Why you should aim low when investing in an apartment
Real estate agents often advertise apartments as “an ideal investment opportunity” and some investors are attracted to apartments due to their often reduced level of maintenance, strong rental returns and relatively affordable entry price.
Like any investment, it’s the numbers that matter. One of the numbers that can play a major role in determining investment success is the number of apartments in the complex. High-rise complexes which can often contain hundreds of apartments can sometimes provide good investment opportunities, especially when there are scarce views to offer. But as a general rule, investors are better off in low-rise or boutique complexes. Here are some reasons why:
Scarcity and future supply
Low-rise complexes are typically in areas with strict height planning controls, reducing the likelihood of any significant future supply that could dampen capital growth. High-rise towers on the other hand are typically on converted land in and around the CBD and can quickly shoot up in clusters.
If you own an apartment in a complex with hundreds of almost identical properties you will always be in competition for tenants and buyers. This will increase the chance of vacancy and restrain value growth.
Apartments in a low-rise complex typically have higher land-to-value ratio than high-rise apartments. This means they generally have a better chance of achieving capital growth, as it’s the land that appreciates not the building.
Low-rise complexes are typically targeted to owner-occupiers, which ironically makes them a better proposition for investors. Owner-occupiers tend to take pride in their home and are less likely to sell up when times are tough.
In high-rise complexes, which are most investor owned, distressed sales happen more frequently. This is bad new for the value of comparable properties, as it’s easy for valuers and buyers to make comparisons.
The fee that all apartments owners hate. High-rise complexes typically have more amenities and facilities, such as lifts, pools & gyms. This is great if you are the tenant, but it often means higher strata fees for the owner, which can quickly erode rental returns. Additionally the cost of an external strata manager can add significantly to the amount of strata fees you pay which further reduces your return.
Property investors like to control their investment as much as possible. As the owner of an apartment in a low-rise complex you have greater control over the actions of the strata company as your “voting share” is greater than with owners within high-rise complex.
As with any investment, successfully investing in an apartment requires full due diligence at the start prior to committing to the purchase. Do you numbers and understand the market you are buying in.