Apartment v house: which is a better investment?

It’s an age-old question property investors have been asking themselves since they cottoned on to the fact that property makes a sound investment: house or apartment? Which property type makes a better investment?

Unlike European countries such as France and Germany where apartment living is the norm, Australians have long had an attachment to land and the quarter-acre block.

In recent years, however, more and more Aussies have discovered the joys of living in and owning fuss-free apartments. This trend towards apartment living is partly due to a shortage of housing and affordability, as well as changing lifestyles.

Nevertheless, when it comes to deciding which is a better investment, a house or an apartment, the answer isn’t clear cut.

“In pure investment terms and if you are looking to build a property portfolio, most people say apartments are a better investment because they rent out more easily, have lower costs and require less upkeep,” says Mary Anne Cronin, a real estate agent with Raine & Horne Bondi Beach in Sydney.

“However, a house will see you in better stead in the long term because it’s a piece of land.”

If your aim is to buy and immediately rent out an investment property, an apartment is more likely to deliver a higher return in rent. According to the Real Estate Institute of Australia (REIA), apartments are currently enjoying higher rental yields than houses.

Rental yield is the measure of the percentage of income return from a property investment, calculated by dividing the property’s annualised income by the purchase costs, and multiplied by 100. The higher the rental yield, the better your return – and therefore the better your investment.

Related links

In November 2015, rental yields in Sydney were 3.1 percent for houses and 4.1 percent for apartments. In Melbourne, houses returned a 2.9 percent rental yield and apartments 4.1 percent, while in Brisbane rental yields were 4.3 percent for houses and 5.3 percent for apartments. In fact, all capital cities recorded higher rental yields for apartments over houses.

In the capital growth stakes – the rise of value in a property over a certain period of time – apartments again outperformed houses in the past five years, with the median price for apartments increasing 19.8 percent compared to a rise of 16.0 percent for houses. In the longer term, however, houses enjoy higher capital growth than apartments – in the past 10 years, the median price for houses grew 61.8 percent while apartment prices rose 57.3 percent, according to REIA.

If you do choose to buy an apartment, Cronin offers the following checklist to maximise your investment: as always in real estate, location is important in ensuring your property is constantly rented; look for a small block, for lower strata fees and ease of decision making; and ensure your apartment has parking.

Regardless of which option you choose – apartment or house – borrowers are urged to do their homework to find an investment home loan to suit their needs. Because if you get it right, it could make the profit margin all the sweeter.

Related links

Did you find this helpful? Why not share this article?

Advertisement

RateCity

The money talks which you don't need to avoid any more

Subscribe to our newsletter so we can send you awesome offers and discounts

Advertisement

Learn more about home loans

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

What is equity? How can I use equity in my home loan?

Equity refers to the difference between what your property is worth and how much you owe on it. Essentially, it is the amount you have repaid on your home loan to date, although if your property has gone up in value it can sometimes be a lot more.

You can use the equity in your home loan to finance renovations on your existing property or as a deposit on an investment property. It can also be accessed for other investment opportunities or smaller purchases, such as a car or holiday, using a redraw facility.

Once you are over 65 you can even use the equity in your home loan as a source of income by taking out a reverse mortgage. This will let you access the equity in your loan in the form of regular payments which will be paid back to the bank following your death by selling your property. But like all financial products, it’s best to seek professional advice before you sign on the dotted line.

Mortgage Calculator, Property Value

An estimate of how much your desired property is worth. 

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

How personalised is my rating?

Real Time Ratings produces instant scores for loan products and updates them based what you tell us about what you’re looking for in a loan. In that sense, we believe the ratings are as close as you get to personalised; the more you tell us, the more we customise to ratings to your needs. Some borrowers value flexibility, while others want the lowest cost loan. Your preferences will be reflected in the rating. 

We also take a shorter term, more realistic view of how long borrowers hold onto their loan, which gives you a better idea about the true borrowing costs. We take your loan details and calculate how much each of the relevent loans would cost you on average each month over the next five years. We assess the overall flexibility of each loan and give you an easy indication of which ones are likely to adjust to your needs over time. 

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

How can I get a home loan with no deposit?

Following the Global Financial Crisis, no-deposit loans, as they once used to be known, have largely been removed from the market. Now, if you wish to enter the market with no deposit, you will require a property of your own to secure a loan against or the assistance of a guarantor.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002