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House v unit: Which is the better investment?
Chris Gray

House v unit: Which is the better investment?

buying
1 minute read

House v unit: Which is the better investment?

May 01, 2018

There was a time when investing in units was considered a far inferior choice to buying a home. The value of real estate is in the land, the experts say, and so the logic suggests to always buy a house.

Indeed, the saying “land appreciates and buildings depreciate” gives many investors the impression they should favour houses over units. Houses have a greater land component and, because land is an increasingly scarce resource, they rise in value according to a corresponding rise in demand. They also have the advantage of being much easier to make renovations and structural alterations to – units often require permission from strata.

However, if you visit some suburbs, like Bondi Beach in Sydney or St Kilda in Melbourne, buying a two-bedroom house might cost around $2.8 million. While houses give you the added benefit of land that can appreciate over time, not many people can afford to rent a property at that price point. The rental might be around 2 to 3 per cent ($1,100 – $1,600 per week), whereas buying two units at $1.4 million or three units at $900k might get you 3 to 5 per cent ($1,600 – $2,600 per week).

There are more people trying to rent at a cheaper price point, which will push up the rental price, giving you a better yield. In most cases, units will be the more affordable option.

Therefore, when it comes to deciding between making an investment in a house or a unit, take a step back. There are a few key factors you should consider first, such as your investment strategy, adversity to risk, and property prices in the suburb that you are looking at investing in.

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Remember, it is important to opt for those properties that are within the median price area, located 5 to 10 kilometres from major cities, with at least two bedrooms and a lock-up garage, as these will be the most attractive option for renters.

Here’s my advice for investing in units:

1. Get a valuation

Consulting an independent valuer is essential before investing in any property. Even experienced investors can fall into the trap of making a spur-of-the-moment decision. An independent valuer will provide you with a fair, unbiased assessment of a property’s true value.

It’s also worth doing your own independent research to get an idea of where market prices are heading. This is especially crucial when investing in off-the-plan units as the market could change during construction and prices could decrease, causing you to pay more for the property than it is worth.

2. Be aware of ongoing expenses

Units often come with many recurring costs that can add up in the long run. Before investing in a unit, purchase a strata report to understand the monthly fees you will need to pay, and request to see building insurance records and activity over the past few years.

Be particularly careful when investing in units with fancy amenities such as a lift, a gym, swimming pool or 24-hour concierge. While attractive, these mean higher strata fees.

3. Do your research

Once you’ve seen so many properties it becomes hard to compare one against the other. So, like with everything, make a list! Not only do you need to keep track of all the properties you have viewed, but also seeing 10 open houses a day can be overwhelming and confusing when you need to compare the details between each property.

For example, it is important to take note of the number of bedrooms in each property you inspect (equal-sized bedrooms are a must), whether it has a garage, a balcony, a view, the actual selling price, and more.

4. Weigh up potential rental returns

Properties that will always get a reasonable rent and are easy to rent out should always be the most sought after by any property investor. Remember, it’s the rent that pays the mortgage! After many years of experience, I have stuck to choosing units that are around the median price range.

If the property that you are looking to buy is within 10 to 20 per cent of the median price for that area, that means 70 to 80 per cent of the population can afford to live in it. Also, when weighing up potential rental returns, it is important to remember that the aspect of a property is another big attraction for tenants. If the flat you purchase is on the bottom floor of a large apartment block and is not well lit, it will turn renters off straight away.

5. Consider using a buyer’s agent

Viewing a succession of properties can be time consuming and stressful to say the least, especially when you are juggling everything else on your plate. A buyer’s agent will take on most of the stress – from managing the property hunt, to handling negotiations, right through to the purchase itself. Delegating your work and leveraging your money are two of the big keys in property investing.

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