I often have people asking me whether they should buy a house or an apartment.
Generally speaking in recent times there has been an increasing acceptance of apartments relative to houses to cater for our accommodation needs. Families are getting smaller; people have less time on their hands to maintain gardens etc. I, for one, do not like the idea of maintaining a huge backyard, that just sounds like an endless war between me and the weeds and I often lose.
You as an investor need to be mindful that tenants gravitate to properties that meet their needs. These needs will largely depend on how they prioritize and weigh up each of the above advantages and disadvantages. How they feel about the notions of space, time, enjoyment and money in relation to a specific property.
Upsides of buying houses
Houses have typically have more consistent growth over the long term in established areas. Therefore purchasing properties with high land content is a one way to increase your chances of securing better future growth if it is an established area. You usually own the land and have greater control over what you want to do with it. This means there are more options open to you (depending on Council regulations in the area you are purchasing) to modify the property and add value.
Given the reasons above, houses are typically more sought after and therefore it is usually easier to get finance than other types of properties; however, townhouses are now getting popular as family sizes decrease and the number of retirees increases.
Downsides of buying houses
It might be harder to hold because big houses sometimes can be hard to get good rent. So be careful as sometimes houses to offer lower rental returns as a percentage of their value. Another potential downside is the land tax; you will pay a lot more land tax comparing to an apartment or even a townhouse. All those costs need to be considered before purchasing because they can add up quickly and reduce your expected future return depending on your plan for the house.
What about apartments then?
One of the main advantages with apartments (or units) is that they tend to have higher rental, which could be critical to you as an investor because it helps with cash flow.
Moreover, apartments frequently achieve just as good returns as houses in areas where there are no more vacant land and are fully built-up with height limit restrictions on further development.
Over the past few years we have also seen these types of assets start to become popular with younger generation & empty nesters.
Downsides of buying apartments
The main disadvantage is that apartments typically show less consistent growth in areas that are not fully built-up, i.e. there is still room for more apartments to be developed and/or there is no height restrictions so the supply might be higher than the demand and therefore reduces the price.
Owners of apartments also typically have less control over their assets as any changes they want to make to their property usually requires approval from a body corporate. So the opportunity to add value is restricted. Owners have to contribute to the running of the body corporate, so compulsory fees are generally higher.
In terms of finance, it is also hard to get good finance for some type of apartments such as many company titled properties and very small apartments (under 40 sqm).