Land or apartment, this is the question that always surrounds the real estate investment scene or home buyers. It is also the most common question. Real estate usually has its own land at the front entrance, while an apartment building does not have land for the homeowner. Some say that the apartment is inconvenient because it is high and far from the parking lot. Some argue that the grounds are not as secure as the apartments because they are easier to access. Some might also say that the maintenance of the apartment is higher. There are some truths in these statements, but these are not all the truths. It depends on what you want in return. Let’s look at them one by one from the perspective of the real estate investor.
Note: In Malaysian terms, apartment and condo are usually high-rise with more than 10 stories high, while landlord house, as implied, has land and is usually between 1 and 3 stories high.
land freedom – Land ownership is generally associated with ownership of land and the freedom to do what you want at any time on your own land. However, as an investor, through capital appreciation or rental income, do you need to consider whether these factors might contribute to your rate of return? This is probably best explained in the third point.
Not an ideal rental property – The property is always higher in price and monthly fee. A decent townhouse in a good area can cost up to half a million; Take Bandar Puteri (a municipality name in Malaysia) as an example. The monthly fee could be as high as RM2.5K. To generate positive cash flow, you need to rent at least in RM3K. You probably don’t think this is too much if the tenant has a family and children and needs more living space. But do you think they would rather rent the place than buy it on their own? Again, a small family will opt for a smaller living space, such as a 3-bedroom apartment or condo, which only costs them around RM1.5k per month.
Note: RM stands for Ringgit Malaysia, average Malaysian currency.
Real estate tends to appreciate more in the long run – This is not new, if your grandparents had owned a piece of land since the 60s, you would have seen the price go up a few hundred times from the time they bought it. Like land ownership, as land becomes more scarce and the population grows, the price of land will also increase. The faster the population grows, the faster the appreciation. In contrast, the apartment or condo unit is not prized as much as land holdings simply because the “land” is divided into many smaller parcels. The appreciation, if any, simply extends to all owners of the units. Another factor probably has to do with the cost of reusing the land. There are more costs involved in reusing land with built apartments compared to owning land that is typically 2-3 stories high.
Since real estate has always been associated with higher capital appreciation, it is also very common for it to be used in investing. For example, the terrace house in Bandar Puteri (name of township) was sold at RM350K+ 4 years ago, the pre-constructed one has been valued at almost RM600k recently. Stripping out the other cost, we see a whopping 72% capital appreciation. Costs are anything involved from the time you bought the property until it is sold, including the full installment paid plus interest, the cost of rectification not covered by the developer, furnishing and improvement, legal fees, intermediary charges, other processing fee, etc. .
Low cost of entry for apartment compared to land ownership – It is easier for people to make decisions if the cost of entry is low. For rental property, the tenant will typically need to provide 1 month’s rent deposit, 1 month’s rent in advance, and 3 months’ utility deposit. If the cost of renting an apartment is RM1.5k, then the initial cost to be paid by the tenant is around RM1.5K x 2 + 750 (let’s say 3 months utility deposit is roughly equal to half a month’s rent ) = RM3.75K. However, for land property, the tenant should come up with around RM3K x 2 + 1.5k (Let’s say 3 months utility deposit is about half a month’s rent) = RM 7.5K as entry fee initial. In this case, the initial entry cost of an apartment is only half the landing price.
Visible maintenance cost for apartment – Generally, the cost of maintaining the apartment is proportional to the size of the unit. The larger the apartment unit, the higher the cost of maintenance. Depending on the variety of facilities provided and the quality, the maintenance cost per square foot is usually around 15 to 20 cents, which is RM150 to RM200 for a 1000 square foot unit. The property owner does not pay the cost of maintenance, but must pay for any required exterior maintenance, such as painting, roof repair, ductwork, lawn mowing, and miscellaneous efforts to keep the grounds in proper condition. However, with due diligence, a piece of land can be much less upkeep than apartments.
security problem – one of the reasons people like apartments or condos is for security. For a very basic apartment there are at least two levels of security system; one is the fencing of the apartment complex with electronic gate and security post and another is the forced security entrance to the elevator area. Since the apartment consists of many units in a building block, it makes it more difficult for targeted attacks or robberies. If the apartment is a high-rise building, occasional break-ins will also be quite rare. On the contrary, land owners need to invest a lot of money in a home security system, such as automatic gate, alarm system, window or door grill, etc. Even fully equipped lots are still at risk of increased chance of casual/directed break-ins and robberies. However, apartment security isn’t foolproof either, one example being security staff not being scrutinizing enough or being too lenient with strange visitors.
Property life expectancy – A well-constructed land property can last for twenty to thirty years or more without a doubt, however, due to Malaysia’s young age and low-rise high-rise life experience, no one can say exactly how long it can last an apartment or condo. In common sense, the value of the apartment building will start to depreciate only after a certain age, this usually happens when the building is deemed unsafe to live in.
