Investment property: what it is and how it works

Funding describes an investment property as a real estate asset bought with the main aim of earning income or profit, whether through rent, appreciation, or both. In that description, an investment property is not typically the owner's main home. Funding says buildings of this kind can be residential, commercial or industrial, and that some combine several uses at once. Its examples take in houses, duplexes, apartments and multi-family units, as well as offices, shops, shopping centres, hotels, warehouses and distribution centres.

The same glossary sets out why it says people buy them. Rental income comes first, a flow of money that arrives while the property is held. Appreciation is the second, the chance that the property's value rises so that a sale produces a gain. Funding also lists tax benefits, diversification across asset classes and long-term wealth building, and it says real estate can act as a hedge against inflation and market volatility.

Two ideas come up most in Funding's account. Rental yield, it says, is the yearly rent written as a percentage of what the property is worth, and a higher figure points to stronger income potential. Capital growth is the rise in value over time, and the glossary says past growth rates and future potential both enter the choice of what to buy. Location counts too: proximity to amenities, transport, schools and workplaces can affect rental demand and value. Financing, Funding notes, may come as an ordinary mortgage, an interest-only loan or a commercial property loan.

Funding also sets out what can weigh on an owner. It lists the large amount of capital needed up front, the time that tenants and maintenance take, and the way values and rental demand move with market and economic conditions. It notes that selling takes longer than it does for many other investments, and that a vacant period means rent that does not arrive. Management, it says, can be handled by the owner or handed to a professional service.

Funding sorts the field into a few broad approaches. Residential investment means buying houses, apartments or multi-family buildings and renting them out. Commercial investment covers offices, retail space and industrial property, which the glossary says can offer higher rental yields but may call for more management and more capital at the start. Short-term letting of a holiday home can bring in more than a long lease, in its account, at the cost of more active management and marketing.

Property can also be held without owning a building outright. Funding describes real estate investment trusts as pooled funds that buy and manage a portfolio, giving people a share in property and, in its description, diversification and passive income. Mixed-use developments, which bring residential, commercial and industrial space together on one site, are another route it names, with more than one stream of income and a wider tenant base.

ING advises setting out a clear idea of what the investment is for. Among the aims it names are long-term capital growth, a renovation that is fixed up and sold for a quick profit, and rent used for cash flow and income. Negative gearing and positive gearing are two of the strategies it names. It says each strategy leads to a different property and location, and suggests talking to a tax adviser or financial planner before bidding at auction. The purchase, it adds, is a financial decision rather than an emotional one.

On location, ING suggests areas where rental demand is reliable and where transport, schools, universities, business centres, parks and shops are within reach. For capital growth it points past current hotspots to areas that are expanding, where redevelopments, transport improvements, new shops and cafes or people moving in suggest stronger potential. It suggests looking at an area's past capital growth, its vacancy rate and its average rental returns, and says a suburb report can gather that picture.

On the property itself, ING says houses generally deliver more capital growth while apartments generally give a better rental yield, and that lower-density blocks generally do better on growth and overheads than high-rise buildings, unless there is a magnificent view. It notes that new complexes and housing developments in Australian capital cities can be bought off the plan, and that older buildings tend to offer larger spaces and more character for renters.

ING suggests picturing the tenant first and choosing a home that will appeal to them. A couple with children may want a garden, extra bedrooms and parks and schools nearby. Young professionals may prefer a stylish terrace close to cafes and shops, and university students may look for a secure apartment near transport, bars, restaurants and campus. International students may favor one-bedroom apartments over two-bedroom ones. Features most renters look for, ING says, include a second bathroom, built-in storage and air conditioning, along with an internal laundry, a balcony and a garage.