IS LAND TO BUILDING RATIO IMPORTANT FOR INVESTMENT PROPERTIES?
There is a common misconception in property investing that apartments and units don’t go up in value like houses. Many believe that land to building ratio is important.
This assumption states that units aren’t worth buying because, while land appreciates, buildings depreciate – so, it’s better to own land and not bother with attached dwellings.
Our clients can testify that this simply isn’t the case. We have experienced good growth in apartment prices over the past five years, particularly here in Sydney. And depreciation? Well, it can actually be a good thing…
BUYING IN THE RIGHT MARKET
It is true that in some markets apartment prices haven’t grown as much as detached dwellings over the past couple of years.
A recent boost in supply has meant that markets such as Melbourne and some parts of Brisbane have seen a slowdown in price growth.
This has nothing to do with the fact that the properties are apartments. It is more to do with increased construction, and therefore supply, removing upwards price pressure from the market. In other words, buyers have more to choose from so competition is less intense.
CAN APARTMENTS BE ‘LAND BANKS?’
Apartments and units that have a good cash-flow, have a strong upside for growth and are located in a metro area that is not flooded in oversupply can be good investments.
These types of apartments do go up in value, as the land they are located on appreciates in value.
A small block of units may be very attractive to developers, provided there are no height restrictions. It is not uncommon to hear of people being bought out at high prices by developers who want the land.
Not only that, the land tax that you pay on an apartment, if any at all, is bound to be much less than what you would pay for a house on the same block.
LET’S LOOK AT THE VAULT
Located on the central coast of NSW, it made $100,000 in the first year after purchase. The land it is positioned on has water views and the area itself has seen a lot of interest from developers in recent times.
CAN APARTMENTS BE BETTER INVESTMENTS THAN HOUSES?
It depends on the market, of course. The median price for a unit in Waverton, on Sydney’s north shore is $1,210,000.
The median house price for Fairfield, in Sydney’s west, is $747,000.
Which is a better investment?
IT’S THE MARKET THAT MATTERS MOST
Clearly, it’s not a simple case of apartments being better or worse than houses – it’s all about the market. While houses will always be worth more than apartments in the same area, this doesn’t equate to less growth by default.
Buying the right type of apartment or unit below market value, in an area with good growth prospects can be just as fruitful as buying a house.
DEPRECIATION ISN’T THAT BAD ANYWAY
As for depreciation, this can be claimed as a tax deduction. A depreciating asset can go a long way in helping you when it comes to tax time.
CASH FLOW CAN BE BETTER WITH APARTMENTS
Apartments often have a better yield than houses. An apartment renting at $500 and purchased for $600,000 is better than a house renting at $600 that was purchased for $800,000.
If you buy neutral cash-flow properties at a low price, you will probably find it easier to buy and hold more properties throughout a property cycle. The more properties you hold throughout a cycle, the better.
And, let’s face it – 10 apartments are worth more than a single house.