Is buying an apartment a good investment in New Zealand?

Apartment investing in New Zealand, particularly in Auckland, has become popular over the past few years. Compared with buying a stand-alone house, here are two most common reason people choose apartment as investment property.

Apartments are often more affordable than houses in the main cities, so it can be a great choice if your budget is limited. Say you have $600K as your budget, it would be hard to buy a decent quality of freehold property in Auckland. But you have a greater range of choices when buying an apartment.

Also, from an investor perspective, apartment investing generally offers good cash flow / high rental yield. When it comes to property investment, positive cash flow is the king. Otherwise, you have to tap in more money from your pocket, depends how much you have to contribute. Good cash flow also helps you finance easier as the rental income is part of your total income that helped with the serviceability.

However, there’s no such thing as the perfect property. Apartments may be the choice of some investors in New Zealand, but that doesn’t mean they suit everybody, nor does it mean buying one is a piece of cake. That’s why in this video, we’d share four downsides of buying an apartment as an investment, so that you can weigh up the pros and cons and make informed decision.

Apartment vs house investment: 4 pitfalls of buying an apartment as an investment property

Video Timeline:

1. Extra costs: Body corporate fees - 01:45

2. Limited capital growth - 03:13

3. Watch out for the leaky apartment building - 04:28

4. Home loan restrictions for apartment - 05:28

1. Extra costs: Body corporate fees

One of the major considerations to factor in will be the body corporate fees. Body corporate fees vary in price, correlated with the total body corporate fees for the whole apartment building and the size of the apartment.

Body corporate fees aim to share the cost of the common area such as lifts and landscaping. The more facilities the apartment building have, the higher the body corporate amount for the whole building. Then if you have a large size of the apartment, you have to pay more body corporate fees compared to a smaller apartment unit in the same building.

In some cases, body corporate fees can be quite high, particularly for old apartment building because some certain amount of money is required to maintain the building, resulting in high total body corporate fees.

The body corporate fees vary from $3,000 per year to around $10k, which might be significant. So, include these fees in your calculations when you work out the net yield.

2. Limited capital growth

As the ownership of an apartment is not freehold, the capital growth is quite limited. It is not unreasonable to expect capital gains from good quality apartment, but the possibility of accumulating capital gain is far less than houses with land.

The price of the apartment is driven by its supply and demand, and it also fluctuates amongst property cycle you’re in.

Also, the Auckland Unitary Plan has allowed developments of higher density. So it's common to see new apartments and new terraced houses being built in Auckland, particularly in Auckland Central right now. This means potentially there will be more supply than the demand. Therefore, capital growth might be subdued.

3. Watch out for the leaky apartment building

If the apartment has a leaky issue, no matter it happens on your own unit, other parts of the apartment building, or even the common area like carpark, then you have to pay the bill as well. If a new leaky issue detected, then banks will get notified and as a result, they will no longer take the apartment as security.

Plus, banks will not lend you any money to repair the leaker, so you need to stump up the whole cost.

4. Home loan restrictions for apartment

Comparatively low at LVR

When going through the slump property cycle where the property dropped in value, or experiencing economic downturn like the current COVID-19 environment, banks tighten up their lending policies and take a conservative stance on apartment mortgage. To reduce the potential risk, banks have recently reduced the LVR for apartments purchase to 65%, despite the normal LVR is 70% - 80%, depending on the purpose of the property purchase.

The minimum size of the apartment

If you’re looking to borrow for an apartment, most banks do have requirements on its minimum size. If the apartment is below their preferred size, the banks may not fund it at all or only lend 50% on the value.

What size do apartments need to be for a mortgage?

In general, if the internal size is smaller than 40sqm, then lending against these apartments becomes more of a challenge. Some banks allow as low as 40sqm (excluding a balcony size) while other banks prefer them to be at least 50sqm. Plus, some banks measure how much they will lend based on a combination of the size and bedroom number. For example, a one-bedroom apartment needs to have at least 45sqm, and a two-bedroom of 55sqm is desirable.

Also, from the perspective of selling an apartment, if your apartment is too small, the bank might not fund at all. Consequently, the apartments might only be attractive to cash buyers or people who have equity on their other properties, then you might sell your apartment below its market price.

Prosperity Finance – here to help

In a housing market that is highly competitive, it’s important to consider all available options and weigh up the pros and cons. Apartments are not for everyone but if buying an apartment is a good way for you to invest, talk to your mortgage advisor first to get an idea of what the banks think.

Prosperity Finance are mortgage broker in New Zealand. If you’d like some home loan help with buying an apartment, we’re here to help. Call us at 09 930 8999 for a no-obligation chat with our adviser.

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Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.