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Small properties are low priced, generate significant cash flow and in certain suburbs, are hotly in demand. Plan your investment strategy with caution and reap the returns.
When it comes to property investing, size does matter. Most banks have lending restrictions on mortgages for properties less than 50 square metres (40 square metres in some cases), excluding external balconies. That means buyers will typically have to fork out at least 20 per cent of the loan, plus costs, in order to meet approval.
David Johnston, who is Managing Director of Property Planning Australia, says banks usually exercise lending restrictions on small investment properties for valid reasons: “They typically perform poorly from a capital growth perspective”.
Even so, property investing is not a black or white matter and there are exceptions to every rule. Johnston shares his advice on selecting the right type of small property for investment purposes.
One-bedroom apartments and studios look like they attract a high amount of rent for the space they occupy, but don’t be fooled, says Johnston. The reason studios and one-bedroom apartments are priced so high, from a renter’s perspective, is because they don’t tend to generate a lot of capital growth – a key factor to consider when investing.
“For small properties, my real advice to anyone is to buy the best property they can for what they can afford to purchase,” he says.
Johnston suggests buyers opt for a small one-bedroom apartment or studio in a two or three-story high apartment block.
“It isn’t the property that creates capital growth, it is the land the property is built on. The larger percentage of land the property is on, the larger the potential percentage of capital growth. And the larger the apartment block, the lower your share of land. So generally speaking, the smaller the block the apartment is in, the better.”
There are ways to maximise the capital growth prospects of a small property. Johnston advises buyers to choose a one-bedder with a:
- Large living space.
- Kitchen that has a good amount of space.
- Good-sized bedroom.
- Car spot.
One-bedroom apartments outrank the investment potential of studios. However, Johnston explains, if a buyer is determined to purchase a studio, they should follow the basic fundamentals of property.
- Ensure the floor plan is logical.
- The studio must be in a block that’s on a nice street in a highly desirable suburb.
- It should have a nice amount of natural light.
- Buy new to boost its market attraction.
“The first and foremost reason to purchase an asset should be to provide a great return, typically with capital growth,” he says.
“Many people get sold on a smaller asset, like car spots, because of the tax deduction angle, without understanding how the asset is likely to perform.”
The truth is, Johnston says, car spaces don’t produce good capital growth rates. But he concedes that if an investor is not interested in capital growth, but instead set on cash flow and a tangible tax deduction, then a car space might be the option.
Managed studios or one-bed apartments tend to look like good deals, but they could come with much higher property management fees: from seven to 20 per cent.
“On top of that are the levies for the concierge, pool facilities, lifts and body corporate fees. You could end up paying $4,000-$10,000 pa, instead of $1,000-$2,000. So in fact, they end up being more expensive than standard properties as the holding costs tend to be greater.”
“Every investment decision must start with an individual’s goals and financial situation. Determine what you can afford to buy and then from there, develop a property strategy. It’s important that the buyer makes a decision with their eyes open,” he says.
by Yasmin Noone