What should your next property purchase be?
Buying an investment property is one of the biggest financial decisions you’ll make, so it’s important to take a considered approach before jumping into the market.
Research from the Grattan Institute reveals that Australians are now more than ever choosing to live in the inner city to reduce commute times. For investors, this raises the question: how can you best leverage this demand for inner-city living? It comes down to the type of property you purchase – an apartment or house – when looking to secure the best return on your inner-city investment.
The case for apartments
There are many benefits of purchasing an apartment as an investor, the key one being that apartments have a lower entry-level purchase price. You can find quality apartments for half the cost of a house – and a smaller deposit makes it more achievable to start or grow your portfolio sooner rather than later.
Data also shows that apartments typically generate a stronger rental yield than a house. For instance, a two-bedroom house in Fitzroy (with its median house price of $938,000) can earn you an average return of $568 per week. Whereas a two-bedroom apartment in the same area, which has a median unit price of $655,000, can earn you an average of $580 per week (Realestate.com.au data).
If you are looking to fix up the property, some handy work on an apartment is less likely to send you into the red, too. A quick coat of paint, new door handles and appliances can help to improve the appeal of an apartment for a minimal cost when compared to renovating a larger home.
However, there are some downsides to investing in an apartment. Namely, you can’t escape paying owners' corporation fees. These quarterly payments often go towards maintaining building facilities and you’ll have to pay these even if you aren’t the occupier.
Off-the-plan apartments are also very popular in Australia, however these type of high-density developments often offer very slow capital growth. Resale can be limited with land value typically worth less than 10 per cent of the purchase price.
Is a house a better investment option?
Revisiting the Great Australian Dream
For an investor, the upside of purchasing a house is that the potential for capital growth is far greater. This is because houses generally have larger land size value, giving you greater flexibility to develop, sub-divide and extend if required. When it comes to selling, a house will always appeal to a larger, more diverse range of potential buyers such as first home owners, investors and young families.
In terms of fees, since there’s no shared land or facilities, there’s also no owners' corporation costs. Rather than being locked into paying quarterly levies, you can invest that money in upgrading or fixing the property.
But, just like apartments, there are still pitfalls to consider when investing in a house. In terms of capital outlay, owning a house requires much effort and financial consideration, such as higher stamp duty and loan interest fees. Also, a house will always generate higher structural and renovation costs.
As I’ve already indicated, properties with higher capital growth generally have lower rental returns. Investors will also find that there’s less tax deductions and depreciation benefits for established homes in the inner city compared to newer apartments which are fairly common in the CBD and surrounding suburbs.
So where to invest?
With housing affordability dropping and our population tipped to grow to 37.6 million by 2050, experts forecast apartments may be the better investment choice to cater for the rising demand for inner-city living.
However, not all apartments will deliver the same returns. Our experience tells us newer apartments are not performing as well as older-style apartments from the 1920s to 1970s eras. This is because the latter have a significantly higher land value and will ultimately accelerate your capital growth. It’s also worth investing in a small boutique apartment block rather than a high-rise development. Again, this is because the land value of smaller blocks is higher.
If you’re on the hunt for a solid inner-city investment, prioritise older-style apartments in a small block and you’ll be on your way to reaching your property goals.
Frank Valentic
Frank founded Advantage Property Consulting in 2000 and has since built a strong reputation as an advocate for buyers, sellers, and investors. He’s helped literally thousands of Melburnians find and move into their dream home, as well as helping hundreds of people find long-term security through developing successful property portfolios.
Who better to help with important property decisions than someone who’s spent the better part of two decades building their own extensive property portfolio? Frank is familiar to many from his TV appearances on Hot Property, Hot Auctions, Channel Nine News and The Block. He also writes for various media publications and has won many of the industry’s most coveted awards – some multiple times.
