The Real Price Of Buying An Apartment
It may feel like the right decision if you’re on a tight budget, but is it really the wisest move? Lucia Xiao explores the options.
31 August 2022
If you are currently hunting for a property the main factor you are probably considering is the cost and value for your money. I am sure a lot of us have shown some interest in purchasing an apartment instead of a freehold property simply because of its seemingly cheaper price tag. It may seem like the right decision to go with if you’re on a tight budget, but is it really the lower risk option for your money in the long run?
I recently spoke to someone who has been thinking about property investment and was considering buying a one-bedroom apartment. As a seasoned property investor, the encouragement I gave was not to invest in apartments simply because of unforeseen risks.
There are a few areas in property investment that apartments fall short on when compared with freehold properties and not all of them are known to new investors.
One of the golden ideals with investment properties is financial safety. For investment purposes, apartments are very limited in their capital growth as the value is reliant on rental income as it doesn’t have land or interior space to add value to it. In comparison, the majority of the value of freehold properties is in the land. Nowadays, with inflation hitting everyone where it hurts, potential tenants’ capacity to cover higher rents has reduced dramatically.
The upcoming unitary plan changes have led to more apartments being built around central Auckland, meaning there is a potential to have an oversupply in the area. We’ve already seen it turn into a buyers’ market. For example, there have been $500,000 apartments which have devalued by at least $100,000 within the last few years. So, the value of apartments is highly dependent on market conditions, whereas freehold sites will appreciate as the land becomes more scarce.
Another pitfall lies in the body corporate fees. A body corporate consists of all the legal owners in the building, which gives them the right to have a say on how the building runs its daily routines and, of course, are financially tied to it. Meaning, any maintenance costs have to be split between all the owners, which can turn into hundreds or even thousands of dollars.
In New Zealand the average annual body corp fee is around the $5,000 range. However, we have all heard about apartment buildings becoming leaky and even if your unit is not directly affected you still have to pitch in.
You cannot forget that the shared cost also includes any outdoor shared areas and garden spaces. Worst of all, the banks won’t let you borrow money for repairs, so it has to come from your own cash reserves.
There are also restrictions to renovations or repainting as they have to be approved before work starts. It’s like asking your parents’ permission to hang a poster in your own bedroom. If you have pets, some apartment buildings won’t allow them to live with you. Probably the most annoying issue you might come across is having terrible neighbours. Sharing walls and being in close proximity with others can be a problem if you’re unlucky enough to get noisy ones. For tenants and owners this could make or break your decision to reside in the apartment long-term.
Body Corp Fees
These are just some of the ongoing problems you will come across once you have purchased the apartment, but what about the buying process? Will the banks even lend you the money?
Well, in most cases, yes, but the loan to value ratio is generally lower compared to freestanding homes. Some banks will offer you less than 80 per cent of the purchase price. This is not because of your servicing, but the additional risk of apartments for banks.
The best example is your body corp fee: as the building ages and the body corp increases to maintain upkeep, you could quickly find you can no longer afford to pay this with your mortgage.
Also, even if you have your 20 per cent deposit, banks will require the apartment size to be at least 50m2 . Only a few will take on 40m2 apartments at 80 per cent LVR. This raises the difficulty in lending you the rest of the money, not forgetting that because of this barrier to lending, these apartments tend to go for a much higher price.
In short, if your dream is to use property for financial freedom, saving up and going for freehold homes with a good amount of land will give you the best way forward. To put it simply there are no body corporation fees, you own all the land for potential development, you have way more independence, and it’s easier for the banks to lend against.
So, if you are initially going for an apartment because of its affordability, maybe now you should think about a slightly different strategy.