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So You Want to Buy a Studio Apartment?

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When it comes to property, especially properties located in the inner city, a studio apartment is one of the most affordable ways to enter the market. But, even though they're affordable, are they a good investment? We outline what you need to know here to help you get started on making the decision about what property to buy.

What is a Studio Apartment?

According to banks and other lenders, a studio apartment is defined as any apartment that doesn't have a wall separating the bedroom from the living areas and kitchen.

Advantages of Studio Apartments

One of the biggest advantages of buying a studio apartment is that they have good rental yields, with studios being able to get a rental yield of one to one and a half percent more than a one or two bedroom apartment. That is, if a one bedroom apartment yields you 5 percent, a studio apartment will yield you 6.5 percent. The rental yield is the percentage of the sale price that you can ask for as rent.

Studio apartments are also popular as they give you as the investor a consistent source of income, especially if they are very close to the city and all the amenities that the city has to offer (transport, restaurants, unis etc). Studios tend to rent out quickly and don't remain vacant for very long, which is all important if you are paying the mortgage on it!

Financing a Studio Apartment Purchase

The traditional myth associated with purchasing studio apartments is that it can be difficult to secure finance (a loan) for it. This is due to the fact that you can't get lender's mortgage insurance (LMI) on a property that is smaller than 50 square metres. LMI is the insurance that covers the bank or lender against you defaulting on your home loan resulting in the need to sell the home at a loss. Banks have believed that studio apartments appeal to a limited range of buyers and thus it may be harder to sell a studio apartment quickly if needed.

However, in actual fact, studio apartments are great medium to long term investments and they can as much as double their price over ten years or so. The demand for studio apartments is also quite constant so it should be possible to sell quickly should the need require.

If you are interested in buying a studio apartment, be aware that you'll probably need a deposit of between 20 and 30 percent to secure a loan. Here's a guide to how much you can borrow:

If the apartment is less than 18m2 you will not be able to get finance for a property this small from any lender If the apartment is from 18m2 to 40m2 you can borrow up to 80 percent of the property's value If the apartment is from 40m2 to 50m2 you can borrow up to 90 percent of the property's value but you may be able to borrow up to 95 percent if you are in a very strong position financially If the apartment is more than 50m2 you can borrow up to 95 percent of the property's value

If you are looking for a low doc loan, you'll need to buy a studio apartment that is more than 40m2 in area. Also be aware that the sizes stated above are internal living areas only does not include balconies, car spaces or garages.

Please remember that the information given here is a general guide and the amount of finance that you can obtain for a studio apartment will depend on your specific lender.

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