Why Apartments Trump Houses as Investments

Clarke McEwan Accountants

There was a time when investing in apartments was considered to be a far inferior choice to buying a home or duplex.

The value of real estate is in the land, the experts say, so you should plonk your investing dollars in houses where the land value appreciates for many years to come. However, George Raptis, director of Metropole Sydney says that rule doesn't always apply.

"Some people have this notion where they think that a house and land is a good concept as far as investment is concerned, because obviously the land appreciates, but the house doesn't," he says. "But here's the thing: if you go out into the suburbs and buy a house and land package, you might pay $400,000. Of that, $100,000 accounts for the land, and $300,000 is the cost of constructing the property. So the part of the asset that appreciates is only a small portion anyway.

"If you buy an apartment in a premium land-locked suburb, the land has a higher value. There might be a block of 10 apartments in Bronte, for instance, where the land beneath is worth millions of dollars. Your land-to-asset ratio is a lot higher, and that's really what drives the price up." In other words, Raptis is saying that it might be better to own a small slice of a highly valuable piece or land, rather than a large slice of a low-value patch of dirt.

To add weight to his argument, Raptis confirms that units have recently outperformed houses as far is growth is concerned.

"That's not traditionally the norm – usually, it's normal for house values to outperform units," he clarifies. "But I think apartments will continue to make good investments, because it all comes back to supply and demand." Raptis points to Australia's changing demographic as the main driver of growth in apartment living.

"Obviously, units are more affordable, and rising property prices mean that more people are looking for units as opposed to houses," he says. "But as well as that, there are more single and two-person households today than there's even been, and they don't want to live in a five bedroom McMansion out in the suburbs. They want to be close to the CBD, close to work and entertainment."

The Australian Bureau of Statistics (ABS) projects that the number of lone-person households will swell significantly in the next decade or two, up from 1.8m in 2001, to between 2.8m and 3.7m by 2026.

"The way that we live is becoming more cosmopolitan, with beaches, cafes, and restaurants creeping higher on the priority list," Raptis adds. "There's a whole new generation of people leaving home looking at apartment living, and basically, it's not necessary for these types of people to own a house with land."

Top tips for buying an apartment

When choosing a unit, there are specific details that can help you refine your search and improve the desirability of your property.

Bedrooms and floor space

The more bedrooms and the larger the floor space the better. If you're looking for a two bedroom unit, look at buying something above 80m2 and above 110m2 for a three bedroom. More bedrooms means that as an investor you can charge more rent, and your tenants can split the rent further to reduce their costs.

"The more bedrooms, the better it is in terms of affordability. Two bedroom units are in high demand, but I always think the larger the unit the better because construction costs are going up," says Rich Harvey, managing director with Propertybuyer.com.au.

Level

The position of the unit in the building is the next element you need to look at. If your unit is in a quiet suburb, your tenants or buyers will probably be young families or empty nesters. These types of tenants or buyers will be looking for an easily accessible but safe, smaller apartment block with a unit on the first two floors. Renting families are likely to expect that the apartment has its own garage or allocated parking spot. They may also pay more for a home with a good view of the city, water or surrounding suburbs.

If you are looking to buy in an active inner city apartment block, you will most probably be renting your unit to young professionals. In the upper end markets these tenants will pay for good views, but in the general tenant market, any level of the building would suffice.

Peter Koulizos, author of Top Australian Suburbs believes that no matter who your market is, the ground floor of a unit complex is by far the best decision for an investor.

"Some people would argue with me but I would say ground floor is best from a landlord's perspective because you don't eliminate any of your market. If you go above ground floor you eliminate the older generation who don't want to go up the stairs or people with young kids," he says.

Orientation Property experts agree that an apartment facing towards the north and away from the road, would make a highly desirable unit in the right area. This type of unit would receive good air flow and minimal noise from the traffic. A unit which is newer or has been renovated to incorporate modern open plan living will also be attractive to tenants and owner occupiers. Look for an apartment which provides a plenty of natural light and areas which can be used to entertain and relax.

Details

Investors should be looking to buy established dwellings with character details as these properties will return higher capital growth due to their individual designs says Koulizos. "I am talking about anything up until art deco or World War 2, before then is classified as 'character'. They were built with higher ceilings and more solidly, and they look nicer than the new high rise apartments," he explains. As an owner occupier, you may be better off buying a newer apartment as it is less likely to have major problems and there is generally less maintenance involved.

Buying process

The legalities of buying a house and a unit should be the same for each purchase. However, there are some key points of difference to keep in mind when purchasing a unit (over a house).

Get a copy of the strata report and get a strata search – the person who does the strata search will explain to you in plain English what has occurred in the strata report.
Ask the professional doing the search whether the building is adequately insured (and if there is proof of how much the insurance covers). Go to http://www.strataman.com.au/insure.html for an example.
Ask yourself whether you can afford the quarterly levies.
Know how much you may have left to pay on the quarterly council, water or electricity rates.
Make sure you have done your due diligence before bidding at auction – this includes your strata search.
K eep in mind the individual unit, common areas and entire building when bidding at the auction – keep your emotions out of the purchase if you're an investor

It pays to do your sums before taking the leap into property investment. For advice about deposits, your borrowing capacity, financing a loan and other property purchase related matters contact us. We can refer you to a wide range of contacts in the financial and banking sectors once your initial figures are in order.

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