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House or apartment: What's the better investment?

/ Mar 05, 2013 7:14AM / Print / ()

House or apartment: What's the better investment?

This is an oft-asked question and, in my opinion, it shouldn't be confusing at all!

Many investors start out with the notion that they will consider buying an apartment (also known as flats or units) as there is a perception that they are cheaper and represent a more 'entry level' price.

Alternatively, it's believed that because a freestanding house has land around it, and land appreciates while buildings depreciate, a house ultimately becomes worth more.

Both of these notions are actually based more on myth than fact, for a number of reasons.

Firstly, an apartment can often have hefty body corporate levies which can add considerably to the holding costs. If we considered that 'profit' in a property is the difference between the purchase price (plus costs) plus holding costs, and the eventual sale price (less costs), then these levies can add considerably to the holding costs and eat into profits. One could argue that a body corporate's sinking fund is like a savings plan for eventual repairs and maintenance, the costs of which you would otherwise bear alone, however a portion of these fees are for the type of ongoing maintenance which you'd probably carry out yourself if it were your home alone.

Secondly, it's not proving true that a house and land necessarily grows in value more quickly than an apartment, and if the myth that buildings depreciate were true where it relates to value growth, then we'd be seeing all apartments go backward in value while all houses grow. Buildings do depreciate for tax purposes, and they do get older, requiring repair and maintenance (this applies to both units and apartments), however for value purposes this depreciation is not necessarily evident. It's a fact that in some areas the houses grow better than the apartments and in others the apartments are the better performer.

And that brings me to my final point – it's demand which ultimately drives growth, not the property type. Therefore, the only way to establish whether to buy an apartment or a house is to discover what kind of people live in the area, and their preferred choice of property type. In some areas, such as those where young, childless couples live, apartments are the bigger sellers, and in others, such as areas where family units are settling, it will be houses. It makes sense to realise that the property type most in demand will also be the property type which grows better in value!

This is why property type choice should never be the first thing you do. You should never decide to buy, say an apartment, and then go looking for the best area. You should always work out the best area to buy, discover the largest demographic in that area, and buy a property which suits that demographic. Buying a property which is not the preferred choice in any area is one of the biggest reasons investors do not get the outcomes they would like in terms of growth.

This story first appeared on Property Observer



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