In my last blog, I went through the pros and cons of investing in shares. In this blog, we will dive into property.

There are endless types of property investments. A few include residential houses, units or blocks of units, small commercial properties, office space, large commercial properties, carparks, and storage units. Then you overlay this with properties in capital cities, regional towns, mining towns, and overseas properties.

There have been countless books written about how you can create wealth with each of the different types of properties. It is not surprising that a book written by a residential property buyer’s agent thinks residential property is the best. Or a book written by a commercial property buyers agent that thinks commercial property is the best. Or a book that recommends you buy properties that prioritise rent over capital growth by someone who also sells courses on investing in cashflow-positive properties.

The simple fact is they can all be good investments, but which one suits you really depends on your goals. Long-term, most properties will provide overall returns of between 5 and 10%. Some of it will be made up of rent and the rest will be made up of capital gains.

Houses in capital cities – Most often, these have rental returns of around 2% and growth of about 6-8%. There are three big advantages of houses in capital cities. The first is the banks will lend you a large percentage, which allows you to leverage your own money. The second is you can add value by making improvements to it. The third is any capital gains are not taxed until you sell it. Yes, you can continue to get the benefit of compounding of this deferred tax liability.

The pros and cons of property investing

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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About the Author
Phil Harvey is an independent financial adviser. In 2017 Phil set up his company Construct Wealth to help clients best manage their finances so they focus on what is important to them. He is a founding member of the Profession of Independent Financial Advisers and a tax financial adviser, registered with the Tax Practitioners Board.

General Advice Warning
This advice contains general information. It may not be suitable to you because it does not consider your personal circumstances. Phil Harvey and Construct Wealth are authorised representatives of Independent Financial Advisers Australia (AFSL 464629)

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