Embarking on your first property investment? The decisions you make early on will have a huge impact on your long term success as a real estate investor.
There are so many choices to make. How will you finance your investment? Where will you invest? How will you market your property to tenants? And who will handle the maintenance and repairs? However, before you get ahead of yourself, it’s best to start with one of the most fundamental questions:
Land, unit or house: what’s the best first investment?
As with many financial decisions, there isn’t a one-size-fits-all answer to this question. What works best for you may not be the best solution for your colleagues. But knowing the pros and cons of each type of investment will help you to make the best decision for your financial future. Let’s look into how land, units and houses may fit into your property investing strategy.
Should You Invest in Land?
Back in the 19th century in the United States, author Mark Twain made a funny observation: “Buy land. They’re not making it anymore.” Twain lived in the era of the great American land rush, and he saw what was going on. Although the huge continent seemed endless, Twain knew the amount of land was finite, and it would eventually be completely divided up and sold off.
What about Australia in the 21st century? Land can be a good investment for people who have a limited budget but want to invest in property. You can always use land as a stepping stone. Buying a vacant lot will ensure that you don’t get priced out of the property market in the future, even if you don’t have enough cash to buy both a lot and a house right now.
The problem with buying land is that it usually doesn’t generate any income, instead relying on capital gains. With an investment in land, it can feel like it’s just sitting there and incurring expenses of its own, in the form of taxes and maintenance in addition to any loans you took out with which to purchase it.
If you have no intention of building on it, land can be a risky investment. City councils change zoning from time to time, and your land could be positively or negatively affected by the changes. If you do purchase land as your first property investment, try to purchase land near a capital city, which provides more stability over time. Also, have a clear strategy for the property from the very beginning and understand the costs associated with your investment.
Should You Buy a Unit?
Buying a single unit in an apartment building can be a great way to baby step your way into property investing.
Single units are generally less expensive than houses, and you don’t have to deal with all the maintenance issues yourself. In fact, in many cases, you don’t have to be responsible for insurance or upkeep either – greatly simplifying your job as a property owner.
The trade-off is that you have less control over your expenditures. If you buy a unit in an apartment building with features like swimming pools, lifts, and gyms, you may find that the associated fees are steep, and these can increase without much notice. Fees may disrupt your cash flow, so it’s important to run a cost analysis on the property before you make an offer.
Should You Buy a House?
When you purchase a single-family house, you have much more control over costs, but you also have a great deal of responsibility. You may not have to pay any dues to a homeowners’ association, but if the roof needs to be replaced, you’re the one who has to deal with it. Every single thing that happens to the property or the land is your responsibility, whether that be through a property manager or not.
An advantage of owning a house is that you have the value of the land to consider as well. Land appreciates over time, and even if the house itself ceases to meet consumer demand, you may be able to sell the land to a developer many years in the future.
Land, Unit or House: Where to Invest?
As you can see, there are significant pros and cons for each choice. Your skills, interests, and ability to travel will also have an impact on your decision. If you enjoy renovation, buying a house may be the best choice for you. If you’d prefer to be a more hands-off owner and purchase a property in one of the capital cities, a unit may be more suitable. If you’re desperate to invest in property but don’t have the funds, purchasing land might be ideal.
To talk with a property consultant about your decision, or to learn more about property investing in general, contact us at Full Financial Services.