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If you’re thinking about buying an investment property, you’ve probably wondered if a house or an apartment would make a better investment.
There is no one ‘best’ option, as each has its own pros and cons to consider. It also depends on your investment strategy and what you can afford.
Investing in a house
Houses usually offer far greater long-term capital growth than apartments as land appreciates in value over time. But houses can also come with drawbacks. Here are the pros and cons to consider.
Pros
1. Potential for higher capital growth
Houses generally offer greater long-term capital growth than apartments because the land appreciates in value over time, and houses tend to have far more land than apartments. However, this can also be dependent on where the house is located. For example, a house on a block of land in the middle of the outback will be worth far less than an apartment in the middle of Bondi. Location always wins.
2. Opportunities to subdivide and renovate
Houses give the owner far greater control over renovations than apartments as there isn't a body corporate. Investors can add value by subdividing (subject to council approval) and renovating.
3. Zero body corporate fees
As you own the entire house, there are no body corporate fees to pay.
4. Consistent rental returns
Houses are more likely to attract long-term tenants such as families or people with pets, who want to stay in a particular suburb for schooling, or who need backyard space for pets or children. Tenants with pets generally prefer to rent houses as body corporate by-laws for apartments can restrict or limit pet ownership (setting weight limits on dogs for example). Many studies have shown that pet owners, on average, have a longer length of tenancy.
Cons
1. Lower rental yields
As a rule of thumb, houses generally produce a lower rental yield than apartments, despite houses having higher capital growth. Rental yield is the profit you make every year from your investment property as a percentage of its value. A high rental yield equates to greater cash flow.
2. Higher maintenance costs and upkeep
Houses have much higher maintenance costs than apartments as you have to pay all the maintenance fees yourself, as well as insurance premiums and building and pest inspections. The cost of maintaining a home over time is also higher than it is for an apartment.
3. Higher entry cost
Houses are typically far more expensive than apartments in the same area because of the land value. If you’re trying to diversify your portfolio, this can be a deterrent.
Investing in an apartment
Apartments are popular with investors as they’re generally more affordable than houses and have higher rental yields. But they have drawbacks which are important to consider too.
Pros
1. Lower entry cost
If you’re trying to diversify your portfolio or are a first-time investor, apartments can offer an affordable entry point into the market in areas that would otherwise be beyond your budget.
2. Shared upkeep costs
When you own an apartment, the maintenance, upkeep, and insurance costs are split among all the owners in the building through a strata title. An owners' corporation (also known as a body corporate) maintains and oversees the common areas in the building and charge body corporate fees.
However, not all costs are covered by the body corporate. You still have to pay council rates, contents insurance, and maintenance or repairs costs to your individual apartment if/when needed.
3. Potential for multiple assets
Because apartments are generally more affordable than houses, investors who are looking to diversify their portfolio could potentially purchase multiple apartments for the same price as one house and doubling their rental income.
4. Projected higher demand
With the rise in single- and two-person households in recent years, apartments are quickly becoming a more popular accommodation option as skyrocketing property prices put houses further out of reach.
Cons
1. Body corporate fees
You may have noticed we’ve listed body corporate fees in the pros and cons section. That’s because while having a body corporate removes having to organise and pay for some expenses, it can also be an expensive ongoing cost. Apartment complexes (particularly new ones) that have many facilities such as a gym, pool, elevators, and rooftop entertaining space will have higher body corporate fees in order to maintain all these areas. That’s why walk-up brick apartments can be a better option as body corporate fees are generally much lower.
2. Lower potential for capital growth
As apartments don’t have much, if any land, the potential for capital growth is quite limited compared to houses. This means that when the time comes to sell, you may not profit as much over the same period of time as you would with a house.
3. Lack of control for renovations
Owning an apartment means abiding by the body corporate. Any renovations you may want to make could require the approval of the body corporate first. As there’s no land, subdividing isn’t an option either.
4. Can be harder to finance
Some lenders are reluctant to provide a loan to a borrower if the apartment is less than 40 square metres (excluding the balcony/car space). Some lenders may also require the apartment to have a separate bathroom and bedroom (in other words, not a studio apartment). This is because if the borrower defaults, the lender needs to be reasonably confident they can sell the property.
Start your investment journey with loans.com.au
Whether it’s an apartment or a house you’re looking to buy, you can check out loans.com.au’s investment loan rates. Or, if you’re ready to get started chat with their team of lending specialists today and find out how you could save thousands.
