Are 1 bedroom apartments a good investment?
Real estate has always been a popular way to build wealth, and after being looked down upon for a long time, one bedroom apartments are beginning to catch the eye of investors – but are one bedroom apartments actually a good investment?Â
Well, they are starting to make a comeback in property investment portfolios for a reason.
According to recent industry data, one bedroom apartments have shown a higher average rental yield compared to larger properties, often reaching annual yields of 5-8% in the major cities.Â
However, while the affordability and profitability of one bedroom apartments can be enticing, you need to understand that they come with their own unique risks and rewards. The same things that make one bedroom apartments appealing vs two bedroom apartments, can also present you with challenges.
In our latest podcast episode, we spoke to Ronnie Breck, who went from having $5,000 in savings to a multi-million dollar property empire in just two years! His first investment property was a one bedroom apartment that he bought in Cairns that went against the advice of a financial planner but turned out to be a very good investment indeed.
Listen to the full episode to find out how making this controversial move got the ball rolling on an investment portfolio that now contains five investment properties across three states!Â
Pros of Investing in One Bedroom Apartments
High Rental Yields
Rental yield is a crucial metric as it indicates the annual rental income as a percentage of the property’s purchase price. One bedroom apartments typically offer higher rental yields compared to larger properties. This is because one bedroom flats are in high demand among singles, young professionals, and couples who prioritise affordability and convenience over space.
Ronnie’s Cairns investment discussed in the podcast, is a prime example of the benefits of investing in one bedroom apartments. The property was purchased for $139,000, and within the first year, it generated an annual rental income of $17,000. This resulted in a rental yield of 12.5%, which is significantly higher than the average yield for larger properties in the same area.Â
This high yield was achieved due to the property’s strategic location near key amenities and employment hubs, making it a hot property for renters. One bedroom apartments can be a good investment, especially when the property is well-located and maintained.
Lower Purchase Prices
Another significant benefit of investing in one bedroom apartments is that they obviously cost a lot less than properties with two or more bedrooms. This makes them more affordable and accessible for investors, particularly if you are new to real estate investing.
For first-time investors, the affordability of one bedroom apartments vs two bedroom apartments or stand alone houses can be an absolute game changer. These small properties are not only easier to finance, but they also come with lower maintenance costs, reducing the overall risk.
Also strata or body corp fees tend to be less than two or three bedroom apartments because of their smaller size within the building.
One bedroom flats are good investments as they can get you into the investment market earlier so you don’t miss out on future capital growth.
High Rental Demand
The demand for one bedroom units often translates to lower vacancy rates, giving you a steady rental income stream and making them good investments.
There are many reasons people are choosing one bedroom units and a big one is divorce and relationship breakdowns. There are also more couples than ever choosing not to have children or leaving it much later in life. This means there are singles and childless couples that have a preference for smaller, manageable spaces and are looking to snap up a one bedroom apartment.
The low purchase price of Ronnie’s Cairns investment enabled him to enter the market with less capital, while still achieving a high rental yield from the market demand. He then used the equity of this first property to buy his second investment property, kick starting his portfolio and wealth growth.Â
Cons of Buying One Bedroom Apartments as Investments
Investing in one bedroom apartments does carry some smaller risks that you need to be aware of. Knowing these risks can help you make more informed investment decisions and develop strategies to help mitigate them.
Market Volatility
One bedroom apartments can be more susceptible to market fluctuations compared to larger properties. Due to their appeal to a specific (yet growing) demographic—singles, young professionals, and childless couples —demand for these units can be highly sensitive to economic changes.Â
During economic downturns one bedroom apartment renters might choose to move in with family or seek shared housing to cut costs, leading to increased vacancies. Also, local market conditions, such as an oversupply of small apartments, can intensify this risk of vacancy, making it crucial for you to thoroughly analyse the local market before investing in a one bedroom apartment.
Limited Appreciation Potential
One bedroom apartments can have a slower appreciation rate vs two bedroom apartments. Typically, smaller units do not offer the same level of long-term value growth as multi-bedroom properties.Â
While smaller properties can generate higher rental yields, their capital growth can lag behind that of larger homes. This is especially true for stand alone houses, as the land value makes up a greater portion of the value of that investment. When buying a one bedroom apartment, you do not own the land.
This slower appreciation rate can limit the potential for high profit when you decide to sell, which means you need to weigh up immediate rental returns against long-term value growth.
Maintenance and Upkeep
Smaller units are prone to more concentrated wear and tear due to their compact living spaces. Frequent tenant turnover, which can be common with one bedroom apartments vs two bedroom apartments, does exacerbate this issue. Each new tenant can require cleaning, repainting, and minor repairs, which can add up over time.Â
This higher frequency of maintenance can be a significant factor to consider, especially if you own and manage multiple properties.
Resale Challenges
If you ever needed to sell your one bedroom investment property, it could come with some challenges. One bedroom units primarily attract single people and young professionals, whereas larger properties appeal to families, couples, and a broader range of investors.Â
The buyer pool for these units is typically smaller compared to larger properties, which can lead to prolonged selling periods and difficulty achieving desired sale prices.Â
Investing in a One Bedroom Apartment
Investing in one bedroom apartments comes with a unique set of benefits and risks. One bedroom apartments can be a good investment as they often yield high rental returns and have lower purchase prices, making them accessible to first-time investors and can allow you to get the ball rolling on a diverse investment portfolio.
However, they are also more susceptible to market instability, tend to appreciate at a slower rate, have higher maintenance costs, and can be challenging to resell due to a limited buyer pool.Â
Balancing the high rental yields with the potential risks means you need a clear understanding of your long-term investment goals. You should be prepared for the challenges these properties can bring and develop strategies to mitigate risks, such as diversifying your property portfolio or focusing on high-demand areas like major cities.
Chatting with our specialist investment brokers can provide you with valuable insights and personalised advice, ensuring a more secure and profitable investment journey.Â