A standalone house on its own title is often considered a reliable investment, hence the phrase “as safe as houses”. But buying a house as an investment property does not guarantee you will make a good return.
When looking at buying an investment property, the old adage “Location, location, location” is probably a better indicator to use than the type of property that you end up buying…
However, there are distinct advantages for investing in a house:
- You own the property outright and there are no shared facilities to be maintained (such as laundries, gardens or car spaces)
- You do not pay body corporate or strata fees
- You can fix it up the way you want, depending on local council restrictions. If it needs work and you would like to enlarge the kitchen, you can include that in your plans, as well as any other changes you would like to make
- If the block of land is big enough, there is future potential to subdivide and make a bigger profit
- Houses are usually have high rental demand in family orientated areas
- If you qualify for depreciation, there may be larger tax advantages
Let’s look at the last piece, as it is important today. In many cases, buyers are snapping up older fix-up properties as property investment and then either reselling them or renting them out as money-making properties.
If you are investing in houses, it is probably a better idea to buy, fix-up and sell, if you can get your price. If you cannot get your price because it is an older home, it will leave you on the hook as a landlord.
You may believe that you will cover your expenses as a landlord, but that is not necessarily the case. Commonly, houses yield between 4% and 8% depending on where you buy.
A 4% yield means that for a house worth $500,000 you should earn $20,000 in gross rent each year. And likewise, an 8% yield would earn double that or, $40,000 per year.
You should always strive to invest in a house that has a good yield, but this will depend on many factors, such as:
- How big your deposit is
- The interest rate on your mortgage
- The potential future capital growth of the house
As an example, if you buy a house which has a yield of 4% and your mortgage rate is 6% then that means you have a negative cash flow of 2% (which would be $10,000 per year on your $500,000 property) and that is not including the other expenses such as council rates, water fees, insurances etc.
You would only go for this situation if you had a substantial deposit (which would reduce the size of your debt) and the potential future capital gains outweigh the immediate short term cash shortfall.
New Vs Old and Maintenance
Let’s not forget that as a landlord, you are responsible for ensuring that any damage that a renter may have caused is repaired so your property continues to be safe and a viable rental property.
If you use a property manager, they should be staying on top of all repairs and forwarding the expenses onto you.
You will also find that older houses do require more investment not only to make them habitable but also to keep them in good shape.
As houses age, joists sag, frames shift and the ground moves which means your home may wear in unexpected ways. You will have to deal with this to keep your investment property value up.
Investing in newer houses may be prohibitive because of cost, but they should be much cheaper to maintain in the first few years.