If your like 99.9% of property investors, you’ve probably asked yourself in the past, ‘should I invest in a house or a unit?’. The help answer this more challenging question than you might expect, leading property investment company DPN explains the pros and cons of each investment option.
By referring to data from property data powerhouse CoreLogic and tapping into more than 20 years of experience in observing the property market, DPN offers insight for investors as to which choice might deliver the best long-term returns.
According to the ABS, single-person households are expected to increase in volume significantly over the next 10 years. As a result of more people wanting for the convenience of living in or near cities, units offer a practical choice and more cost effective option.
The pros of units:
- Lifestyle factors, such as proximity to work, cafes and restaurants. This cuts down on potential lengthy commuting times, as well as puts the investor/occupant in a central location which is close to transport including bus and train routes.
- Maintenance is taken care of by the body corporate. This might include cleaning of the shared spaces, landscaping, as well as repairs and improvements to the external façade of the building. As a result, less time and effort is required than that which might be spent if an investor was to complete the same works on a house.
- Units are more often than not cheaper than house, so the entry point is lower, with less of a deposit needed. This allows for a greater level of assets diversification if the user for example can purchase two units for the price of 1 house.
- The rental yields are typically higher. Related to the above benefit, the purchase price of a unit is generally lower than that of a house, which means that the rate of rental return is higher. This results in a higher amount of rent per asset value, which is what is used to determine the rental yield of a property. By achieving a higher rental yield an investor is potentially able to hold more assets as their cashflow position is improved and they are not left putting their hand in their own pockets to cover what might otherwise be a negatively geared property.
The cons of units:
- Many capital cities already have an oversupply of units, which leads to rental drops that affect mortgage payments. It’s quite often the case that a new unit development is sold with a rental guarantee in place, for example ‘a guaranteed rental yield of 5% for the first 12 months’. However, the risk of this is that once the rental guarantee period expires, the investor is left competing with not only the other apartments within the same development block, but also other apartment developments which might have been completed nearby during this period.
- It’s harder to get loans for smaller studio units due to their limited appeal impacting resale values. By purchasing a studio apartment which has a smaller floorplan, you are limiting your target market to typically a single person. However, once you purchase a 1 bedroom apartment with a 50m2 plus, you appeal to single and couple, and your target rental and seller market increases further as you consider 2 and 3 bedroom units. Studio units also very rarely come with a carpark spot, which again limits the renter and buyer appeal.
- Unlike a house and land, investors can only do minimal renovations on units, subject to structural approvals from the body corporate.
- Units are subject to strata fees, unexpected levies and special taxes. This increases the ongoing costs of the property, which cannot be reduced unlike other higher property costs such as the mortgage. Therefore, the net cashflow of the property might be lower than is initial anticipated.
- Unit investors have a more limited benefit from land appreciation. Remember, land appreciates, whereas buildings depreciate. And the land to building ratio in units is much lower than with a house.
All data shows that houses generally accrue greater long-term capital gain than units. As an example, the capital gain for Sydney over the past 25 years equates to a 7.6% annual growth rate for houses. For units, the annual growth rate was lower at 6.3%. This may not seem like a significant difference, however over the course of 15-20 years, this can amount to $100’s thousands in lost capital growth.
The pros of houses:
- Houses come with valuable land ownership, which nearly always appreciates over time. From a pure capital growth perspective therefore, the strategy of acquiring houses over units is sounder.
- Houses offer investors the ability to increase appeal by making structural renovation changes. This provides the property investor with the capability to charge a higher rent and increase the overall capital gain of the property once completed. This increased flexibility can suit a variety of budgets, with renovations varying in cost from $5,000 all the way to $1 million plus, depending on which suburb and what type of renovation you are looking to complete.
- Investors in houses have the ability to build new dwellings on their blocks. This might look like keeping the existing house and building a secondary dwelling on the block if the layout and size facilitates. This secondary block could either be an additional house, or a granny flat, both of which can increase the capital value of the property asset, and rental return.
The cons of houses:
- Older houses may incur more costs for maintenance than units. However, building a new house requires minimal repairs and investors qualify for depreciation tax breaks. Typical costs which an older house might incur includes, new paint, new carpets and floor coverings, repair or replacement of the hot water system, repair or replacement of the electricals, new lighting, and maintenance to plumbing, kitchen and bathrooms.
- Houses generally require bigger deposits than units. This is dependent on the location though, as regional houses are often cheaper than city units.
The key is to conduct thorough research, as there isn’t just one property market, and there are pros and cons with each choice. However, data clearly shows that houses deliver the best long-term returns when you select the right house and area.
For more comprehensive information, see Property Investment advisor DPN’s article: Units or houses: the eternal investment question.