Don't Make This Short Term Mistake!

Are you a first home buyer considering a one bedroom apartment? Plan to upgrade again in a few years? 

This scenario is a common strategy rooted in the belief that investing in Sydney property is always a winning bet. However, as a numbers geek at heart, I’ve delved into the data to evaluate this strategy critically. Here’s what I found.

The Scenario: Let's consider the case of buying a one-bedroom apartment in Redfern.

Here are the facts:

• Current Median Price: $757,500

• Historical Growth: 21% over the past 5 years

• Current Median Rent: $650 per week

• Historical Rent Increase: 27% over the past 5 years

These are the assumptions:

• Initial Savings: $180,000 (covering a 20% deposit and stamp duty)

• Mortgage Rate: 6%

• High-Interest Saver Rate: 5%

• Minimum Mortgage Repayments

• Property growth and rental growth maintains 21% and 27% respectively over the next five years

Scenario 1: Renting for Five Years

If you decide to rent instead of buying:

• Cash savings: You invest your $180,000

• Interest Earned on Savings: $51,000 (from a high-interest savings account)

• Rent Paid: $191,000 over 5 years

• Net Position After 5 Years: $40,000

Scenario 2: Buying the One-Bedroom Apartment

If you purchase the apartment using your savings:

• Property Value After 5 Years: $918,000 (assuming 21% growth)

• Purchase Costs:

  • Stamp Duty: $28,000

• Ongoing Costs (over 5 Years):

  • Council Rates: $5,000

  • Water Rates: $3,500

  • Strata Fees: $14,000

  • Mortgage Interest: $176,000

  • Principal Repayments: $42,000

• Selling Costs:

  • Sales Agent Commission: $18,000

  • Sales and Marketing Costs: $15,000

  • Bank Loan Payout: $564,000

• Net Position After 5 Years: $52,500

Note: I haven’t assumed any costs for urgent repairs / maintenance e.g. a burst hot water system, new dishwasher, broken air con, or special levies. Any further costs would reduce the net position.

While it seems like you’re $12,500 ahead by owning the property, there’s a crucial detail to consider: your primary goal was to upgrade after five years.

---

The Growth Challenge:

One-bedroom apartments typically experience slower growth compared to larger properties. Over the past five years, two-bedroom houses and three-bedroom apartments in Sydney have grown by around 40%, compared to the 21% growth of one-bedroom apartments. Consequently, the value gained from your one-bedroom apartment might not be enough to cover the cost of upgrading.

Stamp Duty Considerations:

Even if you saved $28,000 on stamp duty as a first-time buyer, upgrading to a larger property would require an additional circa $75,000 in stamp duty.

“So I should never buy a one bedroom apartment?” 

In essence, one-bedroom apartments may not be the best short-term investment if your plan is to upgrade within five years. You’re essentially breaking even after accounting for all the costs and growth limitations. However, if you’re willing to hold onto the property longer and potentially turn it into an investment property, the scenario might look more favourable.

If you do take on this strategy, at a minimum, ensure you buy an apartment you can add value to e.g. renovate the kitchen and/or bathroom. 

As always, it's essential to consider your long-term goals and market conditions. While the numbers provide valuable insights, personal circumstances and market trends will ultimately shape the best decision for you.

I hope you’ve enjoyed geeking out on these numbers as much as I have!

To find out more about using a buyer’s agent, click here.