As with any large purchase, there are pros and cons of buying an apartment. A lot of thought and effort should therefore go into determining which one is right for you and your situation. Throughout this piece we will delve into the pros and cons of buying an apartment, leveraging our experience as financial advisors Melbourne and Sydney, that specialise in property advice.
This article is written to compliment buying an apartment, an article that delves deep into what your apartment buying considerations should factor in, including wealth creation strategies and financial planning insights for different stages of life.
If you wish to discuss anything covered in this article or how buying or selling property fits into your broader financial plan, please feel free to reach out to our skilled property advisors, Melbourne or Sydney.
Pros of buying an apartment
Depending on whether you are an investor or owner occupier there can be several advantages of buying an apartment. If you are wondering if buying an apartment is a good idea, we have detailed seven reasons why it may well be, including monetary, lifestyle and peace of mind.
Depending on your budget, one reason you may consider buying an apartment instead of a house, is that apartments are generally less expensive than houses in a relative sense. This allows some people to buy apartments in areas they cannot afford a house. Lower price points also make it easier to save the 20% deposit required by most lenders in Australia to get a loan and potentially make the loan servicing process easier. For investors wanting to grow a diversified portfolio, this can be an attractive feature of buying an apartment.
Apartments and units are regularly located within more desirable areas. Often located within highly populated city bound or scenic locations. Purchasing an apartment in these areas may be a more suitable option, if you want to live in these locations but find that you can’t afford to purchase a house. If money is not the primary consideration, you may find that you cannot gain a comparable position or aspect from a house. For investors, it is worth researching these areas, as apartments are often attractive options for renters and could present you with advantageous rental and ultimately resale outcomes.
Many apartment complexes provide a number of amenities for residents to engage with, creating an enjoyable residential environment with great convenience. Often consisting of communal gyms, pools, BBQs and gardens. These facilities are primarily maintained by the complex strata committee and owners corporation, allowing residents to make use of the amenities and share the cost of having them with other apartment owners and tenants.
Owning an apartment often consists of less maintenance for owners than a house, as the responsibilities for the common property, fixtures and services fall on the owner’s corporation and strata committee. This usually includes regular upkeep like garden care and window cleaning and extends to more significant works, like repairs or cosmetic enhancement.
YIELD FOR INVESTORS
It is typical that the rental yield on an apartment is higher than on a house in the same location. This is mainly because tenants will pay more for the building that they are living in than the surrounding land. A quick search on Realestate.com shows a popular inner-city area, Richmond in Melbourne, has an average 2 bed apartment rental yield of $550 pw vs $625 for a house. Yet the cost of buying a 2 bed house is almost twice as expensive, being $1,235,000 compared to $666,000. The difference in rental yield on both is pronounced, being 2.5% for houses and 4.5% for apartments. If yield is important to your wealth creation strategy, then this can be an attraction of buying an apartment.
POTENTIAL TAX BENEFITS (INVESTORS)
There are various potential tax advantages available to investors when buying an apartment. For example, if your property is on a strata title you should be able to claim the cost of a portion of the body corporate fees you pay. Tax deductions for depreciation and negative gearing are typical also. What this means is that any loss of profit due to a decrease in property value and/or interest outgoings and costs that exceed the income the property produces, may be claimed against other taxable income you’ve been paid from other investments you may own or employment income, decreasing your overall tax payable. To understand more about the ‘Tax on investment properties’ read the second blog in this series.
Buying an apartment can mean better security, especially in newer apartments, but this also must be inspected prior to agreeing to buy an apartment if this is important to you. Ultimately responsibility for security of an individual apartment is up to the owner of the apartment, however the owners corporation may have security it maintains as part of its charter, that could include things like CCTV cameras, motion detecting lighting and door security. Living in an apartment means that you have more neighbours in a close environment, that can also increase the sense of security living in an apartment.
Cons of buying an apartment
Before you buy an apartment, it is important that you are aware of some of the potential disadvantages of buying an apartment and balance these out with your personal goals and objectives. Cons of buying an apartment extend to investment attributes, lending considerations and privacy. As a property advisor Melbourne, we can help you balance out the pros and cons of buying an apartment, as they relate to your financial plan.
LAND TO ASSET RATIO
When you buy an apartment, you are paying for a portion of the shared land that the apartment sits on, along with what the building on top is worth. This is called land to asset ratio, as it is determining how much land you own effectively and its value. One of the key drivers of property price growth is land, because land is finite. In areas such as inner city Richmond, that we touched on previously, most of the land available is already built on and therefore over time, the land in Richmond is getting more expensive. Land to asset ratio is important for property price growth but may be balanced out by other factors, such as an apartment on the water in a tightly held area, that cannot be built out.
Before you buy an apartment you need to look at what banks are prepared to lend you. Typically in Australia banks will lend up to 80% of a properties value without incurring mortgage insurance, however on certain apartments, this can be lower and some lenders may not offer any finance. For apartments that are under 40sqm for example, the maximum lenders tend to loan is only 60% of the property value, which reflects their position that they represent more risk.
In Australia apartments are increasing as a proportion of the property market, and we expect that this trend will continue out of necessity. A trend explored in the first article of this series buying an apartment. It is likely that this will create a headwind for the median apartment price growth, as demand will often be met by new supply. One way to achieve a better than median return outcome is to find an apartment that is broadly appealing, yet unique or hard to copy, meaning less risk of demand being met by increased supply.
While buying an apartment is generally cheaper than buying a house, the value of apartments don’t typically increase as much as houses in the same area do. A calculation on the same 2 bed apartment and house market in Richmond, shows the 5 year return for houses was 5.5% total vs 1.8% for units. The balance of the points raised here as con’s contribute to the reasons that apartments often underperform house growth, unless carefully chosen.
A potential con that comes with apartment lifestyle is the lack of space and lower privacy levels. Apartment living often means sharing common areas such as gardens, gyms, pools and even walls, which can be noisy. For some, the idea of living in such close quarters with neighbours can seem less desirable than buying a house, which allows for a little extra space between neighbouring residents. When buying apartments you will see that some complexes have far fewer apartments than others and these can often be favourable for rental demand and property price growth, due to greater likelihood of peace and privacy. Smaller apartment blocks can often have higher land to asset ratio also. Particularly older blocks, that were built when land was less scarce.
While living in an apartment under a strata scheme means less responsibility surrounding maintenance, it also means paying fees. These fees range and are often determined by the types of services provided. For example, if your apartment is part of a complex with higher amenities you will likely pay higher strata fees or body corporate based on the maintenance that goes into preserving these facilities. Also, because these expenses are determined by a committee, they may prioritise expenditure that you would not otherwise spend yourself or equally may prove frustrating if there is something that you would particularly like done that the committee does not prioritise. Also it is preferable to try and understand the work an apartment block may need to undergo, prior to buying an apartment if you can, to mitigate some risk of unexpected, shared costs.
Weighing up the pros and cons of buying an apartment
Ultimately, buying an apartment is a significant investment and there is a lot at stake. What may perceivable feel like minor variables in the decision-making phase, can make substantial differences to the lifestyle and investment outcome.
Throughout this piece we have touched on several considerations that should help to get you in the right frame of mind when looking to buy your own apartment, however to speak directly with a qualified financial advisor in Melbourne or Sydney, feel free to reach out to us here.
How Yield Financial Planning can help you
Yield financial advisors are property planning experts and can help you to identify and understand the capital and cashflow impact of property investing, as it relates to your broader financial plan, goals and objectives. Our advice services include property planning, retirement planning, mortgage broking, and wealth creation. With our support and advice we help you balance your property and financial goals alongside your personal objectives and offer a service which is transparent and in your best interest.
Building a financial plan that is tailored to you
Yield Financial Planning financial advisors have won several awards, including being recognised as a top three Certified Financial Planner in 2018 and 2020. We are an FPA Professional Practice, which is a rigorous process that recognises our ethical qualifications. Our typical clientele are high net worth investors HNWI, business owners, professionals and people wanting to plan their transition to retirement TTR. Over 45% of our clients are also property investors, so if you are considering buying an apartment, we are perfectly qualified to help you in your decision making. As property advisors in Melbourne, we help take the guess work out of property.