Q: I’m looking at buying my first investment property, and I’m trying to work out whether a unit close to the city or a house in the suburbs would be better. What should I be considering when making my decision?
A. Buying your first investment property is an exciting time; though there’s a lot more to think about than just whether to buy a city apartment or suburban house.
First thing’s first, you need to work out your investment strategy, which includes deciding whether you’re buying for capital growth or rental return. This alone will go some way to helping you decide what’s right for you.
A capital growth strategy means you’re aiming to buy a property that is expected to produce above average increases in value over time, so you would want to plan to hold onto the property for the longer term. Higher capital growth is typically found in capital cities or major regional centres where there is greater population growth and higher employment and income levels driving demand.
A rental return strategy involves buying a property that will deliver a strong cash flow through high rents. These are often found in regional or outer suburban areas where rental demand is strong though can also be found in suburbs close to city centres.
TIP! When working out which investment strategy is right for you, ask yourself:
How much money do I have to spend on the investment property? Property prices are typically much higher in capital cities and larger regional centres, and this may rule out a property close to the city if you have a smaller budget.
Do I need my investment property to generate income? Can you afford to be negatively geared, or out of pocket, from your investment day to day, or do you need to be positively geared and have the income from your investment more than cover any expenses?
After you’ve answered the above questions for yourself, you’re in a better position to decide what’s right for you. Here are a few points on the different types you’ve mentioned.
- Houses, and more importantly the land they sit on, have historically shown more consistent long-term capital growth generally but location is a factor;
- Buying a greater distance from the CBD may make the property more affordable than one closer to the city but might attract less demand for rental because of the distance;
- Rental yields, which is the rent you get for your property as a percentage of its market value, can be higher in suburban areas;
- You will likely have greater control and ability to renovate and add value than with a unit; and
- There may be higher ownership and upkeep costs with houses than units because the property is larger and so there’s more to maintain.
- Location is a major driver of capital growth, and historical data shows that higher capital growth has generally been found in capital cities and major regional centres;
- Units in desirable locations have generally provided strong and consistent rental return with lower vacancy;
- Units come with additional time and monetary costs to factor in, such as strata and committee meetings; and
- The cost to purchase an inner city apartment compared to a suburban house may be higher.
- You might also be interested to read a tenant’s perspective on the suburban house vs city apartment debate.
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