Apartments vs. houses: An investment comparison

It's an age-old conundrum: To invest in houses or apartments? Okay, that's a slight exaggeration, but it's a crossroads many first time and experienced investors have been at.

Property investors generally want one of two things (and commonly want both!). These are capital growth (i.e. the property increasing in value) and positive yield (when rent covers ownership costs and generates income).

Apartments are typically cheaper to buy than houses, can offer similar or better rental yields, and are commonly located in desirable locations.

However, houses offer 'bricks and mortar' stability, ownership over the land underneath, and historically stronger capital growth.

So, what property type offers a better investment opportunity? Let's delve into what you need to know before making your decision.

Capital growth: How do houses and apartments compare on price growth?

PropTrack senior economist Anne Flaherty told Your Mortgage the choice between a house or unit will largely come down to an investor's goals and budget.

"For an investor focused primarily on capital growth, houses have historically outperformed units in most markets," she said.

Over the last 20 years, house prices have lifted 184% while unit prices have grown 126% – a difference of 58%, according to PropTrack data.

That's a response to higher demand, PRPTY360 CEO and founder Julian Fadini told Your Mortgage.

"More people are seeking houses – that's the preference.

"And if more people are seeking houses then, overall, that's where the demand is … that's where people are more comfortable investing and purchasing."

^{Image: Julian Fadini, supplied}

More demand for an asset generally means higher prices, as more people bid against each other to invest in individual properties.

Looking towards the future, Mr Fadini sees greater capital growth potential in strategic investments in houses over units due to one factor – the land they sit on.

Australia is in the midst of a housing crisis. The nation is working to build more than a million houses between 2024 and 2029, and with a shortage of available land in many capital cities, the only way to do so is to build upwards.

"The only way to increase supply [in cities like Sydney, Brisbane, and Canberra] is to increase density, and the only way to do that is to take existing homes and turn them into higher density living.

"If you buy a house and the area it's in is rezoned to higher density, in some cases it's just as good as winning the lotto."

While similar opportunities might exist in cities like Melbourne, Adelaide, and Perth, their flatter topography allows for outer suburbs to be developed. That's generally not the case for the likes of Sydney, Brisbane, and Canberra, all of which are largely hemmed in by mountain ranges, oceans, or both.

Thus, Mr Fadini believes the future supply of new apartments is virtually guaranteed, while the supply of new houses will likely be far more constrained. That means the supply-demand equation may be likely to keep tilting in favour of houses.

"Houses will become rarer and rarer, and as they become rarer and rarer, they'll become more valuable," Mr Fadini said.

Rental yield: Do apartments or houses command better returns?

"For investors less focused on capital growth and more interested in creating an income stream, units offer higher yields on average," Ms Flaherty said.

To calculate rental yield, investors generally take the annual rental income generated by a property and divide it by its value (or their purchase price), then multiply that number by 100.

So, a $600,000 property bringing in $700 per week in rent would have a yield of 6% – pretty healthy.

Units are frequently located near amenities, and can attract strong tenant demand. As discussed above, higher demand typically equates to higher prices, whether that be property values or rental income. The cost of buying an apartment over a house also bears consideration, as house values are generally higher than unit values. Therefore, units can often generate higher rental yields than houses.

That said, investors need to account for ongoing costs, such as mortgage interest, property management, and maintenance costs.

When it comes to apartments and units specifically, body corporate fees can eat into those returns. This is something investors need to weigh up carefully as body corporates generally cover the cost of building insurance and external maintenance – costs otherwise borne by the homeowner – but fees charged can be excessive and exacerbated by expensive assets like elevators, pools, and by shallow sinking funds or special levies.

A general rule of thumb when looking for apartments and units with fair body corp costs is to look in low-rises with limited amenities and don't need continuous repairs, according to Mr Fadini.

Risks: Buying an off-the-plan apartment or house

Buying property off-the-plan – ergo, before it's built, based off floor plans and other information – can bring major benefits. Many states and territories offer stamp duty discounts and even grants to those who help boost the supply of housing. Meanwhile, tenants often like living in new properties with modern technology and, sometimes, sweet amenities.

However, buying an off-the-plan house or unit can bring additional risks – particularly when it comes to apartments. Newly built houses and apartments often come with defects, but apartments face additional risks from defects in the building as a whole. New units are typically housed in major developments, and these can be complicated. If they're found to not be up to scratch after they're built, it's generally the owners who have to front the cash for major repairs.

These risks have played out in the public eye in recent years, with some Aussie apartment buyers facing unexpected special levies of tens of thousands of dollars to fund building repairs or the replacement of combustible cladding.

"The majority of new apartments coming out are built so poorly that, particularly in New South Wales, we had to have a commissioner step in to clean up the industry – people were literally losing their life savings," Mr Fadini said.

When it comes to new, off-the-plan houses, he points out an entirely different building code.

"There are more consumer protections for people investing in [new] houses because they've been built to a different code, whether they've been built recently or in the past.

"Also, it's easier to establish whether the property itself has any challenges when it comes to construction."

"[But] people [buying new apartments] not only have to worry about the quality, they also have to worry about whether the project's even going to get out of the ground. Or, if it takes longer than expected to build and the sunset date reaches expiry, the developer may ask the client for additional money or rescind the contract."

How to choose the right apartment or house to invest in

Ultimately, the decision to buy a house or an apartment will be a personal one, dependent on your financial situation, goals, and risk tolerance. When weighing up whether to buy a house or apartment, you may want to consider:

• Your budget
  Apartments typically require a smaller deposit and offer better yields.
  
  
• Your investment goals
  Chasing capital growth? A house on a generous block might suit you better. Prioritising positive cash flow? A well-located apartment may deliver.
  
  
• Location, location, location
  Inner-city apartments may outperform outer-suburb houses on yield, while land value in established suburbs may drive stronger capital growth.
  
  
• Ongoing costs
  Don't forget strata fees, property management costs, maintenance, and vacancy rates – these can eat into returns quickly. Seeking out a low-cost property could be a worthwhile investment decision.
  
  
• Development potential
  Buying a house in an area flagged for rezoning could unlock significant upside.

Buying an investment property or looking to refinance? The table below features variable home loans with some of the lowest interest rates on the market for investors.

Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of .

Important Information and Comparison Rate Warning