What Type of Property Should I Buy?

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This was the question posed to me by a loyal reader this week.

Hm.

Well firstly, thank you to MikeW for posing the question, hope you’re enjoying the blog!

But in response to this, I think the best way to go about it is to understand which types of property your partner likes.

Partner? What partner?

Well the banks of course!

If they’re the ones lending you 80% or more of a value of a property – you’ll need to understand what they like right?

Don’t forget, a 30 year mortgage – is a 30 year relationship!

When your partner says no…

In general, banks restrict lending to properties which appeal to a limited resale or tenancy market such as:

Serviced Apartments

These are the types which come fully furnished, predominantly in our CBDs. The apartment mostly relies on a service operator for short-term rentals, usually through the tourism or business markets for rental occupancy.

You typically won’t be allowed to have owner-occupiers in these apartments, which means a limited resale market, as only investors buy them, in addition to a limited rental market and additional management costs.

Student Accomodation

You can throw this type of accommodation with serviced apartments – as only students (college/university) are allowed to reside here, and there is a fee paid to the accommodation provider.

Some buildings you’ll find that there is a small allowance for owner-occupiers… but not many of us want to be living with rambunctious 18-21 year olds everyday.

Small units

Ever wanted to live in a tiny, cramped unit? Yeah me neither.

Most lenders would prefer an apartment to comprise at least 40-50 sqm of living space, not including balconies or car parking.

Although there is more of an acceptance of increasingly smaller properties due to changing lifestyles.

I know that here in Australia we are fortunate to not have to make do with cramped, under-sized living quarters like some other countries, but going forward the trend is smaller and smaller property sizes.

Studio apartments 

These fall under small units, as essentially all you are getting is one room for living/sleeping/eating, a bathroom, perhaps a small kitchenette and that’s about it.

Some advertise themselves as one bedroom apartments… which is incorrect as a bedroom must have an outward facing window.

Understandably, interest in studios are limited to certain demographics.

Off-the-plan

In isolation, most banks don’t have an issue with these, provided the build and market conditions are OK of course.

But it’s when there are large developments that you’ll find some banks saying no.

Why?

Because they worry about “concentration risk”, and therefore restrict how many apartments they have loan exposure to.

Personally I’m not a fan of new builds, but that’s another story for another time.

Defence Housing 

This is a more specialized investment targeted for providing accommodation to defence personnel and their families.

They come with certainty of long leases and nil ongoing maintenance. Although have a limited tenancy and resale market in addition to pretty hefty management charges.

NRAS

There’s not too many of these left, but the National Rental Affordability Scheme was an Australian government initiative designed to tackle affordable housing whereby investors would receive a tax incentive in order to provide housing at below market rental rates.

Understandably, being so specialized, banks don’t really like them either.

When I say no…

Further to the above, there’s a fair few properties which I typically discount during my searches also.

Mining Towns

Australia is rich in natural minerals and resources, so you’d expect there are communities servicing the mines and workers employed to dig them out of the ground.

Unfortunately these markets tend to be in remote locations with little market depth. There are countless stories of fortunes made and lost from people investing in these locations.

But it’s all too speculative and volatile for me.

Rental guarantees 

Whenever someone says the word “guarantee”, I typically ignore everything they say leading up and after that.

So when properties come advertised with rental guarantees. You’d have to wonder why they need to guarantee it in the first place?

Usually it’s because the cost of the rental guarantee is added onto a purchase price and used by a developer to justify inflated prices.

Holiday Homes

We’ve all got that dream of purchasing a weekend getaway home! But if you can’t afford it, please don’t think of it as an investment, because the tenancy and resale market is extremely limited here – unless it’s in an unbelievable spot.

Main Roads and Secondary Areas

You might think the property on that busy road or next to the warehouse district is cheap… but it’s cheap often for a reason!

Sure people can live anywhere, but when the market slows – you’ll find these properties are the ones to fall in value first.

In saying so, I’ve got a couple in my portfolio – mainly yield plays slowly paying themselves off.

Wrong location

It could mean wrong position in an apartment block – overlooking the car park or the rubbish bins.

Or it could be the wrong location on a street, such as too close to the shops or main road or even at the bottom of a slope.

Or it could just be a property in the wrong place, such as a house in the middle of a street full of apartment blocks.

It’s important to purchase a property consistent with its surroundings – location, location, location after all!

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Most of these are pretty common sense right?

Just buy a property with the biggest appeal to owner-occupiers and investors… and you should do OK.

Hold it for the long-term, and chances are you’ll do more than OK!

Oh and thank you to MikeW for the question – hopefully did it justice, and thank you for asking!

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