Would you buy a 1 bedroom apartment as Investment Property?

Cherry12 on 09/01/2023 - 00:21
Last edited 10/01/2023 - 22:46

Husband and I have our own 3 bedroom house in Melbourne suburbs with a mortgage. Even with the rate increases we can comfortably pay the mortgage. Both work full time and have stable jobs.

Have $300 K in savings, so we are thinking of buying a 1 bedroom apartment as an Investment property, planning to pay cash (up to $250 K apartment value) to avoid having another mortgage. For a 2 bed I would need a $100-150 K mortgage, I would get it approved but don't want to get more in debt.

I'm looking apartments in Noble Park, Oakleigh, Carlton, etc. All 25 km away from the city and near train station, shopping centers, etc.

From my research I see 1 bedroom apartments are not very popular to invest but that's all we can afford without getting a new mortgage. The plan is to keep the apartment to hope (based on historic Capital Growth in the suburb) we get Capital Growth in 10 years or so, would rent it on the meantime.

  • What do you recommend in this situation? What would you do?
  • If this were you, would you buy a one bedroom apartment as investment?
  • Would you wait until you can save for a 2 bed but maybe by then the price has increased?
  • Some articles mention that the house prices will keep falling until Sep 2023 but other articles state that it is falling minimum by now, like a -0.4% in that area.

From historic prices on some of those apartments on the market now, in the last 7 years or so they had gains and then losses so there's no much profit now but mainly falling in 2022.

Please give your feedback.

Update: Thanks so much for all your feedback, it has helped me a lot. I'm learning, keeping notes and researching about topics advised. Once I get the knowledge and am sure of risks will seek professional advice before buying. Thanks again!

Financial

Comments

  • jace88 on 10/01/2023 - 14:13
    +1

    To answer Op's subject question of whether I'd buy a one bedroom apartment for an investment property… It depends on location IMO.

    I wouldn't buy a one bedder in the suburbs (not sure my way around Melbourne so can't comment on Op's post specifically) but in Sydney I do own a one bedder in the CBD with parking. It has appreciated quite a lot (notwithstanding the decline during COVID) as it appeals to a large group of potential tenants whether they be young professionals who want a place in the city near their work, students who want to live near where they study (and potentially do some part time work), city workers who just want a convenient place to sleep during the week and/or at least park in the CBD, couple who wants to live with the convenience of CBD and close to transport/airport/etc, even to DHA as the property is quite well located near infrastructure/etc.

  • kev98 on 10/01/2023 - 14:45
    +3

    I would buy into index fund which has exposure to property. Investment properties can be total headaches + have a lot of variable outgoings (eg repairs, strata, council, maintenance)

  • xavster on 10/01/2023 - 17:02
    +1

    Please go and speak to a financial advisor. Property may or may not be the best investment strategy, it really depends on where you are in life, you and your partner's current financial situation etc.

    To answer your question, the main advantage with property is the ability to fund it with 'cheap' debt, do it up, and sell it for capital gains. The property game is mostly capital gains. If you are buying almost outright with cash, it makes little financial sense because you can't claim cost of debt and the meagre earnings from rents will be taxed at your current tax bracket (assuming you are working and earn a good income to have 300k in cash).

    Apartments traditionally have poor capital gains and good rental returns, the opposite to houses. However with houses, you will be slugged with land tax, depending on your state of course.

    I did note that someone mentioned salary sacrifice into super, this is actually a very good strategy. Super is essentially a tax shelter with a very long term horizon. This has been the investment strategy used by many of my high income clients, they have setup SMSFs and own investment property through it.

    • Cherry12 on 10/01/2023 - 21:46

      Thanks for your comment. What would be the difference on buying/owning an investment property through the SMSF vs normal?

      • xavster on 13/01/2023 - 22:09

        income generated from you super are taxed at 15%.

        Once you reach preservation age you can withdraw that money tax free subject to the usual conditions if withdrawing super.

        If you are a wage earner, your investment income will be taxed at your marginal rate which is much higher than 15%

  • Guerilla89 on 10/01/2023 - 17:26

    From what I've read Australia has one of the most distorted income to housing prices in the world, China's market on housing is set to collapse and that could lead to the rest of world following. All of the zoning/building regulations and federal policies in place that keep the price of housing high will likely somewhat change as the generation of homeowners finish their lives and the voting public priced out of home ownership increase. I don't expect the upper middle class of politicians will swing the opposite way entirely given they'll likely also hold investment properties but as more and more of living voters fail to afford a home, they'll have to do something.

    Even if the price of housing doesn't deflate, the ability of renters to pay it into the future is questionable. If it was me and I had a bunch of money that I wanted to invest I would just throw it in a low management fee ETF and forget about it, a percentage of your holding will be in land owned by those companies anyway.

  • ContinuousCustomer on 10/01/2023 - 17:54
    +4

    I follow the below rule, got 6 investment properties. I use equity to buy more. Hard to find good tenants but once you do, you stick to them.

    House with big land > house with small land > townhouse > unit > apartment

    I’d never buy a 1 br apartment. It’s a bad investment specially in Melbourne. Suggest buying something larger. Then a few years later, use the equity and buy one more.

    • Cherry12 on 10/01/2023 - 21:49

      Thanks for your advice. Given that you have experience, would you buy a 2 bed unit/apartment in these market conditions? Do you think it's a good time to buy?

    • HardQuiz on 15/01/2023 - 07:16

      House with big land > house with small land > townhouse > unit > apartment

      Add location to the mix?

  • kaleidoscope on 10/01/2023 - 18:07
    +1

    my 2 cents. Get an investment house with least % of that savings. Use the remaining to pay off your mortgage. In few years time you’ll have more savings for next investments where you’ll be mortgage free.

  • cbs78 on 10/01/2023 - 18:54
    +1

    Apartments/unit is all about cashflow and high yield. Consider any capital growth as a bonus.

  • down-under on 10/01/2023 - 19:16
    +1

    As someone who has paid cash for property, I think investing in properties without mortgage performs worse than say, investing into a sp500 index fund.

  • od810 on 10/01/2023 - 20:11
    +1

    Borrow as much as possible, put your cash saving to offset. You have better discount the more you borrow and you have access to more cash for your existing owner occupier loan. There is almost no upside of paying off investment loan with cash.

    And no, don't buy 1 bedroom apartment. You will get almost no capital gain for a very long time. Unless you are in a very high tax bracket (earning 200k+) net rental yield of apartment is worse than fixed term deposit.

    • Cherry12 on 10/01/2023 - 21:52

      Thanks! Good advice.

  • ozaym on 10/01/2023 - 22:58
    +2

    I just want to say freakin well done on saving 300k!

    With regarding buying apartment I would suggest you find a good financial planner, I’ve seen people buy 10 apartment with no expectation of capital gain, pay off 5 using the rent and offload the rest.

    Others have invested in lifestyle properties who have now benefited from the lockdown price hike.

    We have gone the traditional way and bought property with land, I am not certain we are better off in the long term.

    Someone also mentioned Vanguard ETF, probably a good diversify strategy to have some of your saving in more liquidable assets.

    Property is generally recession proof, however not very versatile.

  • DeeTrance on 10/01/2023 - 23:29
    +1

    A property's true worth is the land it sits on, not the building. Say you purchase an apartment on the second level of a building, you are effectively buying a piece of air space.

    Consider a 2 bedroom unit on its own land vs a 2 bedroom apartment in the air. If a natural disaster were to destroy the building, what are you left with in the apartment? A 'piece' of air that you bought.

    The unit on the other hand still has the land, exclusive to you.

    • Other on 10/01/2023 - 23:46
      +1

      Insurance will cover the natural disasters.
      Air rights can be extremely valuable - goto NY city where air rights can be worth much, much more than the land ($20m vs $4m).

      Value of real estate is basically dependent on how easy the banks will lend on it.
      If the majority of banks will lend 80% then there will almost be no difference between owning land or owning an apartment with rights in the big scheme of things.

      Sure I would preference owning land a bit, but not at the expense of the investment.

      • DeeTrance on 11/01/2023 - 00:49
        +3

        That's false.
        We're talking Australia, not N.Y.C.
        And no, a 3 bedroom house on its own piece of land in NYC isn't worth less than a 3 bedroom apartment 40 metres in the air in NYC, if they are the same quality building.

        • Other on 11/01/2023 - 05:30

          I suggest you go compare Brownsville NYC vs West 57th Street NYC…. oh but its the quality!
          No its the area, considering most people gut their apartments in West 57th Street and rebuild.

          Go look at Bower Street Manly - people don't even own that land! And they rent it off the Catholic Church! And build buildings worth millions.
          Or look at Canberra.

          At the end of the day its all meaningless if a bank is prepared to lend 80%.
          Then the building will be worth approximately the same as other buildings in the area - and people will buy it and live in it.

    • Hangryuman on 11/01/2023 - 21:07
      +2

      'A property's true worth is the land it sits on, not the building'

      sure - land appreciates, buildings depreciate [lose value]

      I sold a house that had far greater capital gain than a unit - but I was also paying $9Kpa land tax which I don't pay on a unit - and having sold it I paid a shipload of capital gains tax - let's say about a quarter of the entire growth since purchase.

      Margaret Lomas wrote a bunch of books a decade or so including something like houses might get 3%pa gross rent (before expenses and tax), and 8%pa capital growth - whereas units might get 5%pa rent and 6%pa capital growth - in other words overall similar - the difference being houses could defer tax until CGT on sale, while units gave you higher income while holding, resulting in more annual income tax unless you kept purchasing more properties to keep increasing your tax-deductible loan interest.

      https://onproperty.com.au/best-books-on-property-investment/

      Houses are more work to maintain (enjoy mowing lawns, fixing fences and roofs ?) and you have to pay the entire possibly huge bill to repair or replace stuff, while units you don't have to do that as it's paid for in smaller regular amounts by your strata levies.

      Inner city houses may be unaffordable for most, while outer suburbs units may be cheap, but will they attract good tenants and rents - that's something I would ask multiple agents (don't trust just one) to get a balanced perspective.

      • Cherry12 on 11/01/2023 - 22:01

        Thanks for your input, it's a good comparison.

    • netjock on 12/01/2023 - 09:11

      A property's true worth is the land it sits on

      Partially true.

      Try getting someone to rent an empty piece of land.

      It is only desirable if there is a habitable property people are willing to rent to live in.

      • beyondtool on 12/01/2023 - 10:07
        +1

        Then again there’s plenty of Facebook posts with people begging for a spare spot to park their caravan these days. Caravan parks are expensive. Might be an untapped market!

        • netjock on 12/01/2023 - 11:00

          Any metro area an empty piece of land the council won't let you park a caravan. There goes that idea.

          In country hot spots then yes. Not in the middle of nowhere. If the caravan park business was so good you'd have basically every suburb like sushi sushi franchises.

  • Other on 10/01/2023 - 23:40
    +1

    Everyone has details - is it a house? is it in a gentrified area? is it in the air?
    For the most part as long as its fairly decent area and is not unusual you will be fine. Details are irrelevant over the longer time (thats why Buffet advises buying Index fund)
    Just buy it - you have offset (so can always take money out if you find a better investment), plus all the other benefits:
    - negative gearing
    - asset price inflation
    - tenants helping to pay off the mortgage
    - leverage

    I've never ever heard of anyone complain that they regretted buying a house as a financial asset, except in far out regional towns when its hard to get a tenant.

  • whitepuma on 11/01/2023 - 09:15
    +1

    for a starter it's not bad. My first investment property was a 1 bedroom apartment. Best parts of it are:
    - very low maintenance
    - decent rental yield, especially for an entry level investment, making it much easier to service the loan. When it's your first investment property and you don't have a great salary (this is the situation i was in) it helps tremendously.
    - very easy to get tennants, i have a variety of property investments, i find that my 1 bedders are always easiest and quickest to fill up with minimal fuss

    The worst parts are:
    - The property itself won't go up in value as much compared to a more expensive multi bedroom apartment
    - Not really much you can do to lift the value of the place, besides painting and making sure the interior is in good condition, not much else you can do.

    Notes:
    - Purely from personal experience, i have noticed the turn around rate of tennants in my 1 bedder is anywhere between 12 & 36 months, i'm assuming because as time passes peoples living situation changes and need more space or to relocate. But that being said, it's never been unoccupied for more than a week. 1 time i actually had tennants out 1 day to have new tennants moving in the following day.
    - My specific case was an off the plan unit, i did this because i wanted to depreciate EVERYTHING. If you are doing this just make sure it's with a reputable builder.

    • Hangryuman on 11/01/2023 - 21:11
      +2

      'an off the plan unit, i did this because i wanted to depreciate EVERYTHING'

      off-the-plan units were spruiked by dodgy salespeople as 'tremendous depreciation!' as if that was a wonderful thing

      until the ATO got jack of it and required them to change 'depreciation' to 'loss of value' …

      your new purchase will have 'tremendous loss of value!' - doesn't quite have the same ring to it …

      • whitepuma on 12/01/2023 - 08:16
        +1

        Thats fine, i don't care about the wording of it, i don't care if its "depreciation" or "loss of value", all i care about are the numbers in the end. With that specific property, after factoring in standard market rent rises combined with what i get back from depreciation/loss in value, i was positive geared 2 years into owning the thing, meaning it was then easier for me to purchase my 2nd property shortly after.

      • whitepuma on 12/01/2023 - 08:19

        Also, regarding your terminology concerns, i just pay for a "depreciation schedule", many businesses out there can provide them at a cost. I then just depreciate everything per the depreciation schedule. 100% ATO compliant, whilst making the most out of my investment.

  • usbc activist on 11/01/2023 - 10:57
    +1

    I slap myself everyday in the morning for taking that stupid decision of buying an apartment as IP few years back when property prices were soaring. I cannot foresee how this apartment will make me any money at all. It goes on rent promptly due to location. But thats it. I get some money back as negative gearing but I spend a lot to get that.

    • Cherry12 on 11/01/2023 - 21:39

      Oh, not good to hear. How many years have you had it for? Is the mortgage being paid through the rent? I mean, is it enough?

  • netjock on 11/01/2023 - 15:56
    +1

    Only comment is make sure it is bigger than 40m2 (excl parking space) otherwise you have limited lenders who will lend (CBA / Westpac).

    Try to look for low strata fees. I'd check out strata minutes to see if there is any issues reported (sometimes there is flammable cladding, building structural issues or dodgy strata).

    • Cherry12 on 11/01/2023 - 21:43

      I didn't know about that (40m2). Thanks for the tip!

  • creesy on 11/01/2023 - 20:25

    Everyone's so hung up on preparing for the future and a comfortable life as an elderly person. Put me in the cheapest care home you can find and I'll tell stories all-day of what I did with my youth.

    If I had $300k in savings I'd probably get out and live a little.

    But then again that's why I'm poor and probably always will be.

    • netjock on 12/01/2023 - 09:09
      +1

      Saw on Twitter someone complain they had to put a $450k refundable (when the old person dies) deposit and then 80% of pension plus trying to claw at other available assets.

      Care homes aren't cheap and if there is any sickness going through them neither is it pleasant. You would be lucky to end up in a kind non for profit care home. If you end up in a corporate one you are good as stuffed.

      I bet you other residents also want to tell their stories and you'll end up trying to speak over each other.

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