Building an investment property: house vs apartment vs townhouse

Some investors decide to build their own investment property from scratch because it allows them to tailor the property to the market they want to attract right from the get-go. For example, you can build the property for dual occupancy so it can house more than one tenant - doubling the rental income. 

Of course, there are many things you should consider before jumping in, such as working out the costs, the area you want to build in, and what type of property to build for the best return on your investment. 

Townhouse/duplex

We all love a good deal which is why home builders may be tempted by getting two homes for the price of one. 

A duplex is a single residential building with two dwellings under the same roof and a dividing wall in between. Duplexes are sometimes on the one title, meaning both dwellings must be sold together. If a duplex is subdivided into two separate titles, each home can be sold separately.

It may initially cost more to build a duplex than a freestanding house, but it's cheaper than building two separate houses because both dwellings are on the same block of land. Duplex properties also have the potential for significant profits because you're effectively getting two rental incomes from the one asset. 

If it's a duplex you've got your heart set on building, they generally require wide dual-frontage blocks of land (meaning each dwelling has its own street frontage) and appropriate zoning to subdivide the property into two dwellings. Subdivision of a property can get very expensive - consulting fees to town planners can cost around $40,000 to $50,000. Blocks that already have subdivision approval can lessen this hassle, but be prepared to face stiff competition from other investors with the same idea. Holding costs while you wait for subdivision to become completed can also be expensive. 

According to BMT Tax Depreciation, it can cost up to $2,665 per square meter to construct a 2-bedroom single level townhouse. 

Choosing the right area to put your duplex on will determine whether your duplex investment will pay off or not. Town planners can guide you on what type of developments are allowed to be built in that area. 

Apartment

Unless you're a property developer, it's unlikely the average property investor will be able to build an apartment complex - but you can buy an existing one.

An entire apartment complex is a big-ticket item and a huge investment, but so is the profit potential. Unlike a single-family property, if one apartment becomes vacant you still have all the other apartments in that complex to generate income from. 

However, it's safe to say that buying an apartment building is a bit more complex than buying a single-family home. There's high tenant turnover to consider, as well as complex property management (you'll want to hire an external property management company if there are more than four units), less tenant care and higher maintenance costs.

You'll want to consider a commercial real estate agent when buying an apartment complex and a business broker as they sell mixed-use properties like commercial buildings with residential units, smaller apartment buildings (5 - 10 units) and bigger apartment buildings. 

When investing in apartment buildings, you'll want to take a look at the property's profit and loss (P&L) statement and the rent roll to understand the income potential. 

House

Building a brand new home can be easier than you may think, especially if you're going for a turnkey house and land package. 

A turnkey house and land package can be the most attractive option for investors who don't want to get bogged down in all the little details. A turnkey house and land package essentially means the house is finished for the investor and the tenant - all you need to do is turn the key and move in. Turnkey house and land packages often include all the little things normally not included in newly-built homes, like the driveway, landscaping, fencing, letterbox, etc. 

House and land packages are usually sold off the plan, with a range of customisable designs to choose from. These packages usually come with a fixed price contract, so there aren't any unexpected surprises. 

Investors could also purchase a vacant block of land or knock down an existing property and build a new one. A big benefit of this is that you get to choose the builder and architect. 

Better to invest in a house, apartment or townhouse/duplex?

It all comes down to your overall investment strategy and goals. When you're considering a property purely for its investment potential, rental income and capital growth are the two key things to keep in mind.

As a general rule of thumb, houses tend to generate better long-term capital growth (because of the land) while apartments and townhouses/duplexes generate better rental returns. However, a lot of this depends on what's happening with the property market and the economy. 

If you're ready to start building your investment property, you'll need a construction loan first. Lenders such as loans.com.au offer investor construction loans that provide funding for the construction of your investment property. Our investor construction loan offers a competitive interest rate that converts to our market-leading offset variable loan once the construction of your home is completed.

You can start your real estate investing journey with us by checking out our investor construction loan here.

 
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