Pint-sized property: Is a studio apartment a good or bad investment?

For as little as $200,000, you can buy yourself a bolthole in St Kilda, a petite retreat in Petrie Terrace or student digs in Ultimo. Outlay double that and you can pick up a harbourside hideaway in Rushcutters Bay or Potts Point.

But while studio apartments may be affordable, their suitability as an investment depends on many factors.

Location is key

We’re all familiar with the real estate adage “location, location” but it’s never been so important as when your property footprint is not just small, but perhaps tiny.

There’s plenty of anecdotal evidence suggesting buyers and renters of studios tend to spend less time at home than those with larger abodes, making well-located studios a sought-after commodity.

“Often people living in studios are out and about,” said Laing+Simmons Potts Point agent Sylvia Vitale. “They’re visiting cafes, restaurants and galleries, or they’re out walking along the harbour.”

Vitale said Potts Point studios tend to be among the smallest in Sydney, typically measuring between 17 and 30 square metres. However the top city location compensates for the lack of space at home, with every amenity on your doorstep.

“A small property in a good location is better than a big property in a poor location because you can never change location,” said Peter Koulizos, chairman of the Property Investment Professionals of Australia.

“If it’s close to the CBD like the top end of town in Melbourne or in Sydney’s Potts Point, or close to the water like in Bondi, Bronte and Manly or anywhere on the harbour it’s hard to go wrong.”

Small space, high yield

Property analyst and managing director of SQM Research Louis Christopher said studios continue to offer higher yields than other property types even as overall rental yields have fallen over the past 12 months.

“They still attract yields between one and one-and-a-half per cent higher than other property types,” he said. “In Sydney that equates to a gross rental yield of roughly 4.25 per cent.”

Vitale said you can also bump the rent a little higher by furnishing your studio either for executive or holiday rental.

“These tend to appeal to transient tenants, but I have heard stories where people stay for years,” she said.

However, while Koulizos agrees studios often produce a better rental yield, he believes it comes at the cost of capital growth.

“They have a minimal land component and that’s what drives prices up,” he said.

Don’t bank on finance

Despite a trend towards smaller household sizes and higher density living, studios continue to carry a stigma with many of Australia’s big banks, some of which won’t lend against a property they deem to be “too small”.

Otto Dargan, managing director of Home Loan Experts, said many lenders have a policy that a property must be larger than 40 square metres, or sometimes 50 square metres, before they will consider providing a loan.

“Some also say there must be a wall between the bedroom and the rest of the apartment or they do not allow shared laundry facilities which are common with studio apartments,” said Dargan.

How small is too small?

Dargan said guidelines for the minimum unit size varies between lenders, but there are three common policies.

The first requires an internal area of at least 40 square metres. The second looks for more than 50 square metres across the internal area, car space and balcony. The third allows internal areas of at least 18 square metres, providing the LVR is lower than 80 per cent.

“It really depends on the property that someone is buying that determines which lender we go to,” Dargan said. “It’s best to get a pre-approval before making an offer and to be aware of the lender’s policies on unit size. That means you should measure the unit before you make an offer and avoid disappointment.”

“We strongly recommend that you do not commit to buy without formal approval.”

Do you need a big deposit?

More often than not you’ll need at least a 20 per cent deposit to secure finance for a studio, Dargan said.

“Where lenders do consider studio apartments they tend to lend a maximum of 80 per cent of the purchase price, although there are some cases where we can help someone to borrow more,” he said.

This large deposit is one of the key reasons studios tend to appeal to investors rather than owner occupiers, Vitale said.

“For an investor, finding 20 per cent in equity for a deposit is easy, especially if they’re using super fund money,” she said.

Are studios easy to sell?

“The banks are worried that there is a more limited resale market for studio apartments,” Dargan said. “Personally I think they are dead wrong. Lenders don’t consider changes in demographics.”

Dargan believes studios are a great choice for first-home buyers who are single. “They’re very affordable and often in great locations,” he said. “Investors have also done well by renting them out on Airbnb.”

He recommends buyers think twice about apartments with lifts, swimming pools, gyms and a concierge, because the strata costs “really throw out your budget”.

Vitale said when the market was peaking in 2017, studios were being snapped up within a week of listing and faster than any other property type in the area.

In Potts Point, Vitale said investors make up the majority of the studio apartment market, with a sprinkling of first home buyers and retirees.