Buying an investment property can be fun and challenging. You’ll need to work out what type of property is best for you. We explore key considerations to ensure success with your property investment.
There is no right or wrong as to whether an apartment or house is best – it really depends on your personal circumstances and importantly your investment strategy.
An investment decision is not an emotional decision – it’s a financial decision
With property investment – so many fall into the trap of making an emotional decision on a location, even not looking outside your backyard. This can be a mistake. It’s demand which ultimately drives capital growth, not the property type.
Due diligence must be performed including obtaining information on what percentage of the population are owner occupiers rather than renters – the higher the percentage of renters the more demand for rental properties and improvement of rental yield. A high percentage of owner-occupiers are usually in areas outside the city fringes and may have less demand for rental stock making it more difficult to rent out your property. An assessment of the vacancy rate will provide you with further comfort.
You should always work out the best area to buy, areas need to be popular with families and individuals alike, have infrastructure in place, schools and public transport – if not, people just won’t move there. Generally – the further the distance of the property from the CBD – the more likely houses will be found rather than apartments.
Apartments will be generally in areas close to the CBD, “trendy” areas in most capital cities have now become saturated with Apartment stock.Look at South Yarra in Melbourne, it is close to the city and popular with young professionals and foreign investors. As a result, demand is strong with a great shopping district, proximity to the city and great public transport and more importantly lifestyle. It’s a cool place to live; this has meant that there is a low vacancy rate and strong yield. However, there are concerns of over supply in the apartment market, which may impact your capital growth in the long term. In an area like South Yarra, a house will be difficult on a beginner’s budget, townhouses will reach up to $2 million and therefore depending on your strategy and borrowing power, an apartment may be suitable.
Think about the FINANCIAL commitment
Apartments are generally cheaper to buy than houses, so you could potentially be looking at a lower financial commitment. With apartments, there is no ‘land’ attached. Land is generally more expensive closer to the city and therefore apartments may be suitable. However for young families, there is no feeling like home, and a game of cricket in the backyard is required. This choice may push you to the outer limits of capital cities based on your affordability. This is generally where young families buy house and land on the fringes in less developed areas.
Weigh up the potential rental returns
Apartments traditionally provide a better rental yield than houses. According to figures from Core Logic RP Data, the national rental yield in 2014 for houses in capital cities was 3.7%, compared with 4.5% for apartments. A similar trend has occurred in 2015.
Recently, rental yields for both houses and units have been falling, as rises in property values have outpaced rises in rent. A key concern will be rental demand as so many apartments are built in capital cities.
You’ll need to think about both the level of financial commitment you’re up for and the expected rental return in order to work out what type of property makes the most sense for you.
Factor in maintenance costs
Houses tend to cost more to maintain than apartments, because owners are responsible for the cost of repairs inside and out.
Apartment owners are usually only responsible for repairs inside their property, and will probably pay an owners corporation fee to cover all other repairs and maintenance. Owners corporation will differ for one, two and three bedroom apartments. It is important to understand the costs prior to purchasing the property.
The upside of owning a house from an investor’s perspective is that you can make improvements to your property without approval from another party, such as an owners’ corporation.
So what is best for me?
The choice of house v apartment will differ based on an investors preference. The closer you are to a CBD, the more likely an apartment will be suitable as houses with the land attached will require a significant investment. However if you have the funds – why not? The further you consider outside a CBD, the more affordable housing is.