- The relative security of bricks and mortar is now engaging a rekindled interest from a range of investors
- While investing in residential property is well-known, investing in commercial or property funds isn't as well known
- There are two types of property funds - those listed on the ASX, and those unlisted
Property investment is now more than ever proving to be the preferred vehicle for investment.
Considering the current stock market, cryptocurrency gyrations, and low-interest rates for fixed deposits, the prudent investor is seeking alternate solid returns.
The rock-solid security of bricks and mortar are now engaging a rekindled interest from a broad spectrum of investors.
As Perth’s property market lines up across so many sectors to show Perth is currently the leading investor capital city nationwide.
Three types of property investments
Basically, everyday property investors have three types of levels of property investments to choose from – residential, commercial and property trusts, the latter includes both listed and unlisted.
All have varying features and should be viewed depending on the investor’s specific risk profile.
Residential Property
Firstly, residential property is the best-known and arguably the best place to be an investment portfolio. It features lower deposits and higher gearing ratios, and high rental returns.
Low risk – Even during the worst conceivable economic downturn, you will always be able to rent the property, and generate some form of return. The rental market, especially in Perth, looks very promising for the next few years.
Greater re-sale opportunities – Any resale will generally have a greater pool of prospective purchase i.e both owners and investors.
Lower cost base – It is possible to commence investing in a residential property as small as $200,000 for a 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
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, 30% deposit is required on a commercial property
Higher Cost Base – Very few worthwhile commercial investments are available in the sub $500,000 range; they are typically in the $1-million 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 vacancy periods and due to the plight of the economic cycles, 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 5% – 8% (dependant on tenant quality, location, property type, length of lease etc).
Note that liquidity between both residential and commercial property is deemed a clunky asset and not as liquid as shares, cryptocurrency and property trusts.
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% – 12% plus is possible.
No Borrowings – Property trusts, in most instances, do not have the ability to borrow against. (most trusts are invariably internally geared 30% – 50%).
Liquidity – Prove in most instances to be more liquid and can be broken down in units rather than selling the whole investment.
No Fuss – The trusts typically feature blue chip properties with anchor tenants with long leases, or they can be property development funds specific to one development project. Generally, they are free of most management hassles, vacancies and the return is paid monthly.
In summary, all three types of property investment should all produce reasonably similar capital growth, provided they are held for the medium to long term, whilst depreciation allowances 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.
