Should you Buy a House or an Apartment as an Investment Property?

Once upon a time, the idea of investing in a unit instead of a house was unheard of. When you buy a house, you’re buying land which has more inherent value than air, right?

This idea is slowly being dispelled as lifestyles change, spurring investors across Australia’s capital cities to opt for units. House prices in capital cities have risen over the years, leading more buyers to compromise on land and the size of their homes in order to live close to the CBD, pushing up the demand and value of units.

While there’s no definitive answer regarding which is better, there are a number of factors you should consider before pursuing any investment strategy. Namely, your aversion to risk, what you can afford, property market conditions both current and historical and where you choose to buy.

Benefits of owning a house as an investment

Freedom to make changes

One of the benefits of buying a house as an investment is that if you want to change things like the colour of your exterior walls or undergo more extensive work like a major renovation to improve the value of your home, a house is generally much more flexible as you don’t have to abide by strata laws.

Capital growth

A major factor when looking at investing in property is the capital growth that is associated. Traditionally, houses tend to have greater capital growth when compared to apartments in the same location. In November 2021, CoreLogic data highlighted this gap in growth across Australia recorded 24.2% annual growth compared to 13.3% in apartments. This can be due to the fact that when buying a house you own the land associated, which has the potential for higher growth rates. 

That being said, if you live in Australia’s metropolitan areas, you may find that the purchase price of a house is significantly more expensive than a unit with the same number of bedrooms in the same suburb. Of course, this is usually down to the cost of buying land and the fact that the value of land will generally appreciate over time.

Bigger floor plans

Another benefit of investing in a house over an apartment is that houses will in general have more floor space. This can be appealing to any potential tenants, especially families or people with pets. Additionally, the potential for a larger floor plan associated with houses can also be a contributing factor to improving the capital growth of the property. 

Outdoor space

Another benefit of buying a house is that some tenants will look for outdoor space, which means you may be able to attract a larger number of tenants. Conversely, tenants who prefer not to maintain a garden or lawn may steer clear of houses with a backyard.

Benefits of owning an apartment as an investment

Lower entry cost to desirable locations

Location is often what matters most to tenants and when your aim is to generate rental income, you’ll need to seriously consider this when making your decision. One of the main benefits of buying a unit is that they are usually located closer to city centres, public transport, amenities and entertainment

Premium amenities

Many larger apartment complexes feature premium amenities gyms and pools, facilities which are sure to attract tenants (and higher strata fees). Potential tenants might be willing to pay a slightly higher weekly rent for the inclusion of these, particularly if they currently pay for things like gym memberships for external facilities. 

Low maintenance

New apartments with brand new fittings and fixtures are often much easier to maintain which means you won’t have to spend time or money managing the upkeep. Furthermore, you may not have to pay for garden and lawn upkeep – although, keep in mind you will probably have to pay strata. Another advantage of buying a newly constructed unit is that you may be able to benefit from tax concessions relating to depreciation.

When buying a new apartment, you will also be entitled to warranties for fittings and fixtures that can last up to 12 months from when the unit was built. The length of warranty can depend on the building owner. Additionally, for larger issues or defects, you will receive a builders warranty that is a statutory warranty under state laws. The length of this warranty can differ depending on your state, for example in NSW it is 6 years for major defects and 2 years for all other defects, whereas in VIC the implied warranties are up to 10 years. 

What’s better for an investor? 

When it comes to investing, there is no definitive answer for whether houses or apartments are better. Although it’s clear that investing in either option can provide benefits. 

No matter what the investment, the key is to make an informed decision. Property is a significant investment so in order to avoid buying with your emotions, ensure you do as much of your own research as possible. For example, in some coastal cities houses are cheaper than apartments and vice versa. 

What should property investors consider?

When looking for an investment property, regardless of house or unit, there are some aspects that are essential to consider as part of your researching step. An understanding of these considerations can help you make an informed decision and improve the likelihood that you are investing the right property for you.  

Rental yield

Understanding rental yield is an essential part of researching your investment property as rental yield can provide you with how much money you can expect to make on an investment property. When researching an area you want to invest in, looking at the trend of rental yield for both houses and apartments can help you make an informed decision. 

Negative, Positive or Neutrally Geared

When it comes to property investing, the term ‘gearing’ refers to borrowing to buy an asset. To put it simply, when you take an investment home loan to buy a rental property, your investment is considered to be geared as you are borrowing to invest. 

Negative gearing refers to the situation where the costs of owning a rental property outweighs the income it generates each year, creating a taxable loss, which in most cases can be offset against other income to provide you with tax savings. 

Alternatively, if your investment property is positively geared, it means your rental income each year is more than the costs associated to own your property. In this circumstance, you will need to pay tax on any profits your investment generates each year. 

Neutral gearing occurs only when your rental income and investment expenses are the same and therefore will have no effect on your taxable income. 

Maintenance costs and upkeep

With all investment properties, it’s important to understand the ongoing maintenance costs. For an apartment the maintenance and upkeep costs are likely to be shared with all other owners and outlined in the strata title. Whereas owning a house, you will be solely responsible for all maintenance and upkeep costs which can range from structural repairs to cleaning and landscaping. 

Additional costs

When investing in property there are additional ongoing costs that you’ll need to consider. Both houses and apartments will incur some of the same ongoing costs such as council rates and any insurance premiums you choose to take out. Although when investing in apartments, you will need to ensure you account for additional costs in strata levies and body corporate fees, which can vary based on the different amenities the building offers. 

Future value

If you know the area you want to invest in, it's important to research the historical property prices of both houses and apartments for an understanding of the trends. While traditionally houses tend to have higher growth rates, it’s important to understand how apartment prices in an area have performed to make an informed decision on your investment. 

Using Home Equity to Buy an Investment Property

Whether you are looking at investing in a house or an apartment, if you already own your home you may be eligible to use your existing home equity for an investment property. If you have enough available, you may be able to use your home equity instead of a cash deposit for your investment property. 

You can understand more about using equity to invest by downloading our below eguide, or speak to your local Mortgage Choice broker to understand how much home equity you have for your next investment. 

We are here to help

Your local mortgage broker can educate you on your investment journey and help you determine your borrowing power. When you’re ready to buy, your broker will compare a variety of home loan options to find one that suits your unique financial situation.