Whether you are a seasoned investor or a beginner at the trade – one thing is for certain – the type of dwelling you choose to invest your money in will define your future strategy and profits.
Experts and investors are divided in opinion when it comes to the choice between houses and apartments. Most people agree that it’s best to look at the individual traits of each and decide what option promises a better ROI in the future, before investigating specific properties further.
The past is no guarantee of future performance, but the statistics are worth considering. According to the Real Estate Institute of Australia (REIA), during the past ten years alone, the average prices for houses have increased by more than 80 percent. Apartments aren’t that far behind – their median price has been raised by 72 percent as well.
In Perth over the last few years we have seen a shift in buyer demographics towards smaller household sizes, wanting lower upkeep, a lifestyle focused location at an affordable price. This has seen apartments become much more popular here. So I expect this extra demand for apartments will show up as greater price growth over the next 5 years.
Each property type has its pros and cons and at the end of the day, the decision depends solely on the investor’s own strategy and goals. Here is a brief breakdown of the factors that one should consider before investing in either a house or apartment and the risks associated with both sides of the coin:
Rental Returns
It is worth taking a deeper look at the rental returns on offer from each property type because this determine how much your investing is going to cut into your budget in the short term and how long it will take to produce a positive cash flow. One of the advantages apartments have in this area is that with such a high building component, you will have a greater depreciation to offset against your tax. So even if the rental returns are comparable, the after tax position can be strongly tipped in favour of an apartment. The other option you have with an apartment that you usually don’t have with a house, is furnishing it to boost your rental return.
Maintenance Costs and Upkeep
Those who think that houses require more maintenance than apartments are up for a surprise here. Though it’s true that maintaining a house can indeed be a costly affair, the hidden costs on apartments can ultimately affect your overall return too. When you buy an apartment, you automatically have to pay strata fees which go to covering everything from the gardening costs to maintenance of lifts, gyms and swimming pools, regardless of whether you use them or not.
Many apartment developers are conscious of this and are designing their complexes to require little upkeep of the common area. However over time as the building, roof and common area begins to age and requires maintenance, if you want the value to be maintained all owners will have to reach into their pocket.
Demand and Location
Another main factor to be considered here is the demand for a location. In this context I believe it is far better to buy a small part of well-located land than it is to buy lots of land in a poor location.
In the middle to inner ring suburbs it’s much easier to find a location close to amenities, schools, with good transport and these will always be sought after. Unless you have bags of money it can be difficult to afford a house in these locations, so many investors look to an apartment.
The further out you go houses dominate the property types on offer. If you are investing in a house, always go for a suburb where the demand is likely to remain strong and there are good amenities in place or planned for the area.
Space and Orientation
Especially when it comes to apartments, it is important to focus on the space and size of the units and analise the potential buyer mindset in advance. For example, apartments in crowded locations with a stream of other options in the surroundings may make it difficult for you to find a tenant because of all the competition. Similarly, single bedroom studio apartments are more expensive and can also limit the demand for your property in the long run.
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