Property investment in tough economic times
Property investment is now more than ever proving to be the preferred vehicle for investment. In light of the current stock market gyrations, the low interest rates for fixed loans and excellent buying opportunities, many sophisticated and traditional mum and dad homeowners are using the current market conditions to upgrade.
It works like this, if you sell your current property which is worth say $500,000 for 10 per cent less at $450,000, but upgrade to a property that was worth say $1.2 million and purchase it with a 20 per cent discount at $960,000, you have effectively created a $190,000 gain.
In current economic times, higher priced properties are harder to sell and you can negotiate a far stronger outcome, so many prudent homeowners and investors alike are entering the market along these lines of an upgrade. The rock solid security of bricks and mortar are now engaging a rekindled interest from a broad spectrum of purchasers.
Residential investment property is the best place to start the investment portfolio. Featuring lower deposits and higher gearing ratios.
Low risk – even in the worst economic downturn, you will always be able to rent the property and generate some form of return.
Greater resale opportunities – any resale will generally have a greater pool of prospective purchasers (both owners and investors).
Lower net rental returns – generally, the typical residential investment property will show a return in the range of four to six per cent net.
Hands on – residential property can be managed, maintained and even improved by the investor with no specialist skill or expertise required.
Commercial property is typically a better investment for the more financially mature investor – someone who can financially weather the downturns and can offer greater cash contribution to the property.
High deposit – generally 30 per cent deposit is required on a commercial property.
Higher cost base – very few worthwhile commercial investments are available in the sub USD 250K range.
Higher cost price – most worthwhile commercial investments can range from hundred thousands to anywhere in the millions of dollars.
Specialist field – within the commercial sector there are several specialist fields such as retail, industrial, office and showroom, requiring special understanding and skill in sourcing, purchasing and managing.
Prone to economic cycles – all commercial properties are directly tied to the lessee. In recessionary periods, a commercial landlord can possibly experience unhealthy vacancy periods and due to the plight of the economic cycle, may be unable to lease the particular premise at any price, thus having no return and devaluing the investment and in turn forcing the investor to liquidate.
Higher net return – generally, a commercial property will show a net return range of six to 12 per cent (dependant on tenant quality and location).
Property trusts – listed and unlisted
An increasingly popular form of property investment, which is more suited to retirees, super funds and persons not wishing to gear their investment.
High returns – in the range of eight to 20 plus is possible.
No borrowings – property trusts, in most instances, do not have the ability to borrow against.
Liquidity – prove in most instances to be more liquid and can be broken down in units rather than selling the whole investment.
No fuss – the trusts typically feature bluechip properties with anchor tenants and long leases, or they can be property development funds specific to one development project. Generally, they are free of most management hassles and vacancies, and the return is paid monthly.
In summary, all three types of property investment should produce a reasonably similar capital growth, provided they are held for the medium-to-long term. Whilst depreciation allowances available will depend on the age of the building and the type of fixtures and fittings used, overall the ultimate scenario is to have a diverse portfolio.
Source: The West Australian