Growing your property investment portfolio is a tricky and questionable path at best. Which property investment option should you buy and which will give you the best return on investment for the least amount of effort. This is a question that is still very vigorously debated today.
I will however break the options down for you and try and give you the biggest pros and cons to each of the four property investment type.
1. Office Space for a property investment option
Office spaces are considered the “flagship” for serious property investors. This is simple because on average they are the largest and highest profile property type. This is mainly because of their location – which tends to be downtown (CBD) or the suburban office parks.
Pros of office spaces as a property investment option.
Personally I like offices as an investment opportunity because of the quality renter, being “white collar” renters. This would usually suggest that one has less of the renter quality control problems, meaning your renter aren’t going to breakdown your property as easily. Also (especially in South Africa) I like offices for the simple reason that evictions are less common, saving you time, money and lots and lots of frustration.
Cons of office spaces as a property investment option.
Economical fluctuation is a major concern for office spaces as an investment opportunity. This is simply because if there are economical pressures, companies tends to rent smaller spaces. Small business owners find alternative methods, such as working from home or collaboration offices space.
Another concern is that office parks/building tends to have a high operating cost. One has to ensure the property is consistently in a well representative condition, not to mention that it has too be safe, which means security. The moment one adds physical security with CCTV cameras one has high levies, eating into your bottom line.
2. Retail Space for property investment option
Retail is one of those tricky investments at best. You can go for the South African typical and buy a space/share in the mega mall structure or you can go (my personal favourite) the off street/pedestrian zoned retail spaces. Which ever you choose, you have to consider your surrounding retails as well. This is of the greatest importance, what kind of retailers are renting the spaces, what is their LSM market and what type of merchandise are they selling. Of course any business man will say but this can change tomorrow. That is absolutely true, but it should give you a clearer indication of what you will be getting yourself into.
When I talk about the surrounding retails, I’m specifically referring to what the market call an anchor. This will typically be the attracting factor, the foundation store of the shopping centre. For instance if you have a Woolworth Foods (which is a high end grocer in South Africa) you will typically be better assured that higher earners (higher LSM) customers will visit this shopping centre. The market will refer to this as a food anchor, insuring easier investor opportunities for a better/higher foot traffic.
Retail as an property investment opportunity has many drivers, the first (as with all property) is location, visibility, population density, population growth and relative rental income levels.
Pros of retail spaces as a property investment option.
A growing economic perspective will indicate that retail tends to be stable, especially when retail sales are high. In general the thought goes that retail tends to have better investment returns than office spaces. This is simple because retail leases tends to be longer and also retailers are less inclined to relocate.
Cons of retail spaces as a property investment option.
However one might have a general better return on investment, but one returns to the biggest concern with property for investment purposes. That is the rental quality. It is for this reason that you have to be sure about your location and the type of retailers that will be your neighbours. Good retail neighbours can bring far more foot traffic that you will be ever able to advertise for as a retailer, this will make your retail space more desirable for retail renters. Making your bottom line bigger.
3. Industrial Space for property investment option
Industrial Properties are usually considered the “staple” of property investment. This is simple because of all their various uses, increasing your potential retail market greatly.
Pros of industrial spaces as a property investment option.
Industrial property investments generally require smaller average investments (smaller square/ meterage rate), they tend to have less managerial responsibilities and have lower operational cost than their office and retail counterparts.
Also your rental market is significantly bigger than with the other property investments options. This is simply because of the wide variety of options available with industrial spaces. A typical industrial space can be used for manufacturing, warehouse, research, office, development or distribution spaces.
Crons of industrial spaces as a property investment option.
With industrial spaces one has to consider the public counterpart far more than with the other property opportunities. Industrial spaces need to be close to public transport hubs, this will be a huge consideration for your potential rental market for their own work force.
Secondly you have to consider the functionality of the space, what can a potential renter do with the space. Also consider other factors such as building configuration, loading and the degree of specialisation in the space (items such as cranes, freezers, ventilation, loading docks, yard space, est.)
4. Residential Space for property investment option
Residential spaces tends to be the most stable of the property investment options, simply because no matter the economical period, people will always need a place to live. The question however is how big and expensive do you go with your residential units.
Pros of residential spaces as a property investment option.
Residential occupancy tends to stay high in a normal market, which of course is a great benefit of residential property investments.
Another benefit is that the lost of a singular renter is considered minimal in consideration of the previous mention investment property opportunities. The lost of renter in residential simply means to find a new renter, but losing your anchor for instance in a retail mall can be significant to the foot traffic of a shopping center, influencing your desirability for your retail rental spaces.
Crons of residential spaces as a property investment option.
One of the biggest problem with residential spaces is the quality of your renter market. How many times a year will you have to go fix up your property. Also it is important to consider the type of residential property. For instance a house with a yard will have more maintenance expenses the landlord will be responsible, whereas an apartment will have less of this other than paying the levies and painting the flat.
The best advice I can give when it comes to buying property for investment purposes is to try and think for your potential rental markets perspective. Who would want to rent here and why, what would they need and what would be a nice to have. Also most important as with all finances, what is your income and expenses. What profit will you actually make, considering maintenance, levies and taxes. If you are still not sure I recommend you speak to as many entities as you can. Property management companies are a great resource to talk about what and where to buy. Companies like Mafadi knows the occupation rate of each of these 4 property types, the income potential and your potential expenses, they deal with these issues on a daily bases.
Speak to Mafadi for advice or once you have that property, you will need a property management company.
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