You’ve made up your mind; the next step in your path to wealth is to purchase rental property. The research is done and you are ready to become a landlord. Fantastic! The question is: which residential rental properties do you buy?
In the rental investment world, and for this example we will look at residential investments, there are a number of options. Do you buy a new home, an older home, an apartment, a townhouse or a unit in a multi-unit dwelling? All have very different characteristics, market appeal and pricing levels. I will examine each one individually to break down the pros and cons of each.
1) A Newer Home
Who wouldn’t want to own a new home? And it is not uncommon in today’s market for people to purchase a new house with the sole intention of renting it out. The biggest benefit of this is that it will be free from the hassle of repairs and maintenance for the first 5-10 years or so (you would hope). Because it is a new home you can ask for a premium on the rent, which in turn one would expect a higher quality tenant (employed, settled etc). The downside to this is of course the cost! A new home does not come cheap so this would instantly put a lot of potential investors off.
2) An Older Home
Why buy new when you could purchase rental property that is older, that is just as good, for only two thirds of the price? As mentioned above, a new home should be free from any form of maintenance and repairs for a few years at least; the same cannot be said for an older home. Ongoing costs can sometimes be substantial and can put a downer on your newfound investment passion. However, with a little bit of due diligence before you buy (builders, engineers, electrical report) can save you a lot of work later on down the track. Generally speaking, the returns on an older house are actually higher than on a new house (when compared purely on the purchase price). You may pay 30% more for a newer home compared to an older house, but this does necessarily mean that the rent returns will be 30% higher on the new home.
3) An Apartment
In some locations the apartment market is very lucrative, in others the appeal of apartments do not hold the same strength. Apartments work best in major metropolitan areas, where the hassle of commuting and parking are just too tedious to bear. In smaller urban areas, where travelling to the central city and finding parking does not cause you to pull your hair out, then the appeal of inner city apartments lose some of their shine. On the positive side, apartments are generally cheaper to purchase than housing in the same area but can command relatively high rents, meaning the return on your investment is greater. Issues such as Body Corporate Fees can occasionally hit the headlines with enormous fee hikes on a year-to-year basis. Another issue with apartments, and I will be honest and say this is a personal issue, is you have little to hang your hat on in terms of tangible security. You own a box in a building made up of many boxes. With a house, you have a building and the land it sits on (generally), you have something you can see and feel. An apartment you own a very small chunk of that security and have little control over what happens with the other units. I guess that is what I don’t like about it, the lack of control you have over your investment. However, in saying that, many people swear by them and make a very successful living from investing in apartments.
4) A Townhouse
For those that are unsure of what I am talking about here, I am referring to blocks of houses on a single section. They are very popular at the moment as some older sections with older homes are big enough to fit between 3-6 townhouses on them. Developers will buy the section and clear the old house off it and build as many single standing homes, as the local body council will allow. These are generally side-by-side homes with either a double garage on the ground floor and most of the living space up above or single level homes with minimal space between homes. Tenants share a common driveway and usually have a small partitioned area out back for their own personal use. These are similar to apartments in some cases as a Body Corporate can be responsible for the local area maintenance. They can command reasonable rents and prices will vary depending on the quality of the construction, some can incorporate some very high quality fittings and chattels. The drawback of them is you are very limited to what you can do with them and have neighbours so close that it will only take one or two “undesirables” to bring the neighbourhood down. Townhouses are normally situated close to central city or close to common amenities such as universities to appeal to wider groups. They can have the appeal of an apartment with the flexibility of a house (to a degree).
5) Multi-Unit Dwellings
Multi-Unit dwellings are similar to apartments but on a smaller scale. They can range anywhere from 5 to 20 units in a single complex. Typically they are 1-2 bedrooms and (in New Zealand) are constructed out of the old concrete cinder blocks that used to be so common. In New Zealand many of these are former State Housing Flats. These units can be sold as a whole complex or individually. These have the same drawbacks to apartments but are generally much cheaper. Rents are usually toward the lower end of the spectrum, depending on the quality of the complex. Whilst they appeal to a large market (low income), the quality of tenant is usually questionable and repairs, maintenance and general upkeep may be higher than normal. The return on investment of these types of investments can be very good and some people are able to buy several (or all) units and transform them into respectable accommodation options.
This is just a small array options you have for residential rental properites you have. Each has benefits and drawbacks that may or may not suit you.