WILLIAM
Associate
Key Takeaways –
Investing in real estate has long been considered a reliable way to build wealth, and apartments have become an attractive option for many property investors.
The allure of apartments lies in their lower price points and stronger rental yields, making them an enticing proposition.
According to the Australian Bureau of Statistics, the number of people living in apartments in Australia increased by 78% over the 25 years leading up to 2021.
However, the question remains: Are apartments a good investment?
Yes, apartments can be a good investment option. When done correctly, an investor can reap excellent financial rewards from apartment ownership.
Apartments are typically more affordable than other real estate investments and offer higher rental yields, meaning that investors can earn higher returns on their money.
Although it does depend on various factors, including the location, the type of apartment, and the investor’s individual circumstances.
In this article, we delve into the intricacies of apartment investments, focusing particularly on the Australian context, where the dynamics of urbanisation, population growth, and changing lifestyle preferences reshape the property market.
Investing in apartments comes with a unique set of advantages that make them an attractive option for many investors. From their AFFORDABILITY to the potential for high rental yields, apartments present a compelling case for consideration in any investment portfolio.
One of the most appealing aspects of apartment investments is their relative affordability compared to standalone houses. The LOWER price point of apartments provides a more accessible entry into the property market, particularly for first-time investors [1].
This affordability means fewer risks and opens up more investment choices, allowing investors to enter the market sooner and start building their wealth.
Investors with sufficient capital can consider purchasing multiple apartments, spreading risk across different properties, locations, and tenant demographics. This strategy can provide a level of PROTECTION against market fluctuations and ensure a steady stream of rental income.
Australia’s expanding population and rapid urbanisation have led to an increased demand for apartments, particularly in major capital cities [2].
Over the past few decades, the number of occupied apartments in Australia has seen a significant INCREASE, a trend that is projected to continue.
This growing demand translates into more potential renters and higher occupancy rates, making apartments a viable investment choice.
More Australians choose apartment living for its convenience and proximity to urban centres and infrastructure.
The preference for LOW-MAINTENANCE living, coupled with the desire to live near workplaces, shopping centres, and entertainment venues, has made apartments an attractive choice for many.
The increasing demand for apartments has led to high renter demand, providing apartment owners with a larger pool of potential tenants. This demand can lead to shorter vacancy periods, ensuring a consistent RENTAL INCOME for investors.
Rental yields for apartments can often be higher than for houses. For example, CoreLogic recently reported that the average rental yield for apartments in Sydney was around 4.5%, compared to 2.7% for houses.
With more people wanting to live in apartments, investors have the potential to charge higher rent, especially for apartments in desirable locations or with attractive amenities.
And as already mentioned, the potential for a higher rent, coupled with the lower entry point, often results in higher rental yields for apartment investments than standalone houses.
While apartment investments offer numerous benefits, they also come with unique challenges. Understanding these potential pitfalls is crucial for making informed investment decisions.
One of the key considerations in property investment is the principle that land appreciates in value while dwellings depreciate. This is why houses, which often have a large land component, are generally seen as BETTER investment options.
Apartments, especially those in high-rise buildings, have a smaller land component, which can limit their potential for capital growth. However, this does not necessarily mean that apartments are a bad investment.
It simply means that investors need to carefully consider the potential for dwelling depreciation when making their investment decisions.
There are certainly some pros and cons with strata complexes.
When you buy an apartment, you become part of a strata complex, which means you are just one of many property owners. This structure can LIMIT your control over the property.
For instance, major decisions about the building and common areas are typically made collectively by the owners’ corporation, which can sometimes lead to disagreements and delays.
The strata’s complex structure can also limit your ability to change your property. If you want to renovate your apartment or make significant improvements, you may need APPROVAL from the owners’ corporation.
This can be a lengthy and potentially frustrating process, particularly if other owners do not share your vision.
Pro Tip: Before investing, consider an independent property inspector to assess structural issues or potential renovation needs.
High-rise apartment buildings, especially in major city centres, can be subject to the risk of OVERSUPPLY. If many similar apartments come onto the market simultaneously, it can weigh down the capital growth of existing dwellings.
This is because the increased supply can lead to increased competition, potentially driving down prices.
To mitigate the risk of oversupply, investors are often advised to seek out LOW-RISE or boutique apartment complexes, particularly in areas where planning rules cap the number of apartment buildings.
These properties have a higher land value ratio and are less likely to be affected by oversupply.
Additionally, they often appeal to a different market segment, including owner-occupiers who value the sense of community and exclusivity that these smaller complexes can offer.
The location of the apartment complex plays a crucial role in its potential for capital growth and rental yield. Factors such as proximity to amenities, public transport, and employment hubs can significantly impact the property’s APPEAL to renters and buyers.
Additionally, understanding local planning rules is essential as they can influence future supply and demand dynamics.
An apartment complex with a high owner-occupier ratio tends to be better maintained and LESS LIKELY to experience rapid tenant turnover. This stability can enhance the appeal of your investment to potential renters and contribute to the property’s long-term capital growth.
Luxury facilities like pools, gyms, and saunas can make an apartment complex more attractive to potential renters. However, it’s important to BALANCE the appeal of these amenities with their ongoing costs.
When searching for an apartment, be sure to look for investment-grade properties that are well-maintained and appeal to a WIDE RANGE of tenants. A good sign is if the complex has an active owners’ corporation.
Not all apartments are created equal, so it’s important to do your due diligence before investing.
When you buy an apartment, you must pay ongoing body corporate ( to your real estate agents) and strata fees. These fees cover things like building maintenance and insurance and are an IMPORTANT part of your investment budget.
Understanding the full cost of investing in an apartment, including the purchase price and ongoing fees, is, of course, CRUCIAL for maintaining a healthy investment budget.
Underestimating these costs can lead to financial stress and undermine your investment returns.
Despite the challenges, apartments can be a good investment in Australia, offering affordability, high rental yields, and the potential for capital growth. However, like any investment, they require careful research and consideration.
Given the complexities of property investing, seeking professional advice is advisable. A knowledgeable advisor can help you navigate the market, understand the risks and rewards, and make informed decisions that align with your investment goals.
Sources –
Associate
Associate Buyers Agent
Administration support
Buyers Agent | Sydney
Buyer’s Agent | QLD
Senior Property Manager/BDM
