Investing in the right asset type is one of the most important aspects of successfully utilizing property to create wealth. A mistake all too commonly made by investors is following emotion, perception and opinion rather than data and research.
Identifying the right property in a given market is governed by the location in which you are investing. Local demographics and tenure composition provide clarity around a typical household. Ensuring the property which you are purchasing meets local market demand, strengthens your position within the rental and resale markets.
Today we’re tackling the common misconception held among many first-time investors – ‘You can only make money investing in houses’. For the study we’ll look at two scenarios’ in the Sydney market within a budget of $400,000 and how they performed over a 5-year period between 2012 and 2017.
Houses: Jack purchased an established house in Blacktown for $400,000 (the median house price in Blacktown in 2012). By December 2017, this home would be worth an estimated $742,000, indicating a capital gain of 85%.
Apartments: Roy purchased a relatively new apartment in Parramatta for $400,000 (the median apartment price in Parramatta in 2012). In December 2017, this apartment would be worth $659,000. A capital gain of 64%.
Looking at the scenario on a capital gain basis alone, the return is superior for a house. However, it is important when investing to consider rental income as a measure of an investments overall return. This helps understand the real effectiveness of the asset type. Data provided by SQM Research indicates that the average weekly rent for a home in Blacktown in 2012 was $370 per week, while the average weekly rent for an apartment in Parramatta was $400 per week.
Further to the point, when you take into account property costs and considerations such as strata levies, yield, maintenance expenses and depreciation. The after-tax weekly holding costs equate to:
Jack’s House: Cost of $25 per week.
Roy’s Apartment: Positive cash flow of $36 per week.
Over the 5-year period this equates to $15,860 discrepancy in favor of apartments. The ongoing maintenance costs associated with an ageing home are likely to widen this gap as the properties are held longer, as services and finishes become increasingly obsolete. So, the apartment may have grown to a slightly lesser extent but are put in a stronger position as an investment over the medium term.
The accelerated growth in housing prices across the eastern seaboard has made the property type increasingly unaffordable for first home buyers and investors alike. As seen above the minimal disparity in growth and more positive holding cost scenario makes apartments a great alternative for investment.
Jack and Roy’s hypothetical expresses a number of factors about property, but the one that you should take away from it is that there is not one ‘right property type’. Investing in houses or apartments provide varying benefits, from short term rental returns, long term capital gains and helpful tax shelters. Ultimately, investing in the most appropriate property within a selected market, at the right time will bring you the strongest results.