Investment Properties

Written by Michael McAlary

Investing in property is a sound investment strategy. However, when investing in property it is first important to consider what type of investment property you should invest in. The four (4) market segments that should be considered are residential, commercial, retail and industrial. Each has its own unique features and advantages and disadvantages that should be examined and matched against your own investment strategy.

Factors

Regardless of the property segment there are some key factors that should be examined when considering buying an investment property. These are:

  • Location
  • Strong rental income growth
  • Rent ability and continued occupancy
  • Long term capital growth
  • Re-development opportunities
  • Likely maintenance costs
  • Ongoing capital improvements
  • Portfolio diversification
  • Tax effectiveness

It is important to note that tax effectiveness should not be the primary reason for investing, it should be driven by a sound investment strategy to create wealth.

Lender Considerations

Some factors that lenders consider when examining a property loan application are:

  • Loan to value (LVR) ratio. The maximum LVR on industrial, retail and commercial is generally a lot lower than of a residential property
  • Location. Some lenders lower their maximum LVR on certain locations. Currently, lenders view mining towns as higher risk than capital cities because of the risk of a mining down turn, and because of the “fly in fly out” approach of mine operators
  • Serviceability. Lenders frequently discount the amount of rental income that may be included in calculating serviceability
  • Landlord insurance. Some lenders require this
  • Property insurance. The lender will likely require the insurance policy recognising their interest in the property
  • Gearing level. The extent to which you will be geared, positive or negative. It’s important to remember that as Australia is now in a high tax free threshold and high marginal tax environment that negative is less effective than before
  • Exposure to a certain property class. Lenders prefer borrowers to have portfolio diversification and not be exposed to only to one type of asset class, e.g. residential property
  • Concentration risk. Lenders prefer that borrowers do not buy properties all in the one area, or one location. See above on Location

WealthMaker through our relationships with Property companies and lenders can help you find and fund your investment property purchase.

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