One of the questions I’m frequently asked when it comes to people seeking property investment advice is, ‘Should I buy a house or an apartment?’
Many beginning investors are under the impression that houses make a better investment because they’ve read or heard that the land component of property increases in value, while the building depreciates over time.
Hence, they make the assumption that more land equals more bang for buck.
But that’s wrong!
You see – not all land is created equal and it’s a misguided notion that it’s the size of the land that matters, what’s more important is the location and scarcity.
This is the first question you should ask yourself, before you even start to think about what type of property would be the most beneficial for your portfolio.
I always recommend the inner areas around our major capital cities where demand is more consistent from owner-occupiers (who push up the values) and tenants.
So if you agree that investing in the inner suburbs where all the action is, is the right way to go and then look at the median price of houses, you’ll soon realise that homes are not very affordable when we talk about investing in your first, or even second investment is it?
Compare this to the median for a two bedroom apartment and this becomes a much more attainable proposition.
Now you might think that because the house is worth so much more, it must make a better investment.
But if you drill down further and consider price trends over the past five years or so, 2 bed apartments and 3 bed houses have recorded similar rates of annual growth at 4.7 per cent.
Of course there are more affordable opportunities when we talk about detached housing.
However to find them, you need to travel further out where price growth is traditionally a lot lower and therefore, not the ideal for long-term wealth creation.
Essentially, the land component of any given property is important in relation to the overall scarcity of available land in the location you are considering.
Think about it – in those expansive green-fill estates on the outskirts of town there is a surplus of developable land freely available and buyer demand is consistently average, meaning shortages are highly unlikely any time soon and therefore capital growth trends are fairly unremarkable.
Compare this to land – even a small slice divvied up between ten to twelve apartments in a block – in the inner city.
In these neighbourhoods there are often very tight restrictions on development due to natural constraints, such as the bay and harbour-side suburbs of Melbourne Sydney and Brisbane, as well as the fact that all available land has already been built on.
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It is this scarcity – this inability to make more land – coupled with ongoing demand from homebuyers and tenants wanting to live close to desirable and fashionable amenities, as well as employment opportunities afforded by inner city locations, which underpins and places upward pressure on prices.
‘But what about the Great Australian Dream of owning a large home on a quarter acre block with all the trimmings?’ you might be thinking.
While this lifestyle was popular with former generations, times are most definitely changing in Australia.
Inner city apartment living has come into its own in the last twenty or so years, as more people embrace what was once considered a lifestyle for the under-classes, who couldn’t afford the more desirable sprawling properties in leafy green suburbs.
The ever-increasing cost of living, rising petrol prices and a movement toward a lifestyle that embraces the café culture have all caused a swing in favour of the inner city, with an increasing number of young professionals and downsizing baby boomers moving closer to the action.
Walkability is the new buzzword in property circles, with many looking for locations that offer all the necessary leisure, shopping and work opportunities right on your doorstep.
For most, purchasing a detached house in some of the more sought after ‘walkable’ neighbourhoods is simply out of the question as they command million dollar plus price tags.
Not to mention the additional maintenance that comes with a large home and garden – something many inner city residents would prefer not to worry about when their downtime can be spent enjoying the nearby restaurants, shopping and nightlife.
Not all inner-urban apartments make an ideal, high growth property investment however.
Given that land appreciates in value over time, you need to seek out a block of units that offers a decent portion of the ‘good green stuff’ to make your investment worthwhile.
High-rise developments with hundreds of flats might give the investor a very low land to asset ratio.
Additionally, many of these developments are built en-masse by companies looking to profit from those intermittent stages in the property cycle that see buyers flood the market.
Hence, a glut of stock appears all at once and unsuspecting, off the plan investors end up competing with hundreds of others in the same boat, desperately trying to find tenants and having to potentially drop rents.
Whereas well positioned, established apartments in low rise – often referred to as boutique - complexes offer property investors an affordable opportunity to add a good all-rounder to their portfolio.
When it comes to the right combination of desirability and scarcity to provide that consistent long term, above average capital growth and tenant demand, I believe you can’t go past an inner city apartment with character and potential.