- Mark Hay argues property investment is proving to be the most preferred type of investment
- Should you invest in residential, commercial or property trust investments?
- There are pros and cons to each, and it very much depends on your goals and circumstances
Property investment is now more than ever proving to be the preferred type of investment.
In light of the current stock market gyrations, low-interest rates for fixed deposits and the millions of dollars lost in the mortgage brokers’ fiasco, the solid security of bricks and mortar are now awakening a rekindled interest from a range of investors.
Basically, there are three types or levels of property investment available for investors.
All types of investments have different features and should be looked at depending on the investor’s specific risk profile and present and future financial plans. Each form of investment will offer certain advantages and disadvantages.
Let’s take a look at the three types:
Basically, residential investment property is the best place to start the investment portfolio. Featuring lower deposits and higher gearing ratios.
Low risk – Even in the worst economic downturn, you will always be able to rent the property, and generate some form of return.
Greater re-sale opportunities – Any re-sale will generally have a greater pool of prospective purchasers i.e. both owners and investors.
Lower cost base – It is possible to commence investing at an amount as small as $200,000 for a home unit.
Lower net rental returns – Generally, the typical residential investment property will show a return in the range of 4% – 6% net.
Hands-on – Residential property can be managed, maintained and even improved by the investor with no real specialist skill or expertise required.
Commercial property is typically a better investment for the more financially mature investor; someone who can weather the downturns and can offer greater cash contribution to the property.
High deposit – Generally a 30% deposit is required on a commercial property.
Higher cost base – Very few worthwhile commercial investments are available in the sub $250,000 range; they are more typically in the $500,000 plus range.
Higher cost price – Most worthwhile commercial investments can range from $500,000 to anywhere in the millions of dollars.
Specialist field – Within the commercial sector there are several specialist fields; retail, industrial, office and showroom, requiring special understanding and skill in sourcing, purchasing and managing.
Prone to economic cycles – All commercial properties are directly tied to the lessee. In recessionary periods, a commercial landlord can experience unhealthy (i.e. lengthy) vacancy periods. Due to the plight of the economic cycle, they may indeed be unable to lease the particular premise at any price, thus having no return and devaluing the investment and in turn forcing the investor to liquidate.
Higher net return – Generally, a commercial property will show a net return range of 6%- 12% (depending on the quality of the tenant, location, etc.).
Property Trusts – Listed & Unlisted
An increasingly popular form of property investment, which is more suited to retirees, super funds and persons not wishing to gear their investment.
High returns – In the range of 8% – 20% plus is possible
No borrowings – Property Trusts, in most instances, do not have the ability to borrow against.
Liquidity – In most instances, prove to be more liquid and can be broken down into units, rather than selling the whole investment.
No fuss – The trusts typically feature blue-chip properties of anchor tenants with long leases. They can be property development funds specific to one development project. Generally, they are free of most management hassles, vacancies, etc. and the return is paid monthly.
What’s right for you?
So which type of property investment right for you? When held for the medium to long term, all these property investments should produce similar capital growth. Note that depreciation allowances available will depend on the age of the building and the type of fixtures and fittings used. The ultimate scenario is to have a diverse portfolio.
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