Should I buy apartment or house for first IP?

Hi, I’m also a newbie so probably best to take my advice with a grain of salt. I haven’t heard that before about buying an apartment or unit first, could they possibly mean that a unit/apartment would likely be cheaper than buying a house so you may have borrowing power remain after the purchase? We bought our PPOR 2.5 years ago and have built solid equity in it for an IP, and have huge borrowing power, so my advice is to consult with a broker or other finance professional rather than rely on the advice you hear.

Personally, I wouldn’t buy an apartment because of the very real risk of oversupply. I’m in Melbourne and we have definitely hit oversupply of apartments in the inner ring. The only way I would consider it would be if it was a larger than the norm apartment in a boutique complex, or it had something special about it. From my office I can see into an apartment building and those shoebox apartments are so depressing. If I was buying a unit/townhouse I would only do so if the property was on it’s own title.

My plan is to buy my first IP this year and it will be a house. My reasons for this include owning land and also that I believe the value of a house in the area I want to buy will rise much faster than a unit would, hopefully allowing me to tap into equity for my next property sooner. Hope this helps!

mddedf wrote:

So in the same area, if i spend less money to purchase a unit, and if the rental income for the house and unit is roughly the same, the ratio for unit is higher, that is what the bank want when it comes to assess the borrowing capacity for the second property. Do you think this is not true?

Yes and no. Yes they are interested in yield but they also know units have the burden of body corporate fees that erode your rent. If you look at the NET yield (rent that is left after paying the bills) you will be surprised how much the bills chew into the rent of a unit.

Hi mddedf,
I have a feeling the “influence our borrowing capacity” line may have been based on a very broad idea that units have higher yields than houses. Jacqui has pretty much summed it up our banks assess serviceability but it goes quite deep and each lender assesses it in their own ways so trying to calculate it yourself, particularly with an online calculator is all but a useless exercise (see a broker).

With that aside and back to your original question then I would always have my money in houses as opposed to units. Y?
Well really it is a simple concept, land increases in value, buildings decrease in value. A unit has very little value add outside of doing a renovation on it once it ages. What this means is that the market is going to basically dictate its value. If the market increases then so will your unit, if the market stays neutral or goes backwards then so will your unit.
If you are a passive investor and your strategy is long term hold then maybe this is not a big deal because ultimately over time as property has proven then eventually the market will tip in your favour, but how long will that be? And do you want to sit by and have your money tied into a property doing nothing for 10 years? You will stump yourself by not being able to draw on equity.

Let’s flip this around though and look at a house. With a house you have multiple strategies to increase your capital growth or income. For manufactured growth you can do a bigger renovation (you will almost always have far greater scope to value add given you also have landscaping). You can choose to subdivide and sell of the back lot or develop the site and add another 1-2 or even 3 properties.
If cashflow is your game then with a house you can start to get creative, put a granny flat on the back, buy a house with 4 rooms and rent it as student accommodation, the list goes on.

Now ofcourse houses are more expensive and likely not as easy to rent out as shiny new unit but the multiple upsides I have listed above I believe far outweigh these small benefits with a unit.
Keep in mind you do not necessarily have to buy in the same suburb. If you are looking at units in Brunswick for say 450k then consider buying a house in Reservoir where you will get something on a bigger block.

Good Luck!