There’s never been a better time to invest in an apartment. No, sorry, there’s never been a worse time to buy and let a unit.
Obviously both points of view can’t be right – or can they? It all depends on which expert you read.
The argument for: apartment prices are low, interest rates are almost at the bottom of the barrel, and negative gearing is still distorting the market in favour of property investment.
What have you got to lose?
Quite a lot, actually, if you don’t play your cards right. Rents are also falling, competition for tenants is increasing and apartment prices don’t look like being pulled out of their nose-dive any time soon.
Even that blight on residential apartment blocks – short term holiday letting – is no longer the licence to print money (and annoy your neighbours) that it once was.
Also, despite what all the spruikers and apologists say, it’s unlikely to stage a significant recovery before overseas tourists are allowed back into the country.
In the long-term absence of overseas tourists, home-grown guests are not going to fill the Airbnbs of Bondi and Docklands, especially when we are quite rightly being encouraged to boost the faltering recoveries of bush-fire and drought-hit country towns.
Until foreign tourist return, and more so overseas students, competition for residential tenants can only increase and that will push rents lower.
Taking a two-bed apartment in Mascot, Sydney, as an example, according to the Domain website, the median price is $835 to buy there and $730 a week to rent. FYI there were at the time of writing about 40 two-bed apartments for sale and nearly 190 for rent in that area.
If you paid the full 20 per cent deposit on an $835k property at median rates of 2.75 percent, your $730 a week rent would leave you with $16 in your pocket, plus all the benefits of negative gearing on costs.
Paying a 5 per cent deposit plus mortgage insurance takes this well into negative gearing territory with your weekly loss being about $100. Either way, if you choose a block that isn’t about to sink into the mud, and is attractive to tenants, that’s not a bad call for the long term.
Meanwhile, the median price for a two-bed unit in Docklands, Melbourne, is $638,000 (110 listed) while the weekly rent is $650 (338 listed). That translates to weekly mortgage payments of $546 on a 20 per cent deposit and $648 on an insured 5 per cent deposit.
Either way, you’d be quids-in provided you could persuade potential renters that your flat was a better choice than the other 337 competing for their attention.
And as for off-the-plan purchases, in NSW the building commissioner has managed to get laws passed that protect new apartment owners from the worst of the worst developers.
Not only that, you could benefit from HomeBuilder grants, new-build stamp duty allowances and first home-buyer’s grants too, to a total of about 10 percent of the property’s value. There will be more on that in this week’s Flat Chat column in the Financial Review.
The question is, are you a gambler or an investor? If you are counting on tourists coming back in droves, snap up that Docklands unit and ride the low-rent wave until they do, safe in the knowledge that in Victoria, pesky strata committees can’t stop you from running short-term rentals.
If you have a longer-term outlook, that unit in Mascot will be easier to sell in five or ten years when memories of the area’s faulty tower have faded.
You could do what you are supposed to do with shares; look for an undervalued unit in an up-and-coming area.
Or buy into the lifestyle to which you aspire and pay more, but less than you would have six months ago, to buy a prime apartment in a well-run building over 10 years old that has been properly maintained and has a sense of community.
Then lock in good tenants for the long-term and invest a little time in making sure the block continues to achieve its full potential.
Then relax. There may be tough times ahead, but your property will be as close to future-proofed as you’ll get.
A version of this column first appeared in the Australian Financial Review.