What you need to consider when deciding which property to buy
In a recent property investment rant, I discussed a common objection from investors who tell us, “I don’t like apartments, how can they make money?” In this article, I thought I’d break down the difference between investing in apartments and houses a little more. You’ll discover why apartments are hot property today, and why that may change in the future.
What does history tell us?
If you search back through historic property values, house prices have performed better than apartments. However, apartments are a fairly modern concept, and their social use is changing.
In the 1960s and 1970s, apartment blocks were built primarily as social housing – an answer to a growing population unable to buy the houses that they wanted. These apartment blocks were built cheaply, often with little infrastructure (shops, schools, transport) and little regard to environment and aesthetics. It didn’t matter what they looked like; they just needed building. We ended up with grey, drab concrete blocks, which quickly developed into inner city ghettos.
Today, apartment blocks are built for a private market – and sold predominantly to home buyers or property investors who let them to tenants. They are modern eye-pleasers. They benefit from being developed near infrastructure that matters to residents. Often, they go hand-in-hand with other regenerative efforts: look at Crossrail 2 and its impact on property prices.
Recently, apartments have been performing better than houses in many areas. Demand for apartment living is increasing.
Look at lifestyle trends
There are more singletons and couples today than there has been in the past. Families want houses in the suburbs. Young professionals want to be close to the business district, near to bars, restaurants and cafés. They want to be near their work, and a stone’s throw away from entertainment.
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They don’t want the hassle of house maintenance, mowing the lawn twice a week, and washing their car on their driveway. They want to roll out of bed in the morning and be at work within minutes, via public transport. In the evening, they want to return home and hit the nearby nightlife.
It’s not only young professionals looking for lifestyle living. The older generation is selling up their country homes and moving into the city, too, and using their profits to pay rent and enjoy life. Buy-to-let property investors are targeting the silver renter for investment property profits.
So, right now, there’s a lot of demand for apartments. And that pushes apartment prices up, and demand for land from developers increases.
Don’t underestimate the value of land
Property experts have always maintained that the value of property investment is mostly in the land. Traditional thinking, therefore, says that a house will always have a higher value than an apartment.
When you invest in property, you’re buying a piece of land and the property itself. The land is an appreciating asset, while the property isn’t.
Property in the suburb valued at, say, £500,000 might be split as land value of £150,000 and house value of £350,000.
You’d imagine that an apartment in a block of 40 would have a smaller slice of land, and so appreciate at a slower rate. But land in the city is premium real estate: it’s worth millions. So, a smaller slice of the pie, but a far more valuable pie.
For investors, apartments are more manageable
When you own apartments as buy-to-let investments, you’re relieved of a lot of maintenance and repair obligations. The service charge applied pays for the block administrators to undertake all of this work. As an investor in houses, all these obligations fall on you.
These are a few of the differences between investing in houses and apartments. I’m a big fan of owning buy-to-let apartments. I’m also a big fan of owning buy-to-let houses. Demand fluctuates, and as it does, you should evolve your investment strategy, because property values and lifestyles work in cycles.
Affordability and demographics
As demand for houses decreases and demand for apartments increases, house price growth slows, and apartment price growth accelerates. Lifestyle living is one reason for this ebb and flow. Right now, apartments are more affordable for investment. But as prices go up, that price differential will close. Houses will become more affordable in comparison with apartment prices.
And those young professionals who want the city lifestyle? They’ll get married, have children, and their housing needs will change. Demand for apartments will fall, and demand for houses will grow. House prices will rise faster, as a new generation of families looks for different things from their property choice.
So, what is the better property investment – houses or apartments?
The answer is neither. They’re both great investments, but they will grow at different paces, at different times. Sometimes houses will be in greater demand, other times apartments.
The secret to investing in the best type of property is to consider the location and what people living there want. Look also at affordability – property values and rental prices. Ask yourself:
- Where am I investing?
- Who is my target market?
- What do they want from their property choice?
If you understand these dynamics, you’ll understand whether an apartment or a house is the better investment right now.
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