Apartment investing – smart or stupid?
The property spruikers cry, “they’re not making any more land.” Or, “you can’t go wrong with bricks and mortar.”
Investing in residential property has always been attractive to some investors. The emotional comfort of being able to see their investment overwhelms a clinical analysis of the net long-term investment return that residential property provides.
First Hand irregularly analyses residential property investment, listing all of the costs (rates, land tax, maintenance, agent’s rental commission, agent’s selling commission, other selling expenses, etc) and the revenue (rental income). The net rental income yield tends to fall in the range of 2.5%-3.5% p.a.
Reliance on capital gain
The trade-off, is of course, capital gain.
That is, the net capital gain on sale must be high enough to not only offset the poor annual net income, but also to lift the overall return to one commensurate with other growth investments, such as those from commercial or industrial property, or even shares.
The net capital gain must include capital costs: stamp duty on purchase, agent’s selling commission, other sales’ costs, etc.
Don’t confuse profit with rate of return: use % p.a.
And the naive sense of a capital gain is often taken by just deducting the purchase price from the sale price and declaring a large profit.
What is forgotten is to annualise the gain. Recall the First Hand example last year:
Many investors speak in terms of the profit they made on a transaction.
For example, you pay $1m to buy a residential investment property and after 10 years you sell it for $1.8m.
You have made $800,000. An 80% return. Or have you?
|What seems like a massive profit is not so great on a % p.a. basis|
|Annualised return||6.1% p.a.|
No. Because the profit gained was made over a long period of time, the actual gain each year is only a modest 6.1%.
But the point is that it is the net capital gain that must be high enough to make the residential property purchase worthwhile.
House or apartment?
So, assuming you like the bricks-and-mortar concept, you can choose between a house and an apartment.
So, other costs and benefits being equal (they may not be: although the apartment will have owner’s corporation (the old body corporate) costs (around $5,000 p.a.) but, if bought ‘off- the-plan’ will have minimal purchase stamp duty) what are the chances of a strong capital gain?
I had the opportunity to choose between buying an apartment and renting. And I did my sums.
The most obvious fact is that, unlike land, where they’re not ‘making’ any more, they’re building more apartments. Lots more.
And weighing up the costs and benefits: I am now an apartment renter. Why?
Capital gain opportunity
The chance of a decent capital gain on the apartment was virtually zero.
Each new apartment building is offering more features. Ten years ago, an apartment building would offer not much other than the apartment and off-street parking.
The latest high rise apartments offer heated swimming pools (often indoor), well-equipped gymnasiums, resident-only cinemas, 24-hour concierge, off-street parking, ground floor convenience stores, etc.
The problem is that there are more and more of these being built.
Each one has better amenities and the latest appliances (although the ‘European laundry’ doesn’t refer to the home country of the appliance maker – it’s a euphemism for a cupboard laundry).
And so often now these apartments are being offered with rental guarantees for 2 or 3 years.
My conversations with agents make it clear that the opportunity for even reasonable capital gain is limited. And one friend, who is a developer, said, ‘there is no chance for capital gain.’
They keep building more of them. And each new one is better than the last.
Who is buying?
Aside from the ubiquitious investors from overseas, buyers are owner-occupiers who cannot afford a house and like the amenity I have already described.
And if you don’t have young children, the amenity is very good. Although, higher building costs/ greedy developers means that apartments are getting smaller.
But as an investment idea, as distinct from an owner-occupier, it might pay to reconsider your devotion to the ‘bricks-and- mortar’ investment principle.
And talk to experts about this. Talk to First Samuel.