Property investment showdown: Houses versus apartments

Apartments and houses offer differing attractions for property investors but also bring with them their own unique downsides, so how do you decide on the property type in which to invest?

By Lloyd Edge, Director, Aus Property Professionals

| 23-3-2024 | Investment | 3 min read

If you're wrestling with the choice between a house and apartment investment, read on for a balanced assessment of each property type's strengths and weaknesses. (Image source: Shutterstock.com)

When it comes to deciding on the property in which to invest, there are many choices for property investors and whether you choose a house or apartment will really depend on what you are trying to achieve in the long term.

Both have a lot to offer and both have their disadvantages.

There are a lot of factors to consider particularly if you are restricted with budget, because generally speaking, apartments are usually the cheaper option over houses.

There is, however, a lot more to investing than buying an apartment just because you can afford one.

An important consideration is to buy the right type of property (house or apartment) for the demographic of the area.

It is not a question on which is better, but rather to ensure you are buying the right type of property for that area.

For example, you wouldn’t want to by a small apartment in an area that is demographically for families who prefer houses with three or more bedrooms.

The apartment would be a better choice in an area that is close to universities or the city where young singles, students or city workers might prefer to live, being close to the hustle and bustle.

Considering closely the type of person who will be living in your property and what they would want, will make sure your property is in demand and a fruitful investment.

Let’s delve deeper into the considerations of each type:

Apartments

When buying an apartment, the main consideration would be that they are typically more affordable, located close to amenities, require less maintenance, and are a good source of passive income because they have higher rental yields and this cashflow is attractive for a lot of investors.

Often there are building amenities available such as swimming pools and gardens, playgrounds, barbecue area, and sometimes gyms, tennis courts and saunas.

Be aware that the more facilities on offer, the higher the strata fees will likely be.

Apartments also come with an inherent level of security for your investment, being in a building that has swipe passes and access codes to enter and there are usually security cameras in common areas as well.

Apartment downsides

One of the biggest negatives of owning an apartment is that you have less control over your investment because you (as the owner) and your tenant will need to abide by the strata rules and by-laws.

The laws restrict what you can and can’t do to your property and any alterations will need to go through the strata committee for approval.

There are also costly ongoing strata fees paid quarterly to cover building insurance, maintenance of the common areas, and contributions into the sinking fund, which covers unexpected costs for the building.

If you are looking to purchase an investment property and do not have ability to purchase a house, an apartment might be a good choice for you to get a foothold on the property ladder.

What is an investment-grade apartment?

Good location, in a growth area with average annual growth at least 7 per cent
good rental yields greater than 5 per cent
area with very low vacancy rates; less than 1 per cent is excellent
apartments located away from main roads
smaller blocks of units
close to transport, supermarkets, and outdoor spaces
unique features that set you apart from other apartments
quality build
pay attention to cashflow, taking into consideration the strata fees.

Houses

Buying a house for an investment means buying a larger property that will sit on its own land.

It is the land that is going drive the capital growth of the property to generate better returns over the long term.

A house will be a more flexible investment, and if you buy the right property you might get the chance to create your own equity through a renovation or development.

Keep in mind that owning a house is going to be more costly than an apartment because of the repairs and maintenance as well as insurance costs, which is why houses are more typically negatively geared in the short term but you will get the long term gain from the capital growth.

What is an investment-grade house?

Good location, in a growth area with average annual growth at least 7 per cent
good rental yields greater than 4 per cent
area with very low vacancy rates, less than 1 per cent is excellent
away from busy areas, on a quiet street, close to good school
unique features that set it apart, like heritage features, modern upgrades, not a cookie cutter build
ability to create equity (through renovation, subdivision, extension, upgrades, granny flat).

Capital growth versus rental yield

When considering your options while wearing an investor’s cap, it is important to have a clear strategy in mind and consider whether you are seeking an investment that will have good long term capital growth or excellent rental yields.

Rental yields are usually better with apartments because the maintenance and holding costs are less and they are usually situated close to amenities.

If it is investment-grade it will be in demand and attract a premium rent.

In comparison, houses on land that will appreciate will likely reap more growth in the long term.

Comparing the building type costs:

Apartments

Are part of a strata agreement, so you will need to pay strata fees (includes building insurance)
building maintenance costs are covered by the strata funds and you could be liable for unexpected building costs if the sinking fund does not cover the expenses
lower maintenance costs overall than a house, which is larger and has land to maintain.