Units or apartments are a popular choice for a growing number of Australian property investors, namely, because units provide more affordable entry into the marketplace than their counterpart, houses. When comparing REIV’s current Melbourne median house price of $725,000 with the unit price of $538,000, the choice for many investors is a no brainer.

But interestingly, when it comes to purchasing a unit many investors consider a two-bedroom dwelling the logical choice, without much consideration for the one-bedder variety. However, contrary to popular belief a one-bedroom unit can make an equally strong, if not better, investment, and for many reasons. Here’s why.

Growing demand
Of the 1.03 million households in Melbourne, almost a quarter are home to a single occupant. However, only 72,006, or 5%, of dwellings in Melbourne are one-bedroom, while 19.9% or 284,608 are two-bedroom. It’s no secret in the real estate industry that there’s a shortage of quality well-located one-bedroom units to cater to current demand. Moreover, the ABS predicts that the number of single-person households will increase significantly in coming years due to the aging population in Australia, which means there will be even greater demand for one-bedroom units, particularly in our capital cities’ inner suburbs.

Value for money
Another misconception about residential real estate is that properties with a greater number of bedrooms have an exponentially greater value than those that don’t. But this isn’t always the case. A one-bedroom unit in popular Melbourne suburb South Yarra will typically range from $420,000 to $550,000, with well-sized quality examples available from around $500,000. The price range for two-bedroom units in the same location is $570,000 to $800,000, with an equivalent quality well-sized two-bedder typically achieving around $680,000 and upward. Investors with a budget under $600,000 may be tempted to buy a lower quality two-bedroom apartment, however, the age-old adage of quality over quantity is an important one to remember here. Despite having two bedrooms, a smaller two-bedder may be less desirable than a premium one-bedder, with implications for reduced appeal as a result of less floor space, which impacts tenant demand, rental income and capital growth potential.

Rate of return
The appeal of investing in a one-bedroom unit is further heightened by its rate of return. While the price of a one and two-bedroom apartment can differ significantly, the rate of return in many cases is comparable. Take for example a one-bedroom apartment purchased for $450,000 renting for $320 per week and a comparable two-bedroom property in the same block purchased for $570,000 renting for $390. The yield derived from the one-bedroom apartment is 3.7%, while the yield from the two-bedroom dwelling is 3.6%. The yield is clearly comparable overall, but for the additional $120,000 investment to purchase the two-bedroom unit, the return is only an extra $70 per week, which represents a yield of just 3.0%.

Today, Melbourne is seeing the greatest demand among all Australian capitals for one-bedroom apartments. Older-style single bedroom units in boutique blocks in the city’s inner suburbs are among the most popular on account of their larger sizing and lower owners-corporation fees – due to the absence of lifts, gyms and pools – when compared with modern units; and in some cases because of their period charm. These factors add to the scarcity of this type of property in a city increasingly dominated by higher-density apartment complexes.