Should I invest in a house or an apartment?

It's the question property investors often ask themselves and in the rapidly changing, post-COVID world, it's a worthwhile point to consider.

Buying an apartment as an investment can be as safe as houses but it's wise to consider the following ups and downs of both property possibilities.

House vs apartment investment: profit and loss statements

Property buyers join the investment market with the aim of making a profit from their purchase.

As a general rule of thumb, houses rather than apartments can be a better profit possibility, due to their land size appreciating in value over time. 

Thus, houses have a better chance of returning strong capital growth than apartments.

On the other hand, apartments can offer high rental yields (your investment's annual rental income divided by its market value).

Why?

"The lower cost of buying an apartment versus the price you can rent it out for means apartments can have a higher rental yield, versus some houses, particularly older and unrenovated houses," Metropole's Michael Yardney explained earlier this year.

House vs apartment investment: location considerations

Everything in the property market depends on location - and this rule covers both house and apartment possibilities.

You'll be more likely to find an apartment in metropolitan or larger regional towns but either way, you want the property you invest in to be close to amenities such as shops and schools as well as infrastructure such as rail links and major roads.

And there's more to location than first meets the eye too.

You need to explore both current and future infrastructure possibilities and also, the general trends of a property location's demographics.

If the area is more popular with families, apartments may not be in high demand; the opposite is true for an area with singles, downsizers and couples.

Inner-city apartment considerations

It can be trickier to obtain a mortgage when buying an inner-city apartment, particularly very small, serviced, or student property.

Why?

Lenders consider such properties as riskier (ie harder to sell) in which case, they'll not be able to recoup any potential losses from you.

"Cookie cutter" inner-city apartments can also be built far faster and higher than buyer demand.

A perfect example of this situation was Brisbane's apartment "glut" in 2017 which saw prices drop to their lowest figure in three years.

As a result, lenders restricted apartment purchases of properties in high-density, high-risk postcodes to buyers with at least a 20% deposit.

Such investors should therefore aim for a larger apartment with an internal floor space of at least 40sqm (preferably larger).

A higher deposit will also make your mortgage trail easier.

House vs apartment investment: market trends

When it comes to apartments, the post-COVID world has seen a major move from cities to regional areas and smaller towns, which offer more space while still enabling remote working opportunities.

However, this trend to larger living followed a period of buyers "trading space for place", with balconies and courtyards in city locations far more popular than today, Mr Yardney said.

"The COVID-19 pandemic environment has significantly changed homeownership goals and what Australians want most in their next home," he explained.

".... subsided, flexible or remote working is here to stay so it makes sense then that, in many cases, an inner-city apartment in a high-rise tower wouldn’t tick all the boxes."

Yet property investors keen to buy an apartment shouldn't despair about this relatively new trend.

"Family-friendly apartments in medium-density blocks in great neighbourhoods are back in vogue as the high cost of houses is creating affordability issues," Mr Yardney said.

"In fact, apartments have outperformed houses over the last year in the downturn phase of our property cycle."

House vs apartment investment: affordability or space?

This brings us to one of the key reasons why apartments are attracting investors: affordability.

With house prices generally on the up, and even a paused interest rate still seeing high inflation and cost-of-living pressures, apartments are far more affordable than their house cousins.

On the other hand, more expensive houses can offer the space that buyers are increasingly searching for - along with appreciating land values for property investors.

House vs apartment investment: pros and cons

In summary, here are the top points to consider between apartment and house investments:

House investments: pros

• More space, particularly for families and pet-owners
• Higher chance of capital growth due to land appreciation over time 
• Flexibility to renovate or subdivide
• Less risk to lenders
• No body corp fees

House investments: cons

• Higher purchase price
• Higher upkeep costs including utility bills
• More ongoing maintenance needed
• Higher maintenance costs
• Lower rental yields

Apartment investments: pros

• Cheaper purchase price
• High rental yields
  
• Shared upkeep costs as part of body corp structure
• Easier to manage upkeep of communal areas such as gardens, pools etc
• Lower ongoing maintenance costs

Apartment investments: cons

• More risk to lenders, particularly smaller, inner-city properties
• Less space
• Body corp fees can be very high, especially in communities with pools, lifts etc
• Body corp restrictions can mean far less flexibility to renovate or change property
• Lower capital growth

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