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There are so many different types of properties that selecting one can be very confusing, and mixed messages from arm chair experts can make it all the more difficult! There are however some specific property types I suggest you avoid altogether as they are simply a very bad choice or are very high risk investments. And it’s not just my opinion, Australia’s biggest Banks also have concerns with the majority of the below property types and will restrict lending levels on them. I always say that if the Banks are wary and don’t want to lend on a particular property type you should steer clear as they generally have a lot more data on risk profiles of property than we will ever be able to get a hold of! And remember, just because a property has good cash flow it doesn’t mean it’s a good investment, the whole point of investing is to achieve capital growth, cash flow just allows you to hold onto the property whilst it grows in value for you.
Here is my list:
Mining towns – Some of Australia’s most highly volatile and controversial property markets! These towns rely heavily on both investors and the mining industry and property markets can collapse overnight when a mine shuts or scales down. I am not referring to larger regional centres like Mackay and Townsville; these cities are affected by mining but do not completely depend on it to prop up their economies. Rather I am suggesting areas like Emerald and Roma in QLD and Port Hedland in WA.
Department of Defence Housing (DHA) – Yes they seem attractive on the surface with long leases and generally no ongoing maintenance costs however they have huge management expenses, generally need to offered up for sale to defence housing to sell first instead of the open market and are only located in areas that require housing for defence personnel, which may not necessarily be the best place to invest in.
Student Accommodation– Most banks have a limit on the size of a property before they will lend on it. This is about 45m2 for a one bedroom apartment. Student accommodation is often much smaller than this so bank financing is terribly difficult. Not to mention the fact that these properties only appeal to a certain (small) segment of the market, often have complex lease arrangements attached and cannot be occupied by anyone other than a student.
Serviced Apartments – With these properties, an operator is engaged to look after the building and manage the property. So you are reliant on them and cannot change companies as the management rights form part of the ownership. The management fees are also very high which can dilute what often looks like great cash flow, they have an extremely limited resale market and rely on tourism and strong economic conditions to drive occupancies.
Large “Off the plan” Projects – At Property Way; we generally don’t approve projects with any more than 50 apartments in the development (any more than this would require a very, very convincing reason). The majority of our projects have only up to 15 or 30 apartments. As projects get bigger, resale and capital growth prospects get worse as there are so many other similar properties in the same building that can drag values down. Not to mention that the land content (the component of the property that actually grows in value) is very low. Banks also restrict their lending in large developments for fear of over-exposing themselves in a particular building.
A Property With Title Issues – This only affects a very small percentage of properties however making a mistake here can be extremely costly. Part of your solicitors role is to check the Title for the property and let you know if there are any covenants, easements, overlays or outdated title structures that could restrict you from selling or making changes to the property in the future. Some examples of this might be apartments with Company Share Title (banks will restrict their lending on these properties) or a Heritage overlay on a house which might mean you must renovate or improve the property in accordance with heritage conditions; this can add tens, sometimes hundreds of thousands of dollars to the cost of a renovation or addition to the property.
You can probably see a recurring theme here, the best types of properties are those that will appeal to both an investor and an owner occupier, so don’t limit yourself to a small segment of the market by purchasing one of these property types, it’s just not worth the risk!
DISCLAIMER:All information provided in this publication is of a general nature only and is not personal financial or investment advice. It does not take into account your particular objectives and circumstances. No person should act on the basis of this information without first obtaining and following the advice of a suitably qualified professional advisor. To the fullest extent permitted by law, no person involved in producing, distributing or providing the information in this publication will be liable in any way for any loss or damage suffered by any person through the use of or access to this information. The article is produced by Property Way (ABN 57 141 982 934)