some common pros and cons of different property investment types, and how they might impact your personal risk.
Residential investment property types
The most common residential investment properties are houses, townhouses, units and, occasionally, duplexes (or triplexes). Depending on your location, holiday rental accommodation or student accommodation may also be available.
Learn more: Investing in property? You’ll need these tips
1. Houses
A house is the classic Australian investment dream – a standalone dwelling with a bit of garden and room to grow. Generally, you would expect to pay more to invest in a house of any size, but the benefits are that you get something you can upgrade, and which is perceived as more valuable (and will typically appreciate over time).
Pros of investing in a house
- Capacity for higher capital gains compared to other residential property types.
- Total cost of ownership (including council rates and land tax) is often lower than fees for apartments.
- Homes can be renovated, upgraded and subdivided to increase value.
- Often perceived as less of an investment risk than other property types.
Cons of investing in a house
- Higher up-front cost to purchase.
- Typically higher maintenance requirements due to larger size and property footprint.
- Rental yields are usually lower for a house compared to units.
2. Units
Units are apartments – self-contained dwellings found in a building with many more units. Banks quite often view these as riskier investments due to the extra paperwork which comes with buying a unit, but you can quite often get good rental yields out of an apartment.
Pros of investing in a unit
- Typically see higher rental yields than homes.
- Often less expensive to purchase – quick way to diversify an investment portfolio.
- Some maintenance costs covered by strata body, so there’s less to think about.
Cons of investing in a unit
- Usually see lower capital gains than houses.
- May have higher total cost of ownership than a home, due to strata or body corp fees.
- Limited control over the wider building, and limited options to upgrade or renovate to add value.
Bonus point: Houses sitting on a subdivided block may be considered units as well. Standalone dwellings on a subdivision share most of the same benefits as a house, though commonly with a lower price point and lower resale value. Attached dwellings may share more in common with a townhouse depending on body corporate or other shared maintenance fees – see below.
3. Townhouses
It’s increasingly common to see townhouses in Australia’s cities, as these terraced, multi-storey dwellings are viewed as a middle ground between houses and units for solving the housing crisis. This middle ground can be a great space for investors who want to diversify their portfolios without taking on the risk of a unit or the expense of a house.
Pros of investing in a unit
- Often more affordable than a standalone dwelling, but with more of a ‘house’ feel than a unit.
- Some investors see good rental yields here – they can be bought for less than a house but rented out for a similar price to houses.
- May see lower maintenance costs compared to houses, similar to apartments.
Cons of investing in a unit
- Ongoing costs may sit higher than houses due to body corporate fees.
- Pricier than a unit, with some of the same drawbacks.
- Potential for capitals gains usually not as high as a house.
4. Duplex or triplex
A duplex is a building which has been built to contain two houses (or three, in the case of a triplex), typically separated by a single wall. The difference between a duplex and a townhouse or unit is that they exist on the same land title, so will typically be bought or sold at the same time. They’re attractive investment assets for some, but not appropriate for everyone.
Pros of investing in a duplex
- Expect a higher rental income, with two units providing rent for one asset.
- Often less expensive to purchase than two individual properties, leading to higher net income.
- Lowers fees than townhouses and units – no body corporate.
Cons of investing in a duplex
- High upfront cost – it might be cheaper than two separate properties, but duplexes are often much more expensive than a single property.
- Maintenance costs may end up quite high, with twice the maintenance to perform each year.
- Resale may be slightly more complex, as there’s a smaller market for duplexes.
5. Student or holiday accommodation
Generally, any property in the right area (with the right zoning conditions) can be converted into student or holiday accommodation, making these potential alternatives to your investment portfolio.
Student accommodation will need to be situated near universities and other tertiary institutes, or along convenient public transport links. Units and share-houses are common in this context. During the year, investors typically expect steady rental income from these properties, but it can drop off during the off-season – leaving high vacancy rates during summer. You’re also unlikely to get long-term tenants, and most tenants would expect the property to be fully furnished (adding to your bills).
Holiday homes are their own more complex investment, more like a small business than a property. Any property can typically be turned into holiday accommodation if it’s in a desirable location, but beware that holiday rentals involve a lot of extra management. If tourist figures are good throughout the year, you can probably expect higher income than typical renting – but you’re at the mercy of high vacancy rates if you can’t get consistent guests.
Investing in commercial property
Commercial property is your other investment opportunity – think office blocks, retail buildings or industrial facilities. Investing here can be quite different to purchasing residential property, as the expectations of your tenants (and the agreement you’ll sign with tenants) will be very different. After all, someone’s here to do business, not to live.
Pros of investing in commercial property
- Good commercial property often results in higher rental yields than residential property.
- You may be off the hook for certain maintenance costs, which can be passed on to the tenant.
- You’re likely to get a longer-term tenant, as commercial leases tend to be longer than residential.
Cons of investing in commercial property
- It’s more complex, and you’ll need more specialised knowledge to get it ‘right’.
- There’s usually a higher risk of vacancy with commercial property.
- Demand for commercial property isn’t as stable. People always need somewhere to live, but the economy doesn’t always allow people to do business.
Of course, we’ve simplified things here to fit it into our article. If you need commercial property advice specific to your budget, location and investment goals, give us a call and we’ll help you out.
How to know which investment property is right for you
Understanding the right investment for your goals can be tricky. You’ll need a clear idea of how much money you want to generate each year, the level of risk (and effort) you’re willing to take on and a good understanding of the location you’re interested in buying from. These three starting points will make your life a lot easier.
The next step is to talk to a property investment expert. They’ll listen to your needs, help you identify your investment goals (if you haven’t already) and find the right property for you.
Ready to start the conversation? Talk to the MattBlak team today.