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Apartment v house: which is a better investment?

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.

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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.

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