The type of property a person buys carries a risk too.  Here are some typical property types and the risks associated:

Residential property

These are standard houses or units, which are residentially tenanted.  They include freehold, strata titled, community titled, Torrens titled property.

Risks:

  • If vacant you bear the costs alone
  • Tenants may cause damage and flee
  • You may buy in an area which becomes less popular over time
  • Property is generally illiquid
  • Diversity is less possible than with shares or managed funds due to the size of investments.

Conclusion: Suits investors with a low tolerance to risk and lower disposable income.

Commercial property

This includes factories, shops, offices, and warehouses, which are freehold, strata and titled and Torrens titled.

Risks:

  • Vacancy can be more frequent and for longer periods of time
  • Landlords usually have to offer incentives such as rent‑free periods and help with fit‑out to attract tenants from what is often a small pool

In addition to the risk of vacancy there is the commercial risk, if the economy falters and their businesses go broke, your tenants may be unable to see out their leases.

Conclusion: Suits investors with a high tolerance to risk and a lower disposable income.

Vacant land

Buying vacant land will only provide capital growth potential and there is no tax deductibility on any loan interest, as these do not produce an income.

Risks:

  • No major risks except that you must fund any debt on your own and hope the gain covers what you have paid out.

Conclusion: Suits investors with low tolerance to risk and high disposable income.

Holiday apartments, serviced apartments, hotels and resorts

These types of investments are Income producing only in holiday periods.  They can be strata titled, freehold, community titled and Torrens titled.

Risks:

  • Manager has complete control over success or failure of business
  • Expenses can blow out if poorly managed, eating into profits
  • The area you buy in may go out of fashion
  • Lifestyle benefits may create a tax problem as the tax department considers these to be a form of ‘soft dollar’ income
  • Income can be seasonally affected

 

If the original purpose for the property fails (for example, you have a tourism property that no one frequents) you need to be sure that you can let it as a standard residential property. Be sure that council zoning does not preclude this change of use.

Conclusion: Suits investors with medium to high tolerance to risk and medium levels of disposable income.

 

Identifying these risks to clients is an important part of your role and disclosure reduces the possibility of a claim of negligence against them.