Investment Property

House Versus Unit: Which Is The Better Investment?

BY CHRIS GRAY, CEO, YOUR EMPIRE

They say that “land appreciates, and buildings depreciate” and so for many investors that means they should always buy a house rather than a unit. Houses have a higher percentage of land especially when you compare it to a high tower unit when hundreds or even thousands of units all share the same small parcel of land below.

However, it’s not quite as simple as that. Many more factors have to be taken in to account such as which location you are buying in and what your budget is.

LOCATION AND PRICE POINT

If you want to buy a house in some of the best inner-city blue-chip suburbs then it may well cost you a minimum of $2-3m+ if you’re looking at Sydney or Melbourne and Brisbane or Perth could be setting you back $1m+. Not many investors have that kind of money and even if they did, do they really want to punt all that money into one single asset? The choice is then to either buy a unit, or to buy much further out from the CBD and then you run into the issue of there being a greater land supply the further out you go and potentially less demand from higher income earners as they typically don’t want to commute as far.

MEDIAN PRICE

If you try and buy around the median price of a city then by definition you’ve got a good chance that 80% of the locals can afford to buy it or rent it which is good as you’re always likely to have a demand. If you want to buy in a good inner-city suburb that’s close to transport, leisure, schools etc then those properties are often priced well in excess of that median price as a city’s median is an average of the CBD, the inner city and the much further out suburbs. Similar to the example above, the median price in Sydney is around $1m, but you’ve got no chance of buying a house for a $1m in the best inner-city suburbs.

RENTAL YIELD

As houses are typically more expensive than units in the same area, then you also need to charge more rent if you are looking to get the same percentage return on your investment. As the asking price goes up, the less people can afford it and so the price then falls. Not many people can afford $2,000 - $3,000 a week in rent and so the price drops. Of those that can afford even $1,000 - $2,000 a week, even they don’t want to rent as the perception is that ‘poor’ people rent and the great Australian dream is to buy a house and so they do. This makes the rental yield drop even further. So often the more expensive house in Sydney and Melbourne might only rent for 1-3 per cent instead of units renting at perhaps 3 – 5 per cent over the long term.

RENOVATIONS

A great advantage of buying a house is that it can be easier to add more value by doing renovations. If you have an 80m unrenovated unit and do an amazing renovation it will still be 80m as it’s not often you can bolt on some extra space unless you can add a balcony or build into a roof space. Therefore, there is often a cap as to how much value you can add. Whereas if you have a house on a large parcel of land then, subject to council approval, there could be the opportunity to build out the back, add another level or even subdivide and add additional properties. Not everyone is an experienced builder and so whilst this is a potential upside to buying a house you may want to consider using professional facilitator or project manager to assist with the works.

STRATA

If you buy a house then the chances are you will own the land and so you won’t have to deal with a strata or a body corporate unless you are part of something like a golf course project. Some people hate the thought of having their nosy neighbours with nothing else better to do, get involved in their business and dictate what they can or cannot do to their investment property. This is great if you want to be a hands-on owner but there is a number of investors that do like strata especially if there are nosy neighbours there that do get involved, these owner occupiers in unit blocks can be great for keeping control of the building and for making sure that other renters follow the rules and keep the place clean. As all the bills are being shared, they can ensure you’re paying the right price for repairs and maintenance and that the strata are managing the property correctly.

SO, WHAT IS RIGHT?

My investment strategy is a long term buy and hold.

I avoid CBD’s as there’s no limit to supply as developers can keep building upwards. I also avoid the outer areas as I think there is more land for redevelopment (high supply) and there’s less disposable income as the locals are more likely to be blue collar workers with families the further you go out (less demand). I therefore stick to the blue-chip inner-city suburbs as I believe there’s no more land for development as there’s 3 storey height limits and each property is built right up against their neighbours (limited supply). There’s also lots of young professionals who earn high salaries and have a high disposable income (high demand).

I then buy around the median price so that the majority of the locals can afford to buy it or rent it giving me a consistent demand. So, my choice of house or unit is then decided by what the median price gets you in those inner-city areas.

Therefore, in Sydney I would buy a unit, in Melbourne I would buy a unit/villa/townhouse and everywhere else I would buy a house.

So, there is no single strategy that is going to suit everyone. Whilst I do like doing renovations to improve a property’s value I would rather buy a unit where I can do limited improvements but then maybe get a 5-10 per cent capital growth over the long term than buy a house much further out where I might make 20-30 per cent overnight but then only make 0-5 per cent over the long term. If I was in the trades and looking to be more active and turn over a property every year or two, my answer may well be different.