Before answering the above question, I always impose this counter-question – “Do you have sufficient funds available which can be used as a deposit to buy either of them right now?” If I detect a slight moment of hesitation in answering my counter-question, I often keep the conversation relatively short because talking about buying an investment property without having a deposit is like trying to build a castle on a block of sand – its mere attempt is not just counter-productive itself but make one unconsciously drift away from a realistic pragmatist to a idealistic fool.
Let’s assume that you are ready to buy an investment property. You have sufficient cash reserve and you have a secure job which gives you a good cash flow. Otherwise there is no point of reading beyond this paragraph. Let’s talk about buying an apartment.
I bought my first apartment in April 2007. It is a 1 bedroom apartment without a car space, and is located in the heart of Brisbane CBD. (Ignoring that the housing price in Brisbane has not been great for the past many years) It initially sounded like a good investment. However, there is one thing that I always find very distasteful – a hefty strata management fee that is payable by the owner, not by the tenant. (Ignoring that the strata management can be claimed for tax deductions) Just the idea of bearing the cost of $1,500 per quarter does seem cumbersome as I could make a better use of $6,000 per annum. I also recall seeing a sudden leap in the strata management fee because of the floods in Brisbane and it caused a few big dents in my cash flow planner.
Let’s talk about buying a house. Honestly I cannot say too much about buying house because all of my investment properties are apartments but I could justify my position by saying this – my risk appetite was ‘to minimize maintenance costs’. This is my view – a young couple without any child and both of them have a full-time job would prefer a new, clean apartment which is close to public transport and amenities. A mid-aged couple with two or more children and one has a full-time job would prefer a house because they require more living space. Now as myself being a father of 3 children, I appreciate how destructive they can be. Walls and carpets are tainted with unknown substances and they are impossible to be removed. Every electrical device in the house will be stress-tested without mercy and anything fail to resist the test will break eventually. In other words, to me personally at least, ‘children’ are one of the high risk variables that I’d prefer to avoid as a landlord.
I can sense what you are thinking at the moment – Isn’t the strata management fee for an apartment and the maintenance cost for a house essentially the same? Probably not because the strata management fee is known/predictable/controllable (to a degree if you go to strata meetings often) but the maintenance cost is unknown/unpredictable/uncontrollable (I do not know about you but I cannot effectively control my children). I am not sure of your risk profile but remember this – different types of properties attract different types of tenants.
If you want to attract a young couple without a child and both working full-time, my suggestion is to buy a new/clean apartment. Assuming your wallet won’t bleed much due to expensive strata management fees, then you will be fine but don’t forget to take out a landlord insurance because even a young just-got-happily-married couple can be quite destructive time to time as they could express their anger in more of violent fashion.
If you do not mind a mid-aged couple with young children, my suggestion is to buy a well-maintained house. Assuming that you can manage endless repair requests from your agent or your tenant may cause insomnia, having a good landlord insurance may help you sleep well.