Property investors have always asked the age-old question, House or Apartment – which is the better investment? So let’s take a closer look.
Land is the most valuable asset and a rare commodity. If you own a substantial plot of land in a sought after area along with a house, you will see significant capital growth due to the supply and demand of land. There are always numerous options when you own land. For example, you can develop or build a new house. The downside is that this will generally cost you more to purchase. You would expect slightly better capital gain on the land component for a house.
Apartments in the long term should show you a 7% capital return which means the value doubles every ten years. You still own entitlement to a proportion of the land when you own the apartment although the options of what you can do to improve this land is limited therefore; you would expect less capital gain. In saying that, the outlay is significantly less for an apartment than that of a house and land package.
Ongoing management of a house and land will generally be more expensive. There is a lot more to a house and land than an apartment. There will be more costly repairs and maintenance bills with a house such as painting, fencing, general repairs, etc. and the rates will be higher. You would use a managing agent to manage the property on your behalf.
Managing an apartment is generally cheaper as the costs are spread across the owners of the complex. Apartments have a strata manager and owner’s corporation to manage funds and the building on behalf of the tenants as well as having a sinking fund to cover small ongoing maintenance issues to ensure the complex is well maintained. There are costs associated with this in the form of quarterly strata levies payable by the owners and off course council rates.
Apartments are easier to manage because it has an internal check and balance system with the owner’s corporation and a good strata manager and the managing agent to act on your behalf as a buffer.
Negative gearing legislation applies to both a house and an apartment. If you incur costs for either a house or an apartment it is tax deductible. The tax treatment shall be the same. The only difference may be in the building allowance write off. In that, a house may have a higher build cost and therefore receives a greater depreciation benefit.
Generally the rental returns for a house are less than what you may receive from an apartment. The reason for this is that the house and land will cost you more than an apartment but the rent does not increase in comparison. In some cases, more expensive houses in high demand areas show low returns but may give you higher capital growth.
At the moment, the vacancy rates are very low for both houses and apartments. However, as the bulk of the new development in Australia has been in apartment style dwellings; in the short term there may be higher demand for house and land rental properties.
Banks view the security of a house and apartment equally. They will lend 80% of the purchase price because the cost of a house and land is generally higher than an apartment. You will need to have a larger dollar amount as a deposit.
House or Apartment? The answer then comes down to how much money do I have for a deposit? In my opinion, an apartment is cheaper and easier to manage. If you have acquired a new apartment the ongoing costs will be minimal for many years and if you have bought the property in an excellent location, there will be low vacancy and solid rental returns.
The most important question is the location of the investment? Whether you decide to purchase house or apartment, you need to make all the right decisions such as is it near shops, transport, schools and if possible is it closer to the central hub of the city.
I make the above comparisons based on capital city data. There will be exceptions to this, wherein certain areas for example rural areas, may not have a high demand and /or supply in property. So always seek independent advice.
Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.