Different Property Types - Which Is Best?

Summary

This video script delves into the complexities of property investment, advising viewers on which types of properties to target and which to avoid. It highlights the limitations of apartments, units, townhouses, duplexes, and commercial properties, pointing out their poor land value, high fees, and limited growth potential. Instead, it advocates for established properties with high land-to-asset ratios and value-add potential, showcasing their superior capital growth and lower risk, ultimately guiding investors towards informed and strategic property selection.

Takeaways

• 🏢 Apartments are generally not favored due to their poor land-to-asset value ratio, high body corporate fees, and potential for oversupply affecting value and rental returns.
• 🏘 Units, especially those in blocks, tend to have limited value-add potential and can come with body corporate fees that impact cash flow, despite potentially higher yields.
• 🏡 Townhouses, while offering stronger growth rates than units, still lack significant land value and renovation potential, making them less desirable for investors.
• 🏠 Duplexes may offer some value-add through strata titling but involve complex regulations and costs, and may not provide exceptional capital growth or yield.
• 🏢 Commercial properties require careful timing and can have high entry costs, long vacancy periods, and capital growth linked to rental increases, making them tricky for accumulation phase investors.
• 🧓 Granny flats are generally not recommended for building during the early stages of a property portfolio due to low valuation returns on investment and changing property demand dynamics.
• 🏞 Small lot subdivisions can be profitable but are currently not recommended due to high costs, lengthy development times, and professional developers struggling to turn a profit.
• 🛠 Land development is a complex and lengthy process, often reserved for sophisticated investors or large corporations, and involves significant uncontrollable risks.
• 👫 NDIS and rooming houses are hands-on assets that can offer higher yields but come with increased management fees, wear and tear, and challenges in tenant selection and property valuation.
• 🏗 Off-the-plan properties face risks of new supply and lack of established infrastructure, often resulting in negative equity positions and subpar capital growth in the early years.
• 🏡 Established properties are preferred for their high land-to-asset value ratio, potential for value-add strategies, and strong historical capital growth rates, doubling in value every 8.5 years on average.

Q & A

Why are apartments generally not recommended for investment according to the script?

Apartments are not recommended for investment due to their poor land to asset value ratio, lack of land parcel, limited potential for value addition, heavy body corporate fees, lack of control over the asset, threat of oversupply, and typically underperforming against inflation with a growth rate of about 2 to 3%.

What are the downsides of investing in units compared to standalone homes?

Units generally have little value-add potential, often come with body corporate fees that eat into cash flow, and have a lower land to asset value ratio. Their long-term growth rates are about 50% less than standalone homes, averaging between 3 to 4.5%.

What is the main issue with townhouses in terms of investment potential?

Townhouses, while offering stronger growth rates than units, still lack significant value-add potential and are on smaller parcels of land, limiting options for subdivisions or additions. Their growth rates are typically between 4 to 5.5%, which is not exceptionally high.

Why might duplexes not be the best investment option despite the potential for strata titling?

Duplexes may not be the best investment due to the complexity and cost associated with strata titling, including the need for fireproof walls and compliance regulations. The time and money spent on these could be better used elsewhere for capital growth and rental returns.

What are the typical challenges faced when investing in commercial properties?

Commercial properties present challenges such as timing the market entry correctly, dealing with longer vacancy periods, lower capital growth linked to rental increases, higher entry points requiring significant capital, and lower rent servicing levels accepted by banks.

Why are granny flats generally not recommended for investment, especially during the building stage?

Granny flats are not recommended for investment because they do not value up well, costing more to build than the added valuation to the home. They also change the demand dynamics for future buyers and can be complex and costly to navigate in terms of building plans.

What are the potential pitfalls of small lot subdivisions in the current market?

Small lot subdivisions face pitfalls such as high costs of subdivision and new builds, increased post-co costs, and difficulty in turning a profit. Professional developers and clients often find the numbers do not stack up, especially when considering the risks and lack of rental income during the process.

Why should investors be cautious about land development projects?

Land development projects should be approached with caution due to their lengthy planning and development times, the need for large capital investment, and the high risk involved. These projects are best reserved for sophisticated investors or large corporations.

What are the main reasons to avoid investing in NDIs and rooming houses?

NDIs and rooming houses are best avoided due to their hands-on nature, higher management fees, increased wear and tear, lack of control over tenant selection, and the potential for lower valuations due to the unique nature of the properties.

Why are off-the-plan properties often not the best choice for investors?

Off-the-plan properties are not ideal for investors because they are subject to new supply, lack of infrastructure, and potential negative equity positions. They often underperform in terms of capital growth for the first 5 to 7 years, leading to a significant loss in potential gains.

What makes established properties a preferred choice for investors according to the script?

Established properties are preferred for their high land to asset value ratio, potential for value-add through renovations or subdivisions, presence in areas with land scarcity and established infrastructure, and strong average capital growth rates of 7.25% per annum.