Considering return on investment

Question from Maxine updated on 5th June 2012:

I am just seeking some general advice around property investment as I am very new to it. I am currently looking at two properties in Epsom, Auckland. The first is on 683m2 of land and the second is a terraced style house (I can only find specification on floor area - being 192m2). The asking price on both properties is in the early $900,000s. Would either make a good investment property? I plan on buying the property then renting it out for about a year before I move in myself. I am also after advice on setting the rent price and which property would give a better return on investment.

Our expert Kris Pedersen responded:

It is hard to answer your question as you are referring to this from an investment point of view but it does sounds like it will become your owner occupied property over time as well and the factors that one should look at `from an investment point of view (return on investment, potential for capital growth etc) are quite different from the more emotional factors (proximity to schools, work, lifestyle activities etc) that influence where someone is happy to live. Purely talking from an investment point of view you need to decide what it is that you are looking for. In reality if you are investing you should be aiming to get a satisfactory return on that investment so need to look at the cashflow that the property will achieve. if you are aiming for capital growth this is more of a speculative activity as while you can make educated assumptions there you will still be relying on the market to produce a return for you rather than the property itself. Good ways to ascertain what the property may rent for are having a chat with a local property manager, seeing what comparable properties rent for at the Department of Building and Housing site or looking at comparable properties on Trade Me. In regards to what property will provide a better return, this is hard to say as the information is too limited to have any idea on the yield of either. From a growth point of view remember that it is generally land that increases in value more than the dwelling itself.

Kris Pedersen of Kris Pedersen Mortgages is a commentator on property and finance. His team sources top finance strategies.

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