Investment in a house or apartment can be a sound investment. However, the final return is influenced by a number of factors outside the investor’s control including:
- Value – it will only be worth what a similar property in a similar street is worth – set by the market which is influenced by interest rates and demand.
- Occupancy risk if there is an oversupply of properties available to rent.
However, a multiple dwelling such as a:
- Block of flats,
- Boarding house
- Student Accommodation
is valued on investment yield so the more the investor does to improve the return the higher the value.
Having multiple tenants reduces occupancy risk e.g., if there are 6 flats and 2 are vacant there is still income from the other 4.
This is a summary of some key factors
|
Factor |
House / Single Unit |
Multiple Dwelling |
|
Add value above market |
Low |
High |
|
Rent risk |
High |
Low |
|
Yield |
Low |
Medium /High |
|
Sweat equity |
Yes |
Yes |
|
Debt serviceability |
Low |
Medium /High |
When I first invested in multiple dwellings I had concerns about the long-term viability – everybody I knew aspired to own their own home. Then an experienced investor told me “The poor will always be with us.” I am sad to say that he was right. Governments, charities, and churches have failed to solve the problem. Affordable housing will always be needed. In Australia rent assistance is given to people on benefits who are renting.
The first thing that most people on benefits do, when they receive their fortnightly pension or allowance is prepay two weeks rent. In my experience they are also the least demanding tenants and appreciate what building owners do to improve their living conditions. Of course, there will be exceptions but all they do is prove the rule.
We must decide whether we want to be a passive (set ant forget) or active (hands on) investor. Either way, regarding tenants as customers or clients in a service business, almost guarantees that they will stay with us long-term and optimise our returns.
Student accommodation obviously suffered during the pandemic and there will be more about this in a subsequent blog.
Next week I will have a factual case study of my first investment in a multiple-dwelling property.