Take a quick glance at the Melbourne skyline and you’ll notice it’s dotted with towering apartment buildings.
It’s easy to get drawn into the idea that investing in these high-rise complexes is the ticket to boosting your property portfolio.
However, amongst all the hype and initial affordability of investing in an apartment in Melbourne, it’s important to be aware of the potential risks involved.
Negative equity, cramped floor plans, sky-high body corporate fees, sluggish capital growth, and pitiful rental yields; all of these are issues that can take a serious toll on your bottom line when it’s time to sell, and most of them are quite difficult to fix.
At Property Analytics, we know that long-term wealth is best created through asset appreciation, not through positive cash flow. Our best advice for clients is to purchase a property that will historically grow most in value over time.
It All Starts With Your Objective: Positive Cash Flow vs. Negative Gearing
Some people invest in property to increase their monthly income, whereas others invest in property to build long-term wealth. One group looks for ‘positive cash flow properties’, the other for ‘negative geared properties’.
Put bluntly, you’re making a huge mistake if you buy an investment property for positive cash flow (where rental income is greater than mortgage payments and expenses). Instead, buy an investment property that is likely to grow in value – you’ll be far better off for it.
I advocate for investing in houses over apartments for a number of reasons. The main one being that houses have the potential for value growth, leading to greater returns in the long run. This means that even though you might be sacrificing a bit of cash flow now, you’re setting yourself up for the future.
Want more insider advice from expert buyer’s advocates in Melbourne? Dive deeper into capital growth vs. rental yield here.
The Upsides and Downsides of Investing in Apartments
Apartments in Melbourne City and surrounding areas have been gaining traction among property investors, and it’s easy to see why. Melbourne has been ranked as one of the world’s most liveable cities, making it an attractive destination for both local and international buyers.
An apartment could be a great buy if you’re solely focused on a rental yield strategy. With the right features and the right location, you could attract a steady supply of high-paying renters.
However, if you’re placing capital growth first, steer clear of investment properties in the form of apartments. Oversupply and lack of demand result in less property price growth, restricted finance options, and risky business for investors prioritising capital growth over rental yield.
Successful property investors generally don’t favour apartments, for the following reasons:
1. Oversupply and Limited Demand:
Melbourne’s apartment market has been plagued by oversupply, which has resulted in reduced property price growth. Essentially, the abundance of available apartments has created a competitive market where demand is insufficient to match supply. As a consequence, apartment values may stagnate or even decline.
2. Restricted Finance Options:
Lenders often perceive apartments as riskier investments due to potential issues with quality, oversupply, and market volatility. Securing finance for apartment purchases can be more challenging compared to houses. Limited financing options, therefore, could be a major roadblock.
3. Higher Risk for Investors:
Apartments generally have higher ongoing expenses such as body corporate fees, maintenance costs, and sinking fund contributions. If this is the case, additional expenses can eat into your rental income and erode your overall returns. The potential for market fluctuations and changes in apartment regulations adds an extra element of uncertainty and risk.
The Case for Investing in Houses
So, what does this mean for you as a smart, future-focused property investor? It means that apartments can enter high-risk territory if you’re pursuing a capital growth strategy. Instead, consider investing in houses. Let’s explore why.
Houses as a Growth-Oriented Investment:
While houses may not offer positive cash flow initially, their long-term potential for capital appreciation is significantly higher compared to apartments. Houses are in higher demand due to their larger living spaces, land component, and potential for expansion or renovation. Investing in a house with good growth prospects can lead to substantial wealth creation over time.
Stronger Asset Value:
Houses typically hold their value better than apartments, especially in desirable locations with limited land availability. Land appreciates in value, while buildings tend to depreciate. By investing in a house, you are acquiring not only a dwelling but also a valuable asset with the potential for long-term value growth.
More Flexibility and Control:
Overall, houses offer greater flexibility in terms of rental arrangements. You can choose between long-term leasing or short-term rentals like Airbnb, allowing you to adapt to market conditions and optimise rental income. As an added bonus, as the property owner, you have more control over renovations, modifications, and maintenance, enhancing the property’s value and appeal.
Mitigating Risks in House Investments: Research and Due Diligence
Investing in houses requires a long-term perspective. Property values tend to appreciate over time, and by holding onto your investment property, you can benefit from capital growth and the potential to generate substantial returns upon resale.
Consider factors such as location, proximity to amenities, infrastructure developments, and the potential for future growth. Conducting due diligence on the property’s condition, legalities, and rental demand will also help to mitigate the risks and ultimately, make for a sound investment.
Maximise Your Return: Tips for Investing in Melbourne Houses
Always prioritise properties in desirable locations that are close to public transport, employment hubs, and lifestyle amenities. This will help ensure consistent demand and strong rental yields.
2. Research the developer:
Investigate the track record of the developer and the quality of their previous projects. This could be crucial in determining the long-term appeal and value of your investment.
3. Get to know the area:
Before purchasing a house, research the local rental market to ensure you’re investing in an area with strong demand and potential for growth.
Always remember to be as analytical and objective as you can when considering your next investment property. Here’s some advice from our buyer’s advocates in Melbourne.
Determine Your Preferences: Finding the Perfect Melbourne Property Investment
What features should you look for in a Melbourne house? There are several factors to consider to ensure you make the right choice. First, think about the size of the house you’d like to invest in. Are you after a comfortable two bedder or a spacious double-storey townhouse?
Consider the needs of your potential tenants and how much rental income you’d like to generate. By having a clear understanding of your preferences, you can narrow down your search and find a house that meets your investment goals.
Let’s take a look at several important factors including: location; size, layout, and design; building amenities; affordability; and finally the future of the suburb.
Location, Size and Layout
Location is vital to the success of your investment and can be divided into two trains of thought. Firstly, look for properties close to employment hubs, schools, and public transport, ensuring a steady demand from potential tenants. Secondly, focus on houses that offer unique features or amenities that set them apart from the competition. This could include a balcony with a stunning view, or a backyard big enough for an entertainment deck.
When exploring your options, remember to think about important factors such as size, storage space, bedroom and bathroom layout, living area, and how much natural light you’ll get.
Affordability and Budget Constraints
The current housing market in Melbourne offers a range of prices for various types of houses in different locations. By conducting thorough research and working with a real estate agent, you can find a house that fits your budget and investment goals.
As with any investment, it’s essential to stay within your budget while still identifying properties with potential for growth and strong rental returns. Get to know the current Melbourne housing market and familiarise yourself with the price ranges for different types of houses in various locations. Don’t be afraid to explore up-and-coming suburbs, as they may offer more affordable options with the potential for significant growth. Keep in mind that while affordability is important, it should not come at the cost of quality or location.
Future of the Suburb
Another consideration is the future of the suburb itself. You may want to consult with a real estate agent or local council about planned developments in the immediate vicinity of the house you plan to purchase. For example, a large planned development next door to the building where you plan to buy could block out your view, and potentially lower your resale value if many more similar properties end up on the market.
On the other hand, an infrastructure project like shops or a cultural precinct could make the lifestyle in a particular suburb more appealing, and potentially improve the resale value of your house.
For the best advice on investment properties, development projects, and market insights, get in touch with the seasoned experts at Property Analytics.
Do Houses Appreciate in Value in Melbourne?
Historically, houses in Melbourne have experienced steady capital growth compared to apartments. However, the rate of appreciation depends on a variety of factors, including location, market conditions, and individual property attributes. By carefully considering these factors and making well-informed decisions, it’s possible to find house investments in Melbourne with strong growth prospects. Remember to weigh the potential rewards against the inherent risks to make the best choice for your investment portfolio.
Take it from the preferred buyer’s advocates in Melbourne. You can learn more about our property dos and don’ts here:
What are Melbourne’s Most Liveable Suburbs on the Real Estate Market?
To most, a suburb’s liveability is a high priority. You may seek out areas that have the best to offer in terms of amenities and lifestyle. According to RMIT’s 2022 Social Infrastructure Index – which rates suburbs according to factors like access to services like health, education and community centres as well as access to sport and recreation – the top ten most livable suburbs in the Greater Melbourne area are:
- North Melbourne
- South Melbourne
- Carlton North
- Fitzroy North
To chat more about the growth potential of Melbourne’s most liveable suburbs, get in touch with the number one buyers advocate in Melbourne: Property Analytics.
The Better Bet: Houses Over Apartments
When it comes down to the crunch, short-term gain often pales in comparison to long-term wealth accumulation.
Investing in Melbourne apartments for positive cash flow can be a risky venture due to oversupply, limited demand, and financing challenges.
On the other hand, houses provide greater potential for long-term wealth creation through capital appreciation. While sacrificing immediate positive cash flow may be necessary, the growth-oriented nature of houses makes them a more favourable choice for property investors seeking sustainable returns.
Yes, investing in a house generally means that the rent won’t cover the mortgage (i.e. you’ll have to tip in your own money each week). But, if you’re able to sacrifice a bit of cash flow, you’d be far better off in the long-term.
And, of course, always enlist the help of a knowledgeable buyer’s advocate in Melbourne like Property Analytics.
Your Trusted Local Property Development Consultants in Melbourne
Looking for expert guidance in buying a property? Property Analytics is here to help. As reputable buyer’s advocates and property development consultants in Melbourne, we offer our expertise in various suburbs, including Templestowe Lower, Bulleen, Fitzroy, and Ivanhoe. Whether you’re searching for a dream home or an investment opportunity, our dedicated team of buyer’s advocates in Melbourne will assist you every step of the way.