What is the right property to buy?
Welcome to the second instalment of our four part series on investing in property. Our first part in the series was focused on ‘When’ to buy and this one is all about providing some insight for property buyers in selecting investment properties that provide enhanced returns, ie. ‘What’ to buy.
Choosing an investment property is not something most people take lightly. Once you have made the decision that now is the time to buy, the next key decision is what to buy. Before you start trawling through the numerous papers, magazines, websites and local agents looking for a property to buy, a key decision needs to be made on what type of property suits your investment strategy. Fundamentally, this can be broken down into apartment vs. house, old vs. new, and finally, off the plan or already constructed. Let’s explore each of these.
Apartments v. houses. Which is best?
A new RP Data-Rismark report indicated that while in years gone by houses had appreciated faster than apartments, this no longer the case. Apartments are now outperforming houses across the board. Figures show that over the past five years, apartment prices have risen an average 7.4 per cent per annum compared to 7.1 per cent for houses. This trend is increasing with the latest RP Data figures showing in the 12 months to June 2010, unit values increased by 11.4 per cent. Click here to read property expert Tim Lawless' article which outlines this trend in more detail.
So if apartments are providing greater capital gains, what about the rental yields? RP Data research analyst Cameron Kusher has looked into this and concluded:
“Units are appealing because in most instances the rental yields are much higher than they are for houses” he said.
Read more of Mr Kusher’s insights regarding investing in houses and apartments.
The Eureka Report’s property expert Monique Wakelin has also recently investigated this issue and concluded that “under $700,000, apartments are often the winning investment.” She goes onto explain some of the more complex reasons behind this ‘surprising’ trend that apartments and units are outperforming houses, including the growing trend of the ‘inner urban dweller’ – residents looking for greater access to work, schools, hospitals, entertainment and public transport, who are attracted to the low-maintenance, highly secure ‘lock up and leave’ appeal of the apartment lifestyle. View full copy of Ms Wakelin’s article.
The new v. old debate
Last year, Herron Todd White estimated roughly 70 per cent of property owners were unaware of the benefits offered by having a tax depreciation schedule prepared for their investment property.
Depreciation on your investment property allows you to claim a tax deduction on your personal income tax each year. The tax man effectively contributes to paying off your investment property. See the below chart provided by Poole and Partners Accountants and Investment Advisors which graphically shows “Who pays the costs” of an investment apartment.
Chart 1: Who pays the cost of a new apartment investment.
Source: Poole and Partners Accountants and Investment Advisors 2010.
The tax depreciation benefits are one of the main reasons why many investors often favour new properties. Depreciation is a term that describes the general wear and tear of an asset that occurs over the time that you own it (also called its 'useful life'). For example, an investor may claim a tax deduction for the wear and tear of fixtures and fittings such as carpet, appliances, light fittings, furniture and the like.
Learn more by reading the full article by the Australian Property Investor.
With claiming depreciation as a tax-deductible expense being one of the key advantages of buying new properties, use this online tax depreciation calculator to obtain your own estimate of predicted tax deductions for your investment property.
Property investment expert Craig Turnbull of the Australian Investors’ Association also claims that buying new property allows investors to avoid continually dipping into their wallet.
"Buying new or near new property in good condition means less income ploughed back into repairs or renovations and long term maintenance, as well as less chance of excessive vacancy periods whilst work's being carried out." View copy of Mr Turnbull’s full article regarding boosting cashflow.
Buying off the plan
Buying off the plan involves entering into a property purchase contract before it is constructed. There are many benefits for buying off the plan as opposed to buying already constructed. National finance expert David Koch says the benefits of buying off the plan can pose a win-win situation for both developers and buyers.
“It allows buyers to buy an asset at today’s prices that may be more valuable down the track, when the development is completed. In a sharply rising property market, some investors buy off the plan (with a 10 per cent deposit), then sell before settlement and make a profit,” Mr Koch said. View full copy of Mr Koch’s article.
Property Investors Association of Australia representative Tyron Hyde said the extended settlement period associated with off the plan properties also posed benefits for those not looking to sell straight away.
“Delayed settlement gives you more time to plan for mortgage repayments,” Mr Hyde said.
“Another benefit for buyers purchasing new strata units off the plan is the ability to select or vary finishes and fixtures, giving you the opportunity to make certain changes to suit your own taste.” View copy of Mr Hyde’s article about buying off the plan.
Executive Director of the Victorian branch of the Urban Development Institute of Australia (UDIA), Tony De Domenico, recommends investors purchasing a property off the plan should only purchase through companies registered with bodies such as the UDIA, Master Builders Association and Housing Institute of Australia. Read article in full.
Loan Market’s finance strategist Lindy Kelly agreed with Mr De Domenico’s comments and said as long as buyers did their homework and had appropriate protections in place, the benefits and flexibility that come with this type of property investment are attractive for investors.
“The process of buying off the plan is as safe as houses (so to speak). Your deposit goes into a trust account held by a solicitor and does NOT go to the developer, so that you know your money will be safe if something happens to go wrong. If the developer goes under or if the project does not proceed you are guaranteed on getting your full deposit back. ”
“The other great thing about paying a one-off deposit into a trust account is that unlike houses, off the plan investors do not have to pay regular fortnightly or monthly payments during the construction period. If something were to go wrong with the builder, the developer takes care of it, saving you the time and hassle.”
Ms Kelly said the greatest opportunity with buying off the plan is that in a rising market you get 100% of the capital gain in the value of your apartment but only need 10% deposit until settlement.
“To put this into context, the Maroochydore apartment market has appreciated 7.4% over the past year. As an example, if you bought a $400,000 apartment off the plan 12 months ago with only having to provide a 10% deposit, and your apartment increased in value in line with the average over the past year, you would have made a profit of $30,000 with an outlay of only $40,000 - that’s a 75% return on investment. The share market has averaged only a 3% increase in the same period.”
We hope this edition has helped shed some light on identifying the type of investment property that is right for you. Our next e-news instalment in this four-part series will focus on demystifying the many and varied options on ‘how to buy’. If you have any further questions or would like to learn more about buying off the plan with the Emporio development and the great investment returns on offer, please call Nicholas on 0403 001 992 to arrange your private viewing.
Until next time,
Carl Nancarrow - Manager of Development, Reed Property Group
Nicholas Criss - Emporio Sales Manager, Ray White Maroochydore
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