Investing in real estate has long been considered a reliable investment strategy, especially during challenging economic times because, unlike stocks and bonds, property is a tangible asset that offers unique advantages that can accelerate wealth accumulation over time.
So says Claude Mc Kirby, Co-Principal for Lew Geffen Sotheby’s International Realty who adds that real estate market fluctuations are generally not as extreme and property tends to appreciate steadily over time, making it a reliable long-term investment.
“Property ownership therefore tends to offer better long-term financial security and, on another level, being a physical asset with intrinsic value it invokes a sense of security and stability.”
However, McKirby says that one of the most critical decisions investors face when acquiring a property to enter the rental market is choosing between letting it on a long-term lease or opting for short-term rentals.
“Each option has its unique attractions, challenges, and benefits, shaped by market demands, the investor’s lifestyle, investment goals, and risk tolerance.
“For example, investors looking for a hands-off approach may prefer the relative ease of long-term leasing whilst those seeking maximum returns and who are willing to engage more actively with their investment might gravitate towards short-term rentals.”
Attraction: The traditional appeal of long-term leasing lies in its predictability and simplicity. Investors are generally attracted to the steady, predictable income stream, reduced turnover costs, and lower operational demands.
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Attraction: The rise of the sharing economy has propelled platforms like Airbnb, which appeals investors due to potentially higher returns and flexibility.
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McKirby says that whichever option you choose, there are a number of ways in which to minimise risk and optimise returns:
Ensure you buy in a prime location: Buy the best you can afford in the best location as your investment is most likely to not only retain its value but also grow and yield better returns.
In the holiday let market, this is important because in peak season in popular towns, most holiday properties perform well, but out of season and tougher economic times, units in secondary locations could well suffer from low occupancy rates.
Consider sectional title: The upkeep required on older properties and homes on large grounds can easily eat through returns, so unless you are able to put a portion of the rental earned away as a maintenance fund, low maintenance options like lock-up-and-go properties are a better choice.
There will be a body corporate with trustees who are responsible for the maintenance of the common property, and the upkeep of the complex which significantly reduces the owner’s involvement in maintaining the exterior of the property. One word of caution – the levies in some complexes can be quite high.
Know your market: It’s essential that investors research the general demographic of the area and decide which segment of market they will be servicing, especially in the long-term rental arena.
For instance, in the student market, the buyer should choose a suburb close a campus with easy access to public or student transport routes, while families will need to be in close proximity to good schools and sports and shopping amenities. Corporate tenants will favour an upmarket suburb which has quick access to freeways leading to the airport and typically close to business hubs.
Familiarise yourself with the relevant legislation: Legislation regarding the rental sector and short-term rentals have been tightened in recent years for both your and your guests’ protection so make sure you operate within these stipulations to avoid potentially costly and stressful pitfalls.
Consider professional management: This is especially important if you don’t live in the area because there is likely be a guest or an issue that needs your attention on a regular basis. They will also have a thorough knowledge of all the relevant legalities.
And an experienced and professional rental manager could well make the difference between an empty and an occupied property.
Adequate cover: Ensure that you are adequately insured as you don’t want to have to fork out if a geyser bursts or a window is broken. And, in short-term lets with more people coming, accidents and incidents are far more likely.
Also bear in mind that some policies include a clause about vacancy, and properties that are vacant in excess of 60 days, which could introduce limitations in cover, so when shopping around, be sure to read the policy terms and conditions carefully.
Do your sums: When you are calculating how much you can afford to spend on an investment property and what your returns will be, make sure you include all expenses, including insurance, rates and taxes and management fees.
Be especially careful if you are looking to enter the short-term rental market because holiday rental prices are usually much higher than long-term rentals, often increasing even more in peak season, your initial calculations are likely to look very good. It’s important that your sums allow for longer vacancy periods and fluctuating occupancy levels from season to season as well as maintenance costs which can also be higher than normal what with so many different people using the property.
“Both long and short-term rentals have their place in an investment portfolio, each offering distinct advantages and challenges. However, it’s critical that investors understand the local market and the regulatory environment and are clear about their personal investment goals and available time before taking the plunge,” concludes McKirby.
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