Property investment tip 35: Is it better to buy a house or an apartment?

Some people believe that buying a house is a better investment because the real value is in the land. Over the long-term, land often increases in more value than buildings.

Other people don’t mind investing in apartments because they’re more affordable, allowing you to buy properties in popular locations on a smaller budget.

However, many investors have found great successes from investing in either houses or apartments, or both.

So, which is better? Buying a house or buying an apartment?

For me, it comes down to two key factors: your property investment goal and your budget.

What is your property investment goal?

As a property investor, do you want to make money from selling your property? Or do you prefer to earn more rental income on a monthly basis?

If you want to make money from selling your property, then buying a house could be the better option for you.

Investors make money from selling houses when the value of the house and land increases more than the original purchase price. This is called capital gain. Houses tend to have more capital gain potential than apartments in the same town because of the land.

However, capital gain can takes years or decades to grow, depending on the stability or volatility of the housing market – so you’ll need to be very patient if you want to make big money.

Houses command higher rent. However, as they are more expensive to buy and occupy more land, the mortgage repayments and land taxes are also higher. So with higher expenses, the profit made from renting out a house can often be lower than a cheaper apartment.

Contrarily, apartments have a lower capital gain potential due to the smaller living spaces and lack of land.

However, as apartments are cheaper to buy and easier to maintain, the mortgage repayments and expenses are lower. And so, in areas with high tenancy demand, an apartment can actually earn you more profit from the monthly rental income than a house.

What’s your budget?

If budget is not an issue for you, then buying a house in an in-demand area is a ‘winner’ in the long-term. Not only can you charge a higher rent, you have more options to convert the property because you own the land.

For example, you could, with council approval, sub-divide the land to create more individual houses, or convert the existing house into a multi-level apartment. In future, the individual houses or apartments can be sold off separately.

A word of caution: the mortgage repayments for a house is more costly than an apartment. Just because you have a deposit for a house does not mean you can afford higher repayments for the next 25 years or so. Do your calculations first.

For those with a limited budget, buying an apartment in a central location can be a good option. In fact, I own three apartments because, at the time, I could not afford a house in my desired location.

Buying an apartment should not be perceived as a ‘second best’ choice. It is mistakenly claimed that land is always a better investment. But I would ask you to question: where exactly is the land located?

Many apartments, and even tiny studios, in capital cities can be worth much more, and attract higher rent, than houses in suburbia or the countryside.

The biggest mistake people make

The biggest mistake people make is wasting time.

Many people who are adamant that owning a house is better than an apartment, spend years and years trying to save for a house. But, what happens is, house prices increase faster than what they can save. And so, they gradually become out priced from the market.

You need to enter the housing market as soon as you are financially and emotionally ready. If it’s going to take you four years to buy a house, start with a smaller investment like an apartment. Don’t waste time.

You can upgrade to a house at a later date, when the value of your apartment increases. Or you can sell your apartment to buy a house, but, this is not my preferred option. Read my post on why you should not sell your property.

So, do you prefer to buy a house or an apartment?

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Please note, though I own a few properties, I am not a legal, financial or professional property expert. I’ve written this post to share my personal experiences and would love to hear your opinions and views.

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