Almost every day I am asked whether I recommend buying apartments or houses. It’s not an easy question to answer and it does depend on a number of factors. As an investor, I have chosen to invest in both and I intend to keep my portfolio balanced with approximately the same number of houses as apartments.
When you’re considering what to look at, it’s worth keeping in mind the following advantages and disadvantages of each. Remember to make sure that, whatever your purchase, it fits in with your overall property investment goals!
Advantages of buying an apartment
Generally apartments are cheaper than houses. Properties’ values are a total of their land value and the value of the actual building. The land value for apartments is generally very small because, unlike a house on its own block, the actual land ownership for a block of apartments is shared between several owners. Land is often worth more than the building anyway, hence apartments are cheaper.
Build a portfolio
The cheaper nature of apartments means that it’s easier to buy a larger number of properties if you buy apartments. A larger number of properties spreads your risk wider, enables you to buy in different places and reduces the impact if one of your properties is untenanted. Essentially, buying apartments is a faster way to get more people paying you rent. Remember, though, as you build your portfolio with a larger number of properties it might be wise to at least diversify into owning some houses too!
Spread capital growth over a larger number of properties
Buying a larger number of cheaper properties has capital growth benefits for your portfolio too! If you buy several apartments in several different areas (or even states) you can expect that there will always be one property in your portfolio which is increasing in value (in contrast to one or two properties where you might go for years without an increase in value).
Buying apartment blocks
It’s also possible to buy blocks of apartments (not that we’d recommend you do this until you’re very experienced and have a lot of properties under your belt). Owning a block of apartments means that you have a number of tenants all paying rent, and it’s easier to raise rents because all the tenants will have their rent raised at the same time and by the same proportion. Raising the rents in many different locations is a much tougher proposition. Of course, by buying a block of apartments, you won’t spread your portfolio geographically and there are many other costs too (see the “costs” advantage of buying a house, and multiply this by however many apartments are in the block!).
Advantages of buying a house:
In many areas there is a greater market for houses, especially the “average” three-bedroom home in the “average” area. A simple internet search for properties in affordable areas will bring up far more houses than apartments. Remember, Kaz and I look for affordable properties (this means they’re usually below the median price for the city or town in which we are looking). We acknowledge that there are places where there is a majority of apartments (take New York, for example) but this is the exception rather than the rule for most areas.
If you choose your houses wisely you can leave yourself the opportunity to further develop the block. Most local authorities will stipulate that blocks under a certain size may not be sub-divided. By buying properties over that given size you enable yourself to consider future developments on the same block. Of course, you need to get council approval but it’s still an option!
There are many ongoing costs for apartments which you don’t incur when you own a house. The tenant is responsible for maintenance of the property, so you don’t have to pay expensive Body Corporate fees (which you must pay for apartments – they generally range from $1500 to $2500 per annum). Furthermore, houses have their own water, gas and electricity meters and therefore the tenant is also responsible for paying these bills. In contrast to this, if you own an apartment which does not have a separate meter (and therefore individual billing) then you are responsible for paying these bills.
The potential capital growth for a house on a block of land is greater than for an apartment of the same value. As I mentioned before, the value of a property is the sum of the land value and the building value. Over time, it’s generally the value of the land that increases (they’re not making any more land!) so properties that have a larger land content can expect to have a greater capital growth. Of course there are other factors such as the desirability of an area and changing trends (sea-change, tree-change and the like) but generally you can relate capital growth more to the land than to the (unimproved) building itself.
Of course you can improve the buildings too! Renovating and extending are ways to increase the comfort and desirability, and the value, of your property. It’s far easier to improve a house than an apartment – sometimes even minor improvements to an apartment (especially if there is any effect on the external appearance of the building) need permission from the Body Corporate.
Finally, tenants in houses are normally stay longer than those in apartments. This is because they are often families who don’t want to move regularly. They put down roots, send their kids to local schools and fill your garage and rooms with their belongings. They may even make minor improvements to your property. All this adds up to longer-term tenants.
As you can see, both property types have significant advantages and it’s up to you to decide what suits you best and what fits in best with your overall property strategy and goals. Good luck!