Landowner vs Landlord: what's better for you?

There’s more to real estate investing than finding a house and flipping it—or kicking back as you watch the rent roll in. 

  5 minutes

 

Would you be better off buying land in regional Australia, a trendy inner-city apartment or perhaps a car park space? Is it less taxing to be a landowner vs landlord? And how can you reap the heftiest return? If these are questions you've considered, then you may find the below insights valuable. 

Investing in residential property

The premise: as a residential landlord, you’ll lease out a home to tenants, collecting rental income each month. It’s the entry-level investment choice for the average working person for a simple reason: “They’re comfortable with it,” says Malcolm Gunning, President of the Real Estate Institute of Australia (REIA).

The perks: regular rental income lines your pockets while you wait for capital gains to appreciate and grow above inflation—seven years or so should do the trick, says Gunning. Then there’s negative gearing: “If you have a shortfall in rent, you’re able to get a tax deduction.”

The pitfalls: tenants can be flighty, leaving you with vacancy, new letting fees, and a pulsing headache. Secure them for the long-term by setting your rents slightly below market, suggests Gunning: “Sophisticated landlords know it’s best to keep tenants in for continuation of income.”

Also, be mindful of where you buy. Property is risky in places where the economy hinges on a vulnerable industry. “Mining is a classic example. Recently North Queensland, Darwin and Perth have all suffered from a downturn in the economy,” says Gunning.

It’s better to buy near an employment hub that integrates a range of industries (think Sydney or Melbourne). Just don’t buy an apartment in a suburb with high-rise flats on every corner: “If your place doesn’t have any distinction, you won’t see the same rental growth.”

Investing in land

The premise: when it comes to being a landowner vs landlord, it’s all about capital growth. “When you buy land, you pay taxes and you get no net income,” says Gunning. “But you’re looking for capital growth. You may recognise the location as a growth opportunity, or you might be able to add value through a subdivision or rezoning.”

The perks: you don’t have the hassle of getting tenants in (or unblocking the sink). Plus, you can often see good turnarounds relatively quickly—around three to five years, in Gunning's view.

The pitfalls: as well as receiving zero income, you’ll often have to fork out for holding costs, land packages, and other rates. You need to be comfortable running at a loss for the short-term.

Investing in commercial property

The premise: instead of investing in a house, why not buy an industrial unit, a service station, or even a car space? Commercial property can be a sound venture for the savvy, patient investor (they’re slow-burners, best held onto for a decade or longer).

The perks: while residential investments usually require steep deposits, you can secure certain commercial properties with much smaller capital outlay. Usually, your tenants cover the outgoings, if not your out of pocket costs are usually tax deductible.

Even better, you can expect a higher return on your investments, with commercial gross rental yield more than double that of residential. Plus, unlike the revolving door of suburban flats, commercial tenants tend to sign leases of three years and upwards, giving you a steadier continuation of income.

The pitfalls: it’s complicated. Commercial leases are more involved and, unless you keenly understand market trends and conditions, you’ll find it tough to maximise their benefits. Commercial properties are also more vulnerable to economic downshifts and changes in supply. “You can always sell residential properties, whereas commercial properties tend to sell on the yield of property,” explains Gunning.


From these examples, you can see there's a variety of choices available if you're looking to invest in property. It's important to be aware that any form of investing comes with associated risks. If you're serious about making an investment it's important that you make an appointment with your banker and accountant to plan your investment strategy, and make sure you're aware of the risks involved before making any decisions which affect your financial future.

 

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