7 Reasons why we think you shouldn’t buy an apartment in 2020

Ok, here at Property Lab we aren’t afraid to speak up to let you know our thoughts. We have been seeing a fair bit of advertising on Facebook and Instagram for discounted deposits if you pre-purchase an apartment.  In theory this looks pretty appealing.  Who wouldn’t want a 5% discount on a 500K property.  That's 25K of “instant equity”.

If you have been a follower of Property Investment for a while, you will know that apartments are generally offered up as a solid investment.  And for the right portfolio at the right time they are awesome.

But here in 2020, we feel that while there are some incredible opportunities to be had in property investment. Apartments are not the right for most people.

HERE ARE OUR TOP 7 REASONS WHY.


Over Saturation

59% of all apartments in Australia are rentals.  Currently there are about 70,000 apartments in central Melbourne that are built.  This means that there are about 45,000 rental apartments in a 10Km radius of Melbourne.  As we have seen, Covid-19 is changing the way we live, and quite frankly, we aren’t sure if people want to continue to live in high density apartments and in close proximity to others.

 

Decreased demand

What can we say, we all know that there is a high dependency on international students and immigrants that live in apartments.  We have seen many people return to their home countries.  With Covid-19 still being well in play and borders being closed, there isn’t the same pool of tenants.  Only 40% of apartment dwellers are Australian, with around 20% of apartment dwellers coming from Asia or India on some sort of non-permanent visa.

We also predict that young people will either move home to their parents or they will congregate in shared housing. Most apartment dwellers are between the ages of 19-25.  THe prime age to decide to save money by living with mum and dad or their friends.

 

Distressed owners bailing

This is huge. Imagine your apartment has been occupied by international students for the past 2 years.  Now the students have gone back home due to Covid-19.  Your building was a go-to student apartment. Owners are dropping their rent to get at least some of their bills covered.  Rents were $450 a week, now, if you can get a tenant, apartments just like yours are being let for $300 a week.

How long can you go with no rent or a massive rent decrease? 3 months, 6 months? What if your neighbours are forgein investors and just want out of the market and are ok to firesell? The close proximity of apartments and the high dependence of overseas tenants and investors mean that there is a huge risk for Aussie owners.

High body corporates

Apartments Body Corporate fees are tax deductible.  So they often are passed over when discussing apartment investments, because the more a property costs you, the larger the tax deduction. It is very easy to justify a 5K fee, when you are saving 15K a year on tax overall.  But what people often forget is that you need to be making great money, to get great tax deductions. So when we think about the ease of a body corporate covering the external maintenance and the tax deductions, we rarely think about the actual 5K bill you will have to pay each year.

Very few houses will cost you 5K a year on external maintenance.  So what is better, 5K to body corporate, or 5K off your mortgage?

 

Poor capital growth

When we see a drop in the apartment market, a few desperate fire sales can affect an entire building, or suburb. Valuers will look at recent sales figures to work out the value. We have seen examples already of buildings in Melbourne that sold off the plan at 500K but quickly devalued to 350K, through to the people targeting to purchase these apartments as investments not really being financially set up to maintain their mortgages if the apartment is left empty for a sizable about of time and the body corporate fees increasing.  The financial pressure of a bad investment set up can quickly devalue an entire building.  So we have seen people stuck in bad investments for years, because they own way more on their apartment that what they can sell for.

So the idea of instant equity doesn’t work, if there is a mass devaluation of a market, and we are predicting the apartment market will slump over the next 6 months, by 10%. ( we know, if you hold long enough you will make money. But we want you to flourish and be able to utilitise your investments quickly, not wait 5-8years to recover from the 2020slump.

 

Less versatile

Buying an apartment can seem like a logical purchase. 1 bedroom, close to all the big city action. $450 a week rent.  But when we see large increases in unemployment, trying to find one person or a couple to cover the rent, becomes a lot harder. Inevitably, rental prices will reduce to help fill the one bedroom to make it more affordable.  With a 2 or 3 bedroom house, you can rent out to friends, a family, or a couple. There are a lot more options available, which in turn means the rental prices are more affordable and less likely to plummet.

50% of all apartments are occupied by a sole tenant.

 

Changing work trends.

One of the benefits of the Covid-19 situation is that more people are working from home. This means that city based living to reduce commuting time, will no longer apply to many.  Zoom calls and Slack channels have become the norm, with a lot of employers understand the benefits of their staff working remotely.  We predict that this new work/ life balance will see lots of young couples and families moving out to newer suburbs, where they can take advantage of lower rents and lower entry points to the housing market.

So there you go. A few thoughts about how we feel about investing in the apartment market now.  This doesn’t mean we won’t change our minds in the future. Property investment is about being fluid, watching the market, understanding trends and knowing what people need. Apartments are perfect for some people, and don’t get me wrong, given the chance, there are plenty of cities in the world where I’d jump at the chance to invest in an apartment. Just for this time, in Australia, I think first time investors can do better. A lot better!!

Give us a call if you want to chat about the opportunities in the market. 2020 is full of them if you know where to look!

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