5 Things You Must Consider When Investing in an Apartment
Whether you’re a first-time investor conducting preliminary research, or a savvy investor looking to bolster a growing portfolio, investing in an apartment development is an option that’s definitely worth exploring. As with any property investment opportunity, you must always factor in the needs and wants of prospective tenants to ensure there will be demand for your rental. Given the low maintenance, ‘lock and leave’ lifestyle offered by apartment and unit developments, these property types tend to be highly attractive to prospective tenants. However, while renters will generally favour the convenience and security of apartment living, not all developments have strong investment potential. Here’s 5 things to consider when investing in an apartment or unit development.
1) Location, Location, Location
There’s a reason why this phrase has become a real estate cliché. When you invest in a property, you’re essentially investing in the location as much as you are in the building itself. As most people desire to live within close proximity of major amenities, tenants are likely to seek out well-established suburbs surrounded by existing infrastructure. If your investment property has a range of shopping centres, medical facilities, cafes and entertainment precincts on its doorstep, you’re far more likely to gain the attention of potential tenants. What’s more, renters will usually prefer suburbs that are well-connected to major road networks and public transport links, enjoying optimal accessibility to the wider metropolitan area.
On top of selecting a highly sought-after location, you must also take into account the growth prospects of that given area. There will always be suburbs that are thought to be a good investment given recent sales activity, but there is a chance the location is only experiencing a short term burst of popularity. It’s important to consider the long-term performance of the suburb, with the aim to identify areas that have demonstrated sustainable, year-on-year growth over a period of 5 years or more. These areas offer greater stability for investment, as opposed to ‘hot right now’ suburbs that gain a lot of short-term hype. REIWA offers a range of free tools and data that can assist you to analyse suburbs throughout Perth.
Another way to gauge the future performance of a suburb is to examine the activities occurring in and around the area. Is the government investing in new infrastructure? Are there new commercial developments on the horizon? By purchasing a unit or apartment in a suburb surrounded by up and coming projects, you’ll be more likely to see an increase in property values in the future.
There is a common misconception that its best practice to spend a large sum of money and secure a high value investment property, based on the belief that greater outlay should equate to higher returns. However, it can actually be far more beneficial to purchase a property below the median price. Perth properties, especially apartments, with weekly prices above $500 are not going to be accessible to the core rental market, meaning your pool of potential tenants will be significantly reduced. If you buy an affordable apartment, you can rent it out for an affordable price, either at or below Perth’s median unit rental price of $325 per week (REIWA, December 2018). By appealing to a wider range of prospective tenants, you are increasing your chances of quickly leasing your apartment.
There are other advantages of investing in an apartment development in a lower price bracket. For instance, you could purchase a luxury apartment for $760,000 and rent it out for $550 per week, or you could purchase two apartments at Perth’s unit median price of $380,000 (REIWA, April 2019). Hypothetically, you could rent out both units for $325 per week, making a total of $650 per week in rent. While these numbers are purely speculative, the rationale behind them is that cheaper properties have the potential to outperform properties of greater value. Spending more does not necessarily mean you will gain more from your investment.
3) Newer Is Better
If faced with living inside a brand-new development with a contemporary design, or a rundown building that was constructed in the 1980s, which one would you choose? Most are going to go with the first option. You could argue that external facades aren’t everything; an older development may seem dilapidated from the outside, but on the inside its units could be freshly renovated. The reality is, we’re all prone to judging a book by its cover, and when it comes to property, appearances matter, inside and out.
Aside from aesthetics, there are a lot of benefits to be gained from investing in a new unit development. For one, there will be fewer maintenance issues and costly repairs. Newer properties will naturally have newer fixtures and fittings, many of which will be covered under warranty. There will also be more opportunities to take advantage of tax deductions, with 40 years’ worth of depreciation allocated to new developments. Additionally, older apartment developments are not likely to provide modern inclusions, such as NBN connections, security and higher specifications throughout the kitchen and bathroom areas.
4) Supply & Demand
As we all know, the basic principle of supply and demand dictates that an increase in supply leads to a decrease in demand. When it comes to investing in an apartment development, there are two main ways in which supply and demand can impact the potential of an investment. First of all, consider the supply of apartments within the location. Is this an area booming with apartment developments or one in which an apartment is a rare property type to find? Second, examine the supply of units within the development itself. Are you dealing with a large complex filled with a wide variety of apartments, or a boutique development with a limited number of units?
Both the supply of developments in the area and the number of units within the development itself can affect the demand for your investment. When tenants are spoiled for choice, you lose the upper hand and the value of your investment property can be negatively impacted. As a general rule of thumb, consider a smaller complex in a suburb where there is a finite number of developments available.
5) Floor Plans & Inclusions
Let’s compare a studio apartment to a 2-bedroom apartment with a car bay. The first will only appeal to a very specific type of tenant, as opposed to the second option which offers greater versatility. You can generally expect that a larger apartment with a wider range of inclusions will have more leasing potential than a smaller one. However, space isn’t the only limitation of a smaller unit; some financial institutions will only lend on units that exceed a certain amount of living space.
To figure out whether the floor plan of a given apartment is going to be attractive to prospective tenants, look into the demographics of the area and the types of people who tend to live there. If its predominantly young couples in their 20s and 30s, then a balcony or outdoor entertaining area is ideal. Or, if the people living in the area are generally older, perhaps downsizers over the age of 55, then a sizeable storage unit may be a valuable inclusion.
While pools, gyms and other shared facilities within a development may seem desirable to all types of tenants, at the end of the day these inclusions are going to inflate your costs with increased strata management fees. Developments with minimal strata areas are a better option as this will reduce your overheads.
Before investing in any property, you always need to do your research. There is also a lot to be gained from speaking with a professional and obtaining advice that’s specific to you and your financial situation. If you’re considering investing in an apartment development, contact the expert team at Link Residential Group today.