Which is a better investment?
By Advantage Property | 3rd Dec 20
Buying an investment property is one of the biggest financial decisions you’ll ever make so it’s important to get it right.
We often get asked if a house or apartment is a better investment - particularly in terms of wealth creation and retirement goals. Historically, houses have always outperformed units in terms of capital growth but it seems times are changing. We’re now starting to see increased capital growth with many units and townhouses throughout Melbourne.
Pros of Buying an Apartment:
- Lower entry-level purchase prices
- You can find many good quality apartments for half the cost you would pay for a house. A smaller deposit makes it more achievable to own a property sooner rather than later.
- Low maintenance living
- Apartments generally require less care and maintenance than a house. This makes it ideal for socially active professionals or baby boomers looking to downsize.
- Less expensive to renovate
- A quick coat of paint, new door handles and appliances can help to sharpen the appeal of an apartment. This can be achieved at minimal cost, when compared to renovating a larger home.
- Higher rental returns
- Apartments usually generate a stronger rental yield than a house. The increased demand for apartment rentals will ensure good investor returns over the long term.
Cons to Buying an Apartment:
- High Owners corporation fees
- When it comes to apartment living, you can’t escape paying Owners corporation fees. Quarterly payments will often go towards maintaining laundry facilities, lifts, gymnasium, pool and outdoor entertainment areas.
- High-density living
- Depending on where you buy, some apartments may have thin walls and poor insulation. This often results in high noise levels and a general lack of privacy.
- High-density apartment developments, often attracts very slow capital growth. Resale is usually poor with land value worth less than 10% of the purchase price.
- Smaller living spaces
- Some apartments can lack key storage space and can be difficult to navigate in freely.
Pros of Buying a House:
- More potential for capital growth
- Houses generally have a larger land size value, giving you greater flexibility to develop, sub-divide and extend if required.
- More privacy and feeling of space
- Houses are more generously proportioned offering a greater sense of privacy, space as well as keeping pets.
- Appeals to a larger cross-section of buyers
- A house will always appeal to a larger, more diverse range of potential buyers such as first homeowners, investors and young families.
- No shared land or ‘Owners’ Corporation’ costs
- Rather than being locked into paying quarterly levies, you get to decide on what needs fixing today, tomorrow or next month.
Cons to Buying a House:
- Higher stamp duty and interest costs
- Owning your dream home requires much effort and financial consideration. Spending money on a home often equates to higher stamp duty costs and loan interest fees.
- Higher maintenance and renovation costs
- A house will always have higher structural and renovation costs to deal with. Not to mention the increased monthly expenses such as - council rates and utility charges.
- Lower rental returns and reduced cash flow for investors
- As a rule, properties with higher capital growth generally have lower rental returns. To increase the rental yield of a house, you’ll need to invest money on further renovations.
- Less tax deductions and depreciation benefits for investors newer homes tend to offer greater tax depreciation benefits rather than older and more established homes.
There are clear advantages and disadvantages with both options. With housing affordability getting worse and rising property prices predicted for the decades ahead, experts are forecasting that units and townhouses may be the better investment choice.
However, don’t go choosing just any unit. Newer properties are clearly not performing at the same level as older-style apartments from the 1920’s to 1970’s eras. If you have a choice, always purchase something within a small boutique block of eighteen or less rather than within a high-rise development. Older style properties have a significantly higher land value and will ultimately accelerate your capital growth. Add to that, a well-located apartment (within 20 kilometres from the CBD) in need of renovation – and you may have instantly increased your equity and net worth overnight.