When it comes to investing in real estate, there are a number of tough decisions which need to be made. Like all decisions, each option will come with its own advantages and disadvantages. One of the biggest decisions you will make as an investor, is choosing whether the type of property you want to invest in: a house, or a unit, or perhaps even a townhouse.
Generally speaking, most investors who choose to purchase a unit will do so as they have a higher yield and are easier to hold onto. Whereas owner-occupiers are more likely to purchase houses as they are larger and a great place for families to grow.
In order to make the right decision for you, it’s important to understand what you are trying to achieve with your investment and understand the pros and cons of each option.
Investing in Units:
Units are often more appealing to investors are they are cheaper in their initial price and also generate higher rental yields.
The lower initial costs makes them easier to purchase, and to manage repayment costs as rental the income is often higher in comparison to the mortgage repayment price.
Generally speaking, many units are able to achieve yields of 4-5%, while houses in comparable locations may be under 2%, which makes units as an investment very attractive.
Another advantage of purchasing a unit is that it provides the opportunity to buy into a highly sought after area which may have been otherwise unaffordable if an investor was looking at houses only with the same budget.
Many inner-city metropolitan areas that are close to water or amenities are often priced well over $1 million in almost all states in Australia. Comparably, units in the same area can be under $500,000, which is far more affordable for an investor who might be on average wage with limited serviceability.
The general rule of thumb when it comes to real estate is land = value.
Land is scarce, particularly in capital cities and large metropolitan areas.
Houses occupy more physical land, thus their increased cost. As units occupy less space, they are in abundance in comparison to houses. It is this lack of scarcity which can decrease your capital growth over a long period of time should you wish to purchase a unit.
It is worth noting that not all units are the same. Directly comparing one unit with another could be comparing apples and oranges. One unit in a block of three units, is vastly different to a unit in a block of 300. Based on scarcity alone, you can see which of the two is a better investment.
While yields on units are generally higher, strata (also known as body corporate) fees must also be factored into calculations as they can significantly impact the overall yield. In many instances, complexes with great features such as pools and gyms come with sky high strata costs, which can then make them a similar yield to a house.
In terms of price movements, units are the last to rise and the first to fall during a growth cycle.
The most obvious advantage when it comes to purchasing a house over a unit is the land scarcity factor.
As Mark Twain once popularly said, “buy land, they’re not making it anymore.”
This rings true especially for inner-city areas and as a result, populations rise and demand is ever-increasing.
Over long periods of time, houses have been proven to outperform units in terms of capital growth, and we expect that this is a trend which will continue long into the future.
Particularly since the COVID-19 pandemic, research has found more than ever, that people are opting for houses with access to a backyard and fresh air, rather a unit with limited space.
Having a large land component also provides opportunity to further develop or subdivide, which is another way to manufacture equity which a unit simply cannot do.
Just like units, not all houses are equal. A brand new house in an estate 50km from the CBD is not the same as an inner-ring established suburb.
In fact, houses in housing estates are really not that different from large off the plan apartments.
There can also be large costs associated with holding houses, especially when it comes to older homes which can require a large amount of repairs.
Generally speaking, the best investments are a combination of all of these factors.
Units in established locations in small blocks with low to no strata fees are often great investments. Similarly, houses in established areas that have higher yields are also great investments, particularly in those cases where there is room to renovate, develop or subdivide, and these are normally highly sought after types of property.
Both units and houses have various pros and cons associated with them, the final decision is highly dependant on the investor and their specific goals. Ultimately, there is no “one size fits all” when it comes to investing in property!