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One of the common questions clients ask when seeking property investment advice is, ‘Should I buy a house or an apartment?’

Many novice investors are under the impression that houses make a better investment because they’ve read or heard that the land component of property increases in value, while the building depreciates over time.

Hence, they make the assumption that more land equals more bang for buck.

But that’s only half the picture, and a dated concept.

Let me explain – firstly not all land is created equal and it’s a misguided notion that it’s the size of the land that matters. What’s more important is the location and scarcity.

So where should I buy?

This is the first question you should ask yourself, before you even start to think about what type of property would be the most beneficial for your portfolio.
It’s an old cliché but ‘location is key’, it always has been and always will be. There are smart pieces of technology that you can use to help determine the walkability of a location. Walkability is the new buzzword in property circles, with many looking for locations that offer all the necessary leisure, shopping and work opportunities right on your doorstep.

A well located apartment in a blue chip area of a Capital City will outperform a poorly located house.

I always recommend the inner and middle ring areas around our major capital cities where demand is more consistent from owner-occupiers (who push up the values) and tenants.

So if you agree that investing in the inner and middle ring suburbs where all the action is, and is the right way to go, once you look at the median price of houses, you’ll soon realise that homes are not very affordable when we talk about investing in your first, or even second investment are they?

Compare this to the median for a two bedroom apartment and this becomes a much more attainable proposition.

Now you might think that because the house is worth so much more, it must make a better investment.

But if you drill down further and consider price trends over the past five years or so, 2 bed apartments and 3 bed houses have recorded similar rates of annual growth at 4.7 per cent.

The type of land is what matters.

Essentially, the land component of any given property is important in relation to the overall scarcity of available land in the location you are considering.
In established areas, there are often very tight restrictions on development due to natural constraints, such as the bay and harbour-side suburbs of Sydney, Brisbane, and Melbourne, as well as the fact that all available land has already been built on.

It is this scarcity – this inability to make more land – coupled with ongoing demand from homebuyers and tenants wanting to live close to desirable and fashionable amenities, as well as employment opportunities afforded by these locations, which underpins and places upward pressure on prices.

Inner city living has come into its own in the last twenty or so years, as more people embrace what was once considered a lifestyle for the working-classes, who couldn’t afford the more desirable sprawling properties in leafy green suburbs.

The ever-increasing cost of living, busier lifestyles, rising petrol prices and a movement toward a lifestyle that embraces the café culture have all caused a swing towards the inner city, with an increasing number of young professionals and downsizing baby boomers moving closer to the action.
Not just any apartment will do, though.

Not all inner-urban apartments make an ideal, high growth property investment however.
Given that land appreciates in value over time, you need to seek out a block of units that offers a decent portion of the ‘terra-firma’ to make your investment worthwhile.

High-rise developments with hundreds of flats might give the investor a very low land to asset ratio. Additionally, many of these developments are built en-masse by companies looking to profit from those intermittent stages in the property cycle that see buyers flood the market.

Hence, a glut of stock appears all at once and unsuspecting investors end up competing with hundreds of others in the same boat, desperately trying to find tenants and having to potentially drop rents.

Whereas well positioned apartments in low rise – often referred to as boutique – complexes offer property investors an affordable opportunity to add a good all-rounder to their portfolio.

Of course there are more affordable opportunities when we talk about detached housing.

Areas further away from the established parts of the city offer newer and more affordable properties. However you need to ensure that there are sufficient growth drivers in that location to offset the distance from the CBD. If you have the ability to take a longer term view with your investment, these areas can definitely make a valuable addition to your portfolio also.

‘Follow the smart money’ is a valuable piece of advice here. For example, if Westfield’s are building a new shopping centre in a particular location, then you can be certain that they would have carried out extensive research and due diligence into the viability of the location, population growth, demographics, disposable income, planned and scheduled government infrastructure spend…. etc. to ensure their multi-million dollar shopping centre investment enjoys significant returns. Investing in this location would therefore carry lower risk and offer better than average returns. Of course you still need to do your own due diligence, but the fact that there is a major investment by very successful organisations in the area, should give you further peace of mind you are making the right decision.
One must also look at what they already have in their portfolio, and see where you can diversify. Having multiple properties, all of the same type and in the same area and same city can present its own issues. If the property cycle in that specific location is experiencing a downturn, your whole portfolio suffers.
As different property markets grow at different times and different rates, having say an inner city apartment and a middle ring house in multiple cities could be a long term goal for property investors. This would ensure your portfolio is always likely to be growing somewhere, and you are minimising liabilities such as land tax, and the risk of a sustained flat market in any one particular area.

If you are buying your first investment, then a lot will come down to your budget and borrowing capacity, your investment timeframe, risk appetite, and what type of property is currently in most demand, and in which location.

Source your data from reliable expert sources, the same source of data the banks use would be a good start. Beware of well-meaning friend’s advice at a BBQ, or what you read on an internet forum.

We are always here for a no obligation chat to help you get started, and guide you in the right direction.

Phone us on 1300 132 970 to organise a time to meet and go through your options.

Written by Frank Russo, Managing director of Search.Find.Invest Buyers Agency.