If you can only afford an apartment, what should you buy?
Written by Veronica Morgan.
First home buyer: house or apartment, does it make a difference?
What's the smartest property for a first home buyer, a house or apartment? Some first home buyers worry that they can't really afford a house. Others stress about taking on a big mortgage, so an apartment seems safer. Yet there's a lot of negative press about apartments, much of which is well deserved, so how do you work out the right thing to do? For a first home buyer to be happy with buying an apartment, they need to know how to avoid making a bad decision.
Avoid "investor stock".
One reason that apartments get such a bad wrap is that a lot of new developments in recent years have been faulty. Many have been plagued with building defects, with some well publicised examples in Sydney over the past couple of years. There's also the issue of apartment oversupply, particularly in Brisbane and Melbourne. We've already written about the dangers of buying off the plan. What we haven't heard as much about is that a lot of new apartment complexes have actually been built for investors, not owner occupiers.
There are many problems for first home buyers who inadvertently buy this "investor stock". For starters, there is often nothing scarce or unique about the apartments. Many are "cookie cutter", generally small and poorly finished, which means there's nothing to make them appealing for future buyers once they're a few years old. This is especially the case if there's a newer and shinier building going up close. Future buyers are very important to consider because they are the people who will hopefully pay more for your home than you paid. Over the past decade a very high percentage of investor stock has actually sold for less than the original purchase price.
Don't overlook daggy.
Older apartments, on the other hand, can offer a lot of upside for a first home buyer. Look for an established apartment in a suburb where there is little land available for redevelopment. If you buy into a small complex (say 12 units), you'll find there's no lift, pool or gym to make the strata levies expensive. It might be that the unit has renovation potential, so you can actually add value yourself if you have some skills in that area. Often the older apartments are larger internally than the new "investor stock" mentioned above and the buildings themselves can be much more robust. You'll buy in at a lower price point because you won't be paying a premium for buying brand new, so you'll have less chance of losing money.
First home buyers should think very carefully before buying a one bedroom apartment. You have to think 5 years ahead, at least, and ask yourself how quickly you'll outgrow it. You might save on stamp duty if you buy a small apartment, but if you have to sell it to upgrade within a short time, you'll waste all the money you saved. It's a much better idea to buy a property that you think could suit your needs for at least 5 years, preferably 10.
If you are planning to live in an urban area, a three bedroom apartment could be a very smart move and would be worth stretching for. There aren't many around and as young families increasingly choose to live in apartments and more Baby Boomers downsize, the demand is only going to rise. A property that is in demand is typically a good investment.
If you're trying to decide whether you should buy a house or apartment, a combination of affordability and location will dictate the answer. If you're a first home buyer who can only afford an apartment, it's not always a bad option. Steer clear of oversupply, avoid investor stock, buy the largest you can afford in a good suburb and consider a future renovation to add value. Property should always be bought with the long term in mind, so make sure it will suit you for many years and has appeal for other buyers when you're ready to move on