Despite the current volatility of Australia’s real estate market, property investment is a tried and true investment strategy. Unlike other investment opportunities such as the stock market that’s in a constant state of flux, historically speaking, purchasing property with the goal of receiving some kind of financial return bodes well for most real estate investors. Renting out an investment property acts as a source of passive income, but even if you don’t go down the landlord route, real estate prices typically rise in value over time, meaning you can make a profit should you choose to sell, or use the property’s equity as leverage to fulfil other investment opportunities.
But what makes a good investment property? The answer to this question is hotly debated, particularly when it comes to apartments. With lower price points and higher rental yields, apartments are tempting, particularly for first-time property investors. So if you’re considering buying an apartment in Australia as a rental property or adding one to your existing portfolio, there are a few things you should consider first.
Purchase Price & Property Maintenance
A property’s price tag is determined by many factors, but square footage is a big one. The more square footage, the more a property costs; makes sense right? Apartments are typically smaller than homes, townhouses and units, and therefore have a lower asking price. They’re also cheaper to live in; things like building maintenance and general upkeep are taken care of by a body corporate company and a dedicated property manager. If you buy and rent out a 3-bedroom home, unless you want to fork out a decent portion of that rental income to a real estate agency that’ll manage the property, you’re on the hook as a landlord; all repairs and potential problems fall on you. And if you’re paying off the bigger mortgage needed to buy a bigger property, things can get expensive. However, let’s say you’re a young Melbourne property investor who’s just purchased an inner-city apartment. Your property is automatically taken care of by a Docklands strata management company, body corporate fees are split evenly across all building tenants, and you can bake those fees into the cost of the rent.
As I mentioned, the potential for capital growth is one of the main reasons real estate is a popular and trusted investment strategy. But not every property has the same growth potential. There are many factors that contribute to capital growth, but ultimately it boils down to supply and demand.
Australia is currently experiencing a rental crisis due to a shortage of available rental properties in the private sector. As a result, the cost of rent has skyrocketed, with the current median national rent sitting at $582 a week for houses and $540 a week for units. While many Aussies are doing it tough, from an investment point of view, it’s a very good time to be a landlord. Supply and demand are some of the key drivers behind capital growth, and the demand for rental properties (i.e. apartments) in Australia is high, so the rental ROI of an apartment for property investors is quite fruitful.
However, if your investment strategy is to purchase a property and eventually sell it for a profit, apartments might not be the best choice. Affordable apartments with less than two bedrooms have a much smaller resale market in Australia. Why? It comes back to demand. The CBD of most Australian cities are packed with high-rise apartment buildings – potential buyers will be spoiled for choice, and if your asking price is $5,000 over other similar apartments in the area, it’s almost impossible to compete.
What’s more, location plays a key role in property prices. As time goes on and suburbs become more gentrified (a train stain here, some shopping centre upgrades there), the location becomes more valuable and housing prices go up. Smaller, affordable inner-city apartments typically don’t experience that kind of growth, and therefore property prices stagnate. In fact, the latest data shows apartments in Brisbane’s CBD are some of the worst performing in the market, dropping 9.4% in value from June 2022. So if you are thinking about buying an apartment either as an investment property or something that will appreciate in value, focus on well-built properties with at least 2 bedrooms and on-street parking in an area that appeals to your future target market.
So the answer to the question, “Do apartments make good investment properties?” Yes, they can be. The definition of a good investment differs from person to person, so as long as you go in with clear goals and a good understanding of what makes a property value, then an apartment can be a valuable addition to any real estate portfolio in Australia.