If you’re considering buying your first investment property, you might be wondering what makes a better investment: houses or apartments.
There are pros and cons on each side. The debate is generally divided between those who believe that a property’s value is based on its land, and those who believe value is found in the property’s individual characteristics.
When it comes down to it, the ‘better’ investment really depends on the current rental market, the location of the property, and the circumstances of the individual investor. However, we’ve compiled some general points worth considering when deciding what sort of investment property to buy.
The initial cost of purchasing an apartment is often less than that of a house. For first-time investors especially, this alone can make apartments more viable, as the lower price point allows them to get into the market sooner.
However, location is a significant factor when it comes to initial cost. For example, starting prices for a two-bedroom apartment in the Newcastle CBD are around the same price as a three-bedroom house in suburbs such as Adamstown and Broadmeadow, or a four-bedroom house in suburbs like Mayfield and Waratah (source: RP Data).
Additional costs such as strata fees should also be factored in when considering the overall cost of an apartment (more on this below).
Ongoing costs and maintenance
Purchasing an investment property doesn’t just involve a deposit and weekly mortgage payments. There are ongoing costs involved in both investment apartments and houses.
When buying an investment apartment in a unit block, you’ll be subject to fees for strata management. These cover maintenance of the building itself and its communal areas. Strata levies for buildings with expensive communal assets, such as pools and gyms, will be more expensive than those of an older/smaller apartment block.
When you own an investment house, on the other hand, you don’t have to pay strata fees – but all maintenance and repairs are your own responsibility. Land tax is also payable on investment houses if their value is above a certain threshold (more on how land tax is charged here).
Capital growth vs. rental yield
When it comes to maximising return on investment, there are two main components to consider: rental yield and capital growth. Rental yield refers to the income received from the property as a percentage of the property’s costs; capital growth refers to the increase in value of the property over time.
Due to their land component, houses offer higher capital growth potential for investors in the long term. However, apartments often provide higher rental yields, especially in short- to medium-term investments. So depending on the timeframe and financial goals you have for your investment, it’s handy to keep all this in mind when choosing your property.
There’s no universal answer to the question of whether houses or apartments make a better investment. The type of property that’s best for you will come down to your individual financial situation and investment goals.