"View the pros and cons of each property investment type." - Matthew Lapish, Senior Investment Analyst
If you’re thinking about buying an investment property, you’ve probably wondered whether 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.
Houses typically offer greater long-term capital growth due to the appreciation of land value over time. However, they also present certain challenges.
Houses generally offer greater long-term capital growth than apartments because land appreciates in value over time, and houses typically come with more land. In the case of apartments, the land value is shared among all the units in the building, diluting the individual unit’s share of the land’s worth.
However, the potential for capital growth also heavily depends on the location of the property. For instance, a house in a remote area will likely appreciate far less than an apartment in a high-demand urban location like Bondi. Location is a critical factor in determining the value and appreciation potential of a property.
Houses give the owner far greater control over renovations compared to apartments because they are not subject to body corporate regulations. This freedom allows investors to add value by subdividing the land (subject to council approval) and renovating the property according to their preferences. This flexibility can significantly increase the property's value and rental appeal.
Owning an entire house means you avoid paying body corporate fees. These fees, typically associated with apartment living, cover the maintenance and management of common areas and facilities. By owning a house, you eliminate this ongoing expense, potentially leading to significant cost savings over time as they can be quite expensive.
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.
As a rule of thumb, houses generally produce a lower rental yield compared to apartments, despite having higher capital growth. Rental yield is the annual profit generated by your investment property expressed as a percentage of its value. A high rental yield means greater cash flow, providing more immediate income from the investment.
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. In apartments, many of the maintenance tasks are covered by the body corporate, including exterior maintenance, common areas and some internal repairs.
Houses are generally much more expensive than apartments in the same area due to the added value of the land. This higher cost can be a deterrent if you're looking to diversify your investment portfolio.
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.
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. Apartments generally have a lower purchase price compared to detached houses in the same area, making them more accessible for investors with limited capital.
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.
By investing in apartments, you can spread your investment across multiple units or buildings, reducing the risk associated with putting a large amount of capital into a single property. This diversification can help stabilise your investment portfolio and potentially yield more consistent returns.
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.
Apartments, especially in urban areas, often have high demand from renters. This can provide a steady stream of rental income, contributing to a reliable cash flow and enhancing the attractiveness of apartments as an investment.
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.
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.
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.
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.
Source: Your Investment Property
Your Investment Property. (2022, 21). Apartment vs house: Which is a better investment? | YIP. Yourinvestmentpropertymag.com.au. https://www.yourinvestmentpropertymag.com.au/buying-property/apartment-vs-house-investments-which-is-a-better-choice