Apartments vs Houses: Which Type of Investment Property Works Best?

So, you want to invest in the property market. One of the first questions that will come to mind is what type of property should I buy? A house or apartment investment property? This is an excellent question and the answer is - it depends.

Let’s take a look at reasons why you might choose a house over an apartment investment property and get an idea what might suit you the most.

It’s important to understand there’s two sides to an investment property.

  1. The Growth
  2. The Cashflow

We can look at the advantages and disadvantages based on these two elements.

Location

houses vs apartment investments

Firstly, and the most important thing to understand is that location is the growth driver. That means the location you invest into will ultimately be the key to the growth of the property over time.

If we were to take a Dalkeith house and put it in Kalamunda, would it be worth the same value?

No.

Even though the house is the same, the area is determining the value.

So as far as location goes, the house or the apartment doesn’t matter so much. If the suburb goes up in value, then the property within that suburb will increase in value too.

 

Income

From a cashflow point of view i.e. the rental return you’d be getting from your investment, it will make a difference on the type of property you buy in that area.

Even though the property type doesn’t really drive the growth, it will have a large baring on the cashflow.

If we select a suburb that has apartments and houses, then which would be a better choice?

To answer that question, we need to understand a couple of things first.

  1. Rental income is one stream of investment property income
  2. Tax benefits are a potential second source of property income.

The first stream of income – rent, can be very different between houses and apartment investment properties.

Quite often people will buy an older house on a large block as an investment. They may be looking to develop the property at a later stage. That would mean generally the house is older or has little value in itself, because most of the value would be in the land.

The issue would be that because most of the purchase price has been used to purchase the land, the house becomes a secondary thought and based on the overall value paid, the rental return is generally a low yield in this type of scenario. That would mean that you would possibly be having to put more of your own money into the property to keep it going.

On the other hand, if you were to purchase a new apartment in the same suburb you would benefit from depreciation (which I’ll discuss in a moment) due to the property being new.

Most of the purchase price would not be based on land content as with the house, it would primarily be based on the apartment you’re buying which would mean the return (yield) is likely to be stronger. It’s also worth noting that the lower end of the market, in terms of price, apartment investment properties tend to deliver a better yield meaning this apartment investment can often fit that criteria more easily than a house.

So should you drop the idea of investing in a house?

Not necessarily.

If you have the income to cover the lower yield on a house on a larger block of land, as mentioned above, you could benefit by developing the block later or the growth could be stronger than the apartment investment, based on demand for a certain type of property.

For example, it may be a character style house.

This is just a couple of scenarios to consider and why I said “it depends” on what you buy because your situation and what you’re looking to achieve are the biggest determinant of what you should purchase.

 

Depreciation Income

This second stream of income – tax benefits, is maximised when you purchase a new property. The reason for that is you can claim tax deductions on the build of the property as well as the fixtures and fittings.

If the property is brand new, then this allows you to maximise the value that you can write-off as tax deductible.

It’s important to note that to benefit from tax deductions for the fixtures and fittings, you now have to be the original owner i.e. they need to be new – not second-hand.

Depreciation can make quite a difference to your cashflow. If you were in a financial situation where you didn’t want to put any extra money into the investment property to cover expenses, then you’d be more likely to hunt down a strong cashflow property that delivers good depreciation benefits.

On the other hand, if you have a good income and paying substantial income tax, you might be less interested in the depreciation due to getting a potentially higher tax return benefit from negative gearing.

 

Costs

When we look at a house vs an apartment investment property, we also need to consider the potential ‘outgoings’ associated with the property.

apartment investments vs house investments

For example, strata developments such as apartments, come with strata fees. That in itself doesn’t make it a deal breaker but if you buy into a complex that has extremely high strata fees and you aren’t benefitting by any extra rental return, then you’d have to consider if that purchase would be worth it to your own circumstances.

On the other side of the coin, the strata fees pay for things like building insurance, which you’d pay for if you purchased a house.

I discussed the benefit of buying new with depreciation. But what about the disadvantage of buying old?

Obviously, this can severely affect your cashflow if you’re constantly paying out for repairs. Older properties can, at times, become money pits so again it’s well worth considering the potential outgoings that you could be up for.

 

Your Tenant

When you purchase an investment, it’s always important to understand who your tenant will be.

You could be looking for a family as a tenant. They’re less likely to be transient if the property is nearby their children’s school or recreational activities, as opposed to a young couple who may be looking to upgrade their location lifestyle or property type down the track.

Should you buy into a trendy area where there is hot demand due to the café’s, restaurants, entertainment etc? Properties situated in these areas are typically set at a premium price due to the demand so an apartment investment property, from an affordability point of view, might be your best option.

Maybe you’d like to buy in a new an upcoming area where infrastructure is coming in and you think it’s currently a bargain. Sometimes these areas can have a good uptick in value as more homes are built and more infrastructure becomes available. A house would potentially be a good option here due low house price values and the fact that apartments are generally not as popular further out from the city.

tenants for houses vs apartment investments

 

In the end it really comes down to your own financial situation and what you’re looking to get out of your investment.

Whatever you do, make sure you’re clear on your outcome and understand what works for you financially, based on your own unique set of circumstances.

If you’re in the market to for an investment property and you’d like some advice on what the rental market looks like across Perth’s northern corridor, speak to one of our specialist property manager’s today. Whether you’re looking to purchase a house or apartment investment property, we can help you understand which areas work best for the type of property you’re looking to purchase and what kind of rental return you can expect for the area.

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Disclaimer:

The information outlined in this article is for general purposes only. The information is not intended to be taken as financial advice and we do not make any warranties about the completeness, reliability and accuracy of this information. Benchmark Specialist Property Managers strongly advise that you seek the guidance and support of a financial advisor when making any decisions around the property investment strategy that is right for you. Any information that you take from this article and Benchmark Specialist Property Managers is strictly at your own risk and we will not be liable for any losses or damages in connection with the use of this information.

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