Many property investors and developers tend to favour one type of property – houses or apartments. While there are positives and negatives to both, it is often a forgotten factor that you also get the land when you invest in a house. The land itself will invest overtime and provide opportunity for renovations or subdivides which will ultimately develop capital growth. Capital growth is an essential factor to consider when investing. Essentially, it refers to the increase in an asset over time, in this instance – property. Continue reading to find out whether houses or apartments are better for capital growth.

Investing in a house vs an apartment

When considering a house or apartment, the following factors are important for home buyers, property developers, and investors alike.

Investing in a house

Pros

Capital growth is more likely  

Typically, houses offer greater long-term capital growth than apartments, and this is due to houses having more associated land, which appreciates over time. This is not the case all the time; homes situated in rural locations or small-scaled housing estates will have less value than an apartment in Sydney. Meaning it is vital to consider external elements and market conditions when deciding to invest for capital growth.

Opportunities to renovate 

Since the owner controls 100% of the property compared to a section of a building, there are more opportunities for renovations. Making strategic improvements to a property can significantly increase its value in the short and long term. This could either entail something minor such as an interior freshen up or a subdivide of the land; either is very achievable since no permission is needed (potentially council approval).

Consistent rental returns 

Houses tend to attract tenants such as families and couples who intend to stay in a certain suburb for a prolonged period of time. Additionally, this flexibility is a point of difference from apartments that are run solely by body corporate by-laws and can be very restrictive. For example, homeowners are more inclined to approve the tenants having pets, which research suggests increases tenancy length.

Cons

Price 

Compared to apartments, houses are typically more expensive to buy when situated in the same area. This can deter distinctive buyers, specifically first-time property investors or anyone looking to expand their investment portfolio.

Lower rental yield 

The term rental yield expresses the amount of money you make on an investment property, compared to its purchase price, as a percentage. It is a valuable tool in determining the return on investment of a property. On average, houses tend to have a lower rental yield despite larger capital growth.

Upkeep and maintenance 

When you own/invest in a home, you are solely reliable for all maintenance and upkeep fees and insurance costs for the building and potentially everything inside it.

Investing in an apartment

Pros

Affordable options 

Apartments can offer a more affordable entry point into the market, especially in desirable areas where houses are too expensive. This creates the perfect opportunity for first-time home buyers, property investors or buyers wishing to downsize.

Potential for multiple assets 

Depending on your budget, the opportunity to buy two apartments for the price of one house is a potential option. Specifically for property investors, this combined rental income has the ability to provide future flexibility and diversify your investment portfolio simultaneously.

Maintenance costs and upkeep 

A considerable advantage of owning an apartment is that everyone in the building/complex splits the cost of insurance, maintenance, and upkeep. This is done through an owners’ corporation known as a body corporate, which manages and maintains the property’s common areas. Making payments to the body corporate undoubtedly makes the property easier to manage; also, if any issues arise, they are the first point of call in solving the problem.

Cons

Lower land value 

Apartments tend to sit on a lower proportion of land, so they don’t accumulate as much capital growth as houses. Due to this, an apartment owner may not make as much profit when selling over the same period as a homeowner. Of course, it’s essential to consider the external factors that can influence any long-term return, such as comparable sales, location, market trends and property condition and characteristics.

Lack of control 

Living in an apartment building and being under the rein of a body corporate can potentially hinder the owner’s amount of control. Whether it is a minor or significant renovation, permission still has to be granted by the body corporate, which could place limitations on the value of a property.

Future developments 

The number of apartment buildings in certain areas can significantly increase over time. If you already own an existing apartment in an over-supplied area, it can negatively affect rental yield, rental demand, and capital growth. Therefore, it is crucial to consider location and local amenities as they can either increase or decrease the desirability of a suburb.

2022 Forecast for Investors

At the end of last year (2021), Australia’s ‘Big Four’ banks updated their property price forecasts due to a number of factors. This is what they believe will occur: 1. NAB has forecast a 4.9% lift in property values in 2022 and a 4% fall in 2023. 2. ANZ’s outlook is a 6% price hike this year and a 4% drop in 2023. 3. The CBA expects house prices to rise 7% in 2022, and 10% next year. 4. Westpac expects an 8% rise in 2022 and a 5% correction in 2023. However, the new finance environment is making it difficult for home buyers and property investors to grow a solid portfolio. Basically, if you’re already an established property investor/developer, you’re equity and passive income should prove beneficial for the improvement of your portfolio. However, those looking to get started might find it hard to get a loan, live off said equity and manage investments easily. So, although people believe an overall lift in the next few years, pent-up demand may begin to weign growth. Stay tuned for more updates from the PiPr team.

Final thoughts

With the volatility of the Australian property market, gathering all possible alternatives is vital. Therefore, based on the above points it can be seen that a house is more beneficial in accumulating capital growth. Having land that appreciates over-time along with the ability to renovate without restriction and more consistent rental returns provides home buyers and investors with the ideal opportunity for capital growth.

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