Which is better, an apartment vs a house for investment?
Are you looking to invest in the Australian property market? What are your options? Should you invest in an apartment or an old house? Unfortunately, there are no easy answers.
Historically, Australians loved living in freestanding houses on a quarter-acre of land. Europeans, on the other hand, such as Germans and the French, prefer living in the maintenance-free apartments.
Currently, there is a growing trend of Australians who are moving into hassle-free apartments due to the rising costs of maintaining a free-standing house, a shortage of housing and changing lifestyles.
If we look at the value of an apartment versus the value of a house, a free-standing house has a better long-term value; the value of the property includes the land as well as the house built on the land.
On the other hand, most people believe that purchasing an apartment is a better investment because it is affordable, has lower maintenance costs and can be rented out more easily. I believe you need to determine what your goals are when considering whether to purchase an apartment or a house.
Current statistics from the Real Estate Institute of Australia (REIA) show that apartments are returning higher rental yields than houses. A rental yield is the measure of the percentage of income returned from the investment. It is calculated by dividing the property’s annual income by the purchase costs and then multiplying this value by one hundred; higher the rental yield, the better your ROI (Return on Investment).
Statistics from November 2015 showed that the annual rental yield for all the capital cities in Australia was higher for apartments than for houses. For example, rental yields for apartments in Melbourne were 4.1 percent while houses returned only 2.9 percent. Rental yields for apartments in Sydney were 4.1 percent and 3.1 percent for houses.
It is also very interesting to note that the increase in the value of an apartment over a certain period of time is greater than that of the increase in the value of a house over the same period of time. Statistics by REIA show that the capital growth is greater for apartments than houses during the last five years. Though, the median growth price for houses was greater than the median growth prices for apartments during the last ten years.
It clearly shows that the trend is changing now. Property prices are also outstripping the income of the salaried person. As a result, more people are unable to afford houses and have to look at purchasing apartments instead.
There are more and more single people or couples living on their own. They want to be close to the centre of town, where they work and entertainment options. In this case, investing in an apartment is better than investing in a house.
Finally, there are no right and wrong reasons for the purchase of either an apartment or a house. The right investment will depend on your finances, investment strategy and risk profile. For more information, please consult your financial planner.