Looking to buy a home ? There is no debate on the fact that apartments are more affordable even as many buyers vie for villas. However, while the choice on the type of home is probably decided by your budget and your preferences, here are a few factors you should consider when making the choice.
Where apartments save costs
If we look at the options for a home, apartments in large communities are at one end and independent bungalows are at the other end of the spectrum for factors such as privacy, facilities and personalization. Flats in smaller communities and villas in gated communities may fall somewhere in the middle of this.
For a given sq ft of living space, apartments tend to be cheaper in cities, compared to most other choices. The reason for the lower price is simple – land cost. Apartments are usually high-rise developments and tend to maximize floor space index (FSI). Land accounts for the biggest cost in urban areas – 2-10x per sq ft to that of material and labour expenses. And paying for lesser share of land therefore brings down the price of each apartment.
The second reason why apartments beat bunglows and villas in cost is due to lower construction expenses. In a large project, you can get economies of scale – for example when buying material in bulk and engaging labour on contract. Smaller developments or individual home builders may not get this bargaining power, pushing up price.
What you continue to spend over the life of the home also matters.. For example, if you require 24/7 security, backup power and a whole host of services, you may pay more in an individual home versus an apartment. This is because the cost is shared in an apartment or villa community while you have to pay it entirely in an independent home.
Where independent homes score
The cost advantage of apartments may sometimes be offset by higher finance cost in large projects. They may face long delays in completion due to various complexities and lock-up capital. Also, in smaller towns and in peri-urban areas, apartments may be priced comparable to that of individual homes, especially if the project offers a lot of facilities.
A single home can be lighter on the pocket compared to shared communities when you have to pay fixed maintenance costs, whether or not you use the services. Another example is variable costs such as for water. Often resident welfare associations may charge based on sq ft area rather than number of people in an apartment. You could end up paying more than your usage or when you keep it locked.
As a home is a big-ticket investment, it helps to consider not just the costs but also the risk and return aspects of the different choices. In real estate, land is the asset that appreciates while building depreciates with time. So, the type of property with the most land assigned to you will be a better investment, all things being equal. This is particularly true when the building becomes old and needs to be reconstructed. The resale value will be entirely based on the land value.
That said, land price appreciation is very location dependent. It is possible that a smaller land share in a good neighborhood which continues to develop offers higher returns than a larger plot of land in a far-off place which does not see growth. This needs to be factored in your decision and you must not be overly swayed by land size alone.
Rental returns – which are quite low for nearly any residential property - may be lower for independent homes versus apartments. One reason is the desire for tenants to have more standard amenities such as security and access to facilities such as swimming pool. Maintenance and upkeep costs may also be higher for the owner, further reducing rental yields.
Lack of liquidity is one key risk factor in property investments and you must factor this in your choice. An apartment has a wider buyer base compared to villas or independent homes. One reason is the lower price, especially in cities where flats may be the only affordable option. But many home buyers prefer a flat for other reasons such as maintenance support, water and common facilities. Also, apartments are more standard in their layout and features compared to a custom-built home. The personalization done may limit buyer interest compared to the more generic look of an apartment.
Fixed maintenance costs in an apartment may be high in large complexes compared to individual homes
Flats are up
Wider buyer base
The author is an independent financial consultant