The downside is you are making a loss each year, and instead relying on future, unknown capital gains to make your money. If you buy a property that doesn’t get capital growth, you will be losing money year after year.
Houses in regional towns – Most often, these have rental returns of between 4 and 5%, but they also tend to have lower capital gains. The advantage is your expenses are pretty much covered by the rent, so you have a lower chance of losing money. However, the big disadvantage is you will need more of these to grow your wealth.
Units – Units tend to have higher rental yields, with lower capital growth. It is not unusual for there to be no capital growth above inflation. They also have higher holding costs (strata fees, etc) and you have more competition in terms of when you want to sell it or rent it. It is often harder to add any value, although if you buy whole unit blocks you could split them up.
Commercial property – Commercial properties generally have high rental yields, with capital growth usually tracking inflation. The big advantage of commercial property is you can have long-term tenants and very few outgoing expenses. The disadvantage is banks tend to only lend about 60-70% of the value of the property and if the tenant leaves you can be left holding it for a long period while you find a new one.
Each of these can have a place in your portfolio, but you need to understand your goals before you invest. If you are looking to replace your income, commercial property and houses in regional areas (or the outer suburbs in the capital cities) are your best bet. However, if you are looking to build long-term wealth and you have the funds to absorb annual losses, houses in capital cities would be more appropriate.
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