What is the best type of property to invest in during 2020 and 2021 for success? Learn how to pick a good investment property with this 8 minute expert guide.
All right, today I’m going to talk about what is the best type of property to invest in. It’s a very broad question and a very detailed answer to come from it. So what is the best type of property to invest in and what are the options? We have houses, we have town houses, we’ve got apartments. Which one do we go with?
So, let’s start off with apartments. Very controversial. You either love them or hate them. There’s a lot of experts in the market that support them. I guess I’m more on the other side of the fence without trying to be biased. I’m a bit more skeptical of them. Part of the, part of the reasons that apartment’s concerning is growth or lack of tactile growth in recent times. Apartments 20 years ago were fantastic in high density living areas because there wasn’t that many going up, which meant that the demand outstripped the supply.
Now what we have is we’ve got high volumes of apartments going up and the next department’s always much better than the previous one, which means people are always chasing the next one. So the concern with apartments is that the growth isn’t there anymore and we might be overpaying with an apartment when we buy it off the plan. And when we buy off the plan, we could be waiting 18 months to two years before we actually get handed over that product. That’s quite a long time for the market to shift in that period. And we’re with stuck holding an asset because once we pay an off the plan deposit, that’s it. We’re done. We’re in trouble. The one other advantage, though, is that some contracts will allow a clause in there for you to on sell the apartment. So if it is a popular apartment project and there is demand, well what we could potentially be able to do is like a stock almost is actually on sale that apartment to somebody else before it’s even completed and make a capital gain or a profit, whichever word we want to use.
So, that’s the trick with off the plan. Funding can be more difficult because the banks are more conservative now in this environment for apartments as well. So we could be looking at difficulty in funding options and if the apartment’s too small, some banks won’t take them. So if the apartment square meterage is less than 50 or 40 square meters, it could be quite difficult.
The other one it comes to is a lifestyle and the high density living. So some people like it. Some people hate it. What I’ve found is, I think where we’re going with apartments is it’s a lifestyle choice for people. Living in the city, condense, living potentially good views, nice to live in. However by can be highly risky. So we’ve got townhouses and houses. What’s the best one to purchase? Well it’s a bit of a mixed approach here.
Houses are always popular with people because you get a bit of land and you’ve also got an independent dwelling. Townhouses can be great from a tax vehicle perspective because you might be paying almost a similar price to the house and land package. However, there’s much less land. It’s very condensed. Right? If I get my whiteboard here, we’ve got a house walk here. It’s like we’re looking at 350 square meters. We might have a townhouse walk here, which is 110 square meters, right? So the advantage here with a townhouse, if they’re both 400,000 and the land value is 200 and the land value here is 85, as you can see, the building cost for the townhouse is a lot higher, which means we’ve got to be able to claim much more depreciation, which means we’re going to get a lot more tax back in our pocket.
So then it comes down to a question of are we looking at this investment property as a tax minimization strategy to pay less tax even though we will get some benefit here with the house and land as well? Or are we looking at it as a capital growth strategy? They can be two independent strategies. Some people want growth. Some people want tax minimization. Depending on our incomes and our equity, maybe we do both. So that becomes one of the burning questions here. How do we go around it? But we do need to factor in growth into our decision making. And what I’ve seen at the moment around Australia is that growth seems to be more apparent in the housing compared to town housing.
But saying that if we’re in the right profit area, well then we will get strong growths with townhouses as well. It comes back to what I said before with apartments. It all depends on demand versus supply for the product. It’s the reason Sydney’s dialing Harbor’s amazing because it’s got limited supply and high demand, which keeps pushing the process up. So what we also need to think about is the holding cost for these as well. Townhouses might take a bit longer than a house because they’re multi-story. Right? So then we’ve got the other component with these is new versus established. It’s a very strong question because sometimes people want the old, or the established house, because they want the much bigger block, which might have 800 square meters. A completely different strategy. When we go established, we’re not going to get any tax depreciation at all.
And the growth can be quite limited because what I find is people that usually go established, go for established in a location where they already believe because they are familiar with them. And they don’t get the strategy right. Why are we going for the bigger block? We’re going for the bigger block for subdivision, but we don’t do all the research that we need to do to choose the right property. So looking at the council policy, looking at the council roles, looking at the holding costs of this property until we subdivided and the money required and then the re-sale ability of this property. So these are all things we need to think about with an established property. Plus, the buying costs are more expensive as well. So we had a stamp duty costs involved with new. With old, my apologies, which are going to be a lot higher than the new.
So, with new, we’re getting more tax depreciation, we’re getting lower stamp duty, we’re getting the bigger write-offs, right? And we’re getting a more attractive asset for the stronger tenants. This is a business, no doubt. We see with our property management arm, there’s a higher demand for tenants with brand new properties and old properties because it’s more modern, it’s up-to-date air conditioning, it looks nice. It’s more functional to the old property, less maintenance. So, therefore, that brings in a higher quality of tenants.
But with all of this, I mean when we’re talking about property portfolios, what we’re talking about when we told about what is the best property to buy, it’s not what is the best property to buy. It is how many properties can I buy because at the end of the day, we need to diversify our portfolio. And it might be that we have a house, we might have a townhouse and we might have an existing apartment. Right? They all serve a different function. The bigger block’s going to be income producing. The house and land house are going to be income-producing but maybe less than the bigger block, but we’re going to get more tax back. The townhouse might not grow as much as the housing options, but we’re going to get a greater form of depreciation. Now if we had each of one of those in our portfolio, we’ve got a nice diversified portfolio, which is going to give us income in the future and also minimize our taxes.