If you plan to invest in real estate you will not only need to choose the best investment loan but also you will need to choose what type of property to buy, and this generally comes down to a choice between a free-standing home or an apartment.
To make the decision easier, here's what you need to consider.
Rental yield is the profit you make every year from your investment property as a percentage of its value. Having a high rental yield equates to a greater cash flow which means you can live off that passive income, but rental yields aren't always a reliable indicator of a good investment property.
Properties with high rental yields can have no capital growth, or increased risk depending on factors like location, infrastructure, the economy, and so on.
For example, properties in mining towns have very high rental yields but buying a property in those areas can be risky as people living there are heavily dependent on employment in the mines.
On the other hand, capital growth refers to how the property appreciates in value over time. Capital growth is a key way investors build wealth, so it’s crucial in an investment property.
If your property has increased in value, when you sell your investment property you will benefit from a capital gain (a profit). You will also need to pay capital gains tax.
Generally speaking, houses have better capital gain than apartments because the land they sit on tends to appreciate in value over time, whereas apartments generally have a much lower portion of land (if any at all), so they won't rise in value as quickly as houses do.
Location does 80% of the work in an investment property - an average house in a great location will perform better than a great house in an average location.
When it comes to what makes a location great, being close to either the CBD or beach is key, as well as being close to lifestyle amenities like public transport, shopping centres, schools, restaurants, and parks, as these are all things tenants are looking for.
It's a good idea to look for areas where demand is high and the number of properties coming onto the market is limited, as it will mean more competition for your property.
When buying an investment property it's important to consider the range of tenants likely to be attracted to your property - for example if you buy a property in a tiny regional town the pool of potential tenants is a lot smaller than buying a property close to a CBD and lifestyle amenities which will attract a bigger pool of tenants.
If you've spotted an investment property you would like to buy, download a free property report to get a quick summary of important information about the area.
It's important to consider market conditions when choosing an investment property, and look at what's happening in the house and apartment market. For example, if you're thinking about buying an apartment in an oversaturated market, you may be able to negotiate the price down but you could find it difficult to attract tenants if there is a lot of supply to choose from.
Similarly, if you're buying an older house in an area where lots of new houses are being built, you could find it harder to get tenants who are more likely to go for the newer properties.
Detached homes can be great for investors interested in long term commitment. Oftentimes, investors purchase these properties for their portfolios in order to renovate them or wait for their value to grow before selling them for a profit in the future. Naturally, this takes time; it can be upwards of 10 years before the real estate sees a significant degree of capital growth.
1. Capital growth
Generally speaking, houses usually offer greater long-term capital growth than apartments because land appreciates in value over time. But there are some exceptions to this rule: a block of land out in the middle of Alice Springs is unlikely to rise in value over time compared with the square footage of a one-bedroom apartment in Bondi. This is why it's also important to consider the location when choosing an investment property.
2. Flexibility to renovate
Houses allow much greater control over renovations than apartments because you don't need to get the approval of the body corporate. Houses allow the opportunity to sub-divide or build an extension, subject to council approval. Renovations can also add value to the property.
3. More reliable rental returns
Houses generally attract tenants like families and couples, who are usually more reliable and likely to stay for a longer period of time.
Tenants who have pets usually prefer to rent a house because of the yard space and more flexible lease terms. Research shows that renters with pets on average have longer tenancy than those without pets, probably because it can be so hard to find pet-friendly rental housing.
Houses are typically more expensive than apartments in the same area because of the land value.
Houses generally have lower rental yields than apartments but higher capital growth. If chasing rental income for cash flow is more important to you than capital growth, you may want to keep this in mind when choosing an investment property.
3. Upkeep costs
When you own a house, you're responsible for all the maintenance and upkeep fees as well as paying insurance premiums if you've taken these out. You also have to pay for building and pest inspections before buying the property to make sure there aren't any underlying problems.
Purchasing apartments as investment property has a number of benefits, which could be worth looking into. For one, they tend to be cheaper from the get go than detached homes, which can make them perfect for new investors or those interested in creating a large spread of real estate across a certain area.
With the tendency to be found in populated metropolitan regions, apartments often focus on securing a consistent rental yield rather than working towards an overarching capital gains growth.
1. Affordable to buy as an investment
One of the great things about apartments is how (generally) more affordable they are than houses, making them a good entry point into the market if you're a first time investor or just have a smaller budget. If you're trying to buy close to the city, apartments are a more affordable option than a house in the same suburb.
2. Shared upkeep costs
Unlike houses, maintenance, insurance and upkeep costs are shared in apartments among all the owners in the form of a strata title. A body corporate manages and maintains the common areas in strata-titled properties, and charge body corporate fees.
But not all costs are covered by body corporate, you'll still have to pay your own contents insurance, council rates, repairs and maintenance to your individual apartment and utilities.
3. Potentially easier to manage
Unlike houses, apartments usually have no land which means less work for you! Chores like repainting the gutters and mowing the lawn will be a thing of the past. As apartments are usually smaller, it takes less time to clean as well, so it's a win-win.
1. Lower land value
Apartments generally don't have much, if any land, which means they don't offer nearly as much capital growth as houses do. This means you may not make as much profit when you sell an apartment over the same period of time as a house, however many other factors can influence this like property market trends.
2. Body corp fees can be high
Depending on the apartment building, body corporate fees can be quite high. Newer buildings with lots of amenities like a pool, gym, rooftop entertaining space, and so on will have higher body corporate fees to maintain all these common areas.
Older apartment buildings that don't have any of these amenities or an elevator generally have much lower body corp fees, so this is something to keep in mind.
3. Less control for alterations
Living in an apartment means playing by the rules of the body corporate, so any major renovations to your property may need to be approved first. Because there's no land, you can't add on an extension like you could with a house.
4. Increasing supply of apartments
There's always new apartments going up and if you live in an oversupplied area you could suffer from lower rental yield, less capital growth and less demand from potential tenants because there's a bigger selection of apartments for them to choose from.
Apartments can be an affordable entry point into the market for first time investors in areas that may otherwise be beyond your budget if you were looking at houses. The more affordable price point means more investment choices, particularly for cashed up investors who are looking to buy multiple apartments to create a more diverse portfolio.
If you're looking to purchase an apartment as an investment, the same investment rules apply: look for an apartment in a good location, consider rental yield vs capital growth, have a strategy, and look for investment grade properties.
Townhouses are generally cheaper than houses, making them an affordable entry point into the market for first time investors in areas that may otherwise be beyond your budget if you were looking at stand alone houses. A townhouse can be a good alternative for investors who want to achieve balance between rental yield and capital growth, as townhouses generally have more land than apartments.
Rental yield is the profit you make every year from your investment property as a percentage of its value. To calculate rental yield, the weekly rent is multiplied by 52 weeks and then divided by the purchase price.