There are many factors to consider in deciding for the type of property to buy nowadays. It is not a simple, quick and easy decision to make.
If you’re pursuing an investment property – there are things to consider if what you want is any among these options: a house, a townhouse or an apartment. Keep in mind that your goals and total investment strategy are your priorities. For property investors – the two topmost factors to keep in mind are rental income and capital growth.
Normally, the apartments provide higher rental returns while the houses gain better in long-term capital growth. But of course, these conditions are also very much dependent on the status of the economy and the property market.
But whatever option you make, just be guided with the various pros and cons of each one – house, apartment and townhouse, including some issues which we’ve summarised for you. Read on.
What you Need to Know About a Detached House?
A detached house is the usual free-standing residential building with the buyer getting the land on an individual title.
With 72.9% of the population staying in one detached house in 2016, it is certainly the most well-liked type of dwelling for Australian owners-occupiers, as recent figures from the census show.
What detached homes provide is a lot of privacy and wide spaces vs. apartments and townhouses. They’re more flexible in that sense, but the flipside is that the maintenance of larger spaces means corresponding higher costs for utilities.
When Buying a House – these are the considerations:
- Better capital growth – We all know that land appreciates over a period of time and since houses are more associated with land vs. townhouses or apartments — they provide better long-term capital growth. But this is not always the case. Take into account critical factors like market situation and location in property investing. For instance, a block of land in Australia’s interior is unlikely to be pricier than a penthouse unit situated in Darling Harbour.
- Options for sub-divisions and renovations – The possibilities for doing planned improvements or sub-dividing the land in your house are not limited. There’s no need to ask permission from a body corporate or other residents to do this as long as these actions are Council-approved. You are in control 100% of your own house being the sole owner or investor so you do anything to enhance its value.
- Steady Rental Returns – Houses are easily the target for tenants like families and couple-professionals who are dependable and generally live in a suburb for work or school for their children on a long-term basis.
- Pet ownership – Tenants who own pets may also opt for a house for lease terms’ flexibility. For apartments covered by body corporate laws, the reverse is true. Tenants can be restricted for owning pets (completely no pets allowed or having weight limits for dogs). Research suggests that on an average basis – pet owners stay longer with their occupancy or lease.
- Price – Undoubtedly, houses are more costly to buy than an apartment or unit in the same location. For some prospective buyers like first-time investors or those looking to expand their investments – this can be quite limiting.
- Extra costs for maintenance and insurance – Houses require you to shell out money for the maintenance and upkeep as well as the insurance premiums of the house itself if you decide to have it covered by a policy. Before buying a new house – you need to thoroughly check if it is structurally safe and sound and have it fully inspected.
- Smaller Rental Yield – For you to assess your return on investment, a significant tool to use is the rental yield. Rental yield is the percentage of the cost that you can gain out of an investment property vs its purchase price. In most cases, if you are bent in making a rental income to increase your cash flow – crunch the numbers and work out the option first before making the investment. As generally, houses especially when bought at a premium have lower rental yield. But it is important to note that houses normally have bigger capital growth than apartments and townhouses.
What is an Apartment and What you Need to Know About it?
Apartments are quite popular and apt for people who basically do not want to live in a detached house or who couldn’t afford one. An apartment is a self-contained dwelling forming a part of a much bigger complex. If you’re living in an apartment, the flat is yours but you share ownership of the common areas in the property with the rest of the various owners, such as lobby, hallways and rooftop zones. This means you are within a strata title.
If you’re on strata, it is expected that you have to follow some by-laws being part of a body corporate, like paying for costs to include the common areas’ wear and tear.
Apartments are usually reasonably priced and located in very convenient areas, thus, they’re preferred by both property investors and first-time home buyers.
When buying an apartment, what are its benefits and drawbacks?
- Cheaper than Houses – There may be exceptions to this rule but normally apartments are cheaper than houses.
- Law of Supply and Demand – Australia is seeing both single- and two-person households as becoming more popular. In fact, the Australian Bureau of Statistics or ABS data predicts that there will be an increase from 2.3 million to about 3-3.5 million single-person households from 2016 up to 2041. This means about a 2% growth, from 25% up to 27%. Further, per the group’s wealth and household income data – the single-parent with dependent children and lone-person households normally are the low-income and low-wealth households. Thus, they are undeniably less probable to own property. In the long run, when these smaller Australian households get into lease, then it could mean a more robust tenant demand, higher rental yields and increased investment security for the apartment owners.
- Location – Generally, most apartments are situated in city centres or near them to give access to almost everything like hospital, church, school, business establishments and supermarket or mall. Transport is also convenient for both work and school.
- Low Utility Bills – Lower bills for utilities such as electricity and gas is an after-effect of smaller spaces though a smaller space might also be a disadvantage.
- Reduced Maintenance of Surroundings – More time for you to do other chores rather than doing gardening or mowing the lawn as bigger spaces require. More available time for you to handle other activities since most maintenance tasks are taken care of by the strata.
- More Facilities and Amenities – Living in an apartment certainly provides more facilities and amenities for you like a swimming pool, a playground for the kids, a gym, a basketball and tennis court and a common garden. You may want to consider all these amenities when you decide to buy either a house or an apartment.
- Tight Security – With an apartment, it’s very unlikely that thieves might barge in to your place due to strict security measures which is not the case for most houses.
- Opportunities for Higher Number of Assets – You can buy two or more apartments for the purchase price of a single house. Doing this gives you better rental income, lower risks and probable flexibility and makes for a diversified investment portfolio, too.
- Lesser Land Value – Apartments and units usually are at the lower end of proportion of associated land suggesting that you do not get as much capital growth as you would with houses. This implies that you wouldn’t make a higher profit if you decide to sell it over a similar period of time as with houses. Note though that the long-term returns from any property is gauged by other factors such as market conditions and trends, location, comparative sales and property features.
- Extra Fees – You have to include in the total cost the need to pay owners’ corporation fees for the shared maintenance expenses.
- Limited space – We all know that apartments are cramped unlike the roomier houses.
- Owners’ Corporate By-Laws or Strata – What does the limitations living in an apartment mean? You are under the authority of rules being implemented by the owners’ corporate group. Some examples are: no pets allowed in the property, no hanging of washing in the balcony, and so on. The upgrades or renovations you plan in the unit should be approved first by the owners.
- Privacy Concerns – You may think twice if living in an apartment is for you if you do not want any of these situations: neighbours entertaining guests, or fighting or doing anything else right in their own homes. The truth is that most probably, they can also see and hear the same things from you.
- Potential developments – There’s a high probability that the number of units or apartments may significantly go up through the years. In case you are a current apartment owner in an area where there’s an oversupply – you could experience negative consequences like smaller rental yield, low renter demand and capital growth.
How About a Townhouse?
If you’re torn between purchasing a house or an apartment, then, you may want to go for a townhouse which is in the middle ground. Accordingly, these townhouses are about 12.7% of Australia’s residential homes per 2016 census statistics.
Townhouses are multi-level homes apparently styled to imitate a house but owned on a strata title. One owns the dwelling but shares with others the land where it is built. They have the houses’ privacy and expanse of spaces for family members to move and the outdoors. But there are limitations that are just like with apartments – mostly governed by a body corporate.
What to consider before buying a Townhouse?
- Bigger Space vs. Apartments – You have two or three stories for townhouses, thus, they’re roomier than apartments. Ideally, they’re preferred by families because of their larger and wider spaces. They would choose a townhouse when a house is not affordable. Townhouses usually allow pets in the building. It is also a great option for empty nesters and downsizers.
- Price – Townhouses are usually in the mid-price range – it is cheaper than houses and more expensive than apartments. However, what you also need to include as part of the total costs are the maintenance and repair expenses for the property’s common areas.
- Privacy – Townhouses do not have common areas like the apartments have. They also provide almost the same kind of privacy that the house has, without the shared wall or walls. When it comes to selling – the end townhouses sharing just one wall are preferred by buyers while it usually is the first to go if you’re trying to buy a new development.
- Common Title and Uniform Look – As with apartments, you are on a strata agreement when you’re buying a townhouse. This implies that you’re also paying strata fees for the maintenance and upkeep of the common areas with the other townhouse occupiers. A property’s townhouses usually have the same look, both interior design and exterior layout and appearance. Comparing with apartments – the premise is that generally all major renovations or upgrades to exteriors is not allowed. You can do some changes to the interiors but they have to be cleared by the owners/developers before you do anything.
- Smaller Land and Compact Spaces – Townhouses apparently do not have wider spaces as houses do but they’re larger than apartments. Both outdoors and interiors of a townhouse are smaller compared to a house. The total lot size is a bit of an issue or concern for some people.
- Rental Revenue or Income – Taking all things equal, both a house and townhouse provide higher rental income vs. an apartment as usually they are rented out at a higher price. But probably not equivalent to the additional purchasing cost, given that a house sells at a higher price.
But whatever investment option you choose, an apartment, a townhouse, or a house, make sure to run the numbers to know which works best for you. And, at the same time, you should always take into consideration this: capital growth.
Why Should you Consider Capital Growth?
The recent property boom in Australia is largely caused by a few investment strategies creating extensive wealth creation for most of the locals. Most of them are determined in achieving capital gains. Capital gains is the growth in property’s value. In fact, in a dynamic and fast-paced market – several properties have grown 100% over the 5–10-year period. Pretty cool!
The numbers wouldn’t lie: houses provide greater capital growth as compared to apartments and townhouses. Most Australians choose houses. They think that owning a piece of land is more worthy than having a high-rise apartment complex. However, this tendency is slightly evolving – with the growing property developments, more Aussies staying and living in apartments.
Whether you’re thinking of investing on a house, apartment or townhouse – it is important to look at each type of property thoroughly, especially its qualities for investment prospects. Is the location strategic? Do you like their facilities? Are there other amenities you find useful nearby? How do you see the capital growth from the property? Would it generate good rental income for you? Once you’ve identified all the answers to these questions, then you are on your way to make the biggest and wisest decision of your life.
A house, an apartment or a townhouse all have their benefits and drawbacks. It all boils down to your present and future personal and investment goals. The best choice of a property investment depends on your current situation taking into account other factors like the economy, prevailing market conditions and the constantly changing lifestyle trends. If you want to maximise your return on investment, you would have to weigh in these two: capital growth and rental yield.
You’ve seen how each one is different from the other – a house, apartment and townhouse in terms of providing higher capital growth or more stable returns, better rental yield and rewarding rental income. The most logical option for you to look at whether for a home or an investment will largely be based on your current situation, strategies, as well as future plans and goals. It’s inevitable to be forward-looking when you make your investment decisions now.
A wisely selected house commands the highest price among the three, but it has the best capital growth in the long run. An apartment is quite affordable, less risky and provides the opportunity for multiple assets and a good investment portfolio spread for you. The same is effective for a townhouse – it provides higher rental income, though a house would seem to sell faster at a higher price in the future.
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