Houses vs Units

Land accumulates and buildings depreciate – follow that rule and most investors would always buy a house. But is it really that simple? For every dollar spent, houses do have more land content. And supply is limited, so land prices will continue to rise. A typical house may grow at 8-10% over the long term. Units, on the other hand, do not have so much land content and may grow at 6-8% over the long term.

Deciding between a house and unit mostly comes down to affordability. Buyers might not be able to afford a house in a high-growth area (that is, 5-15km from a CBD), so may need to look for:

  • a house in a low-growth area
  • a unit in a high-growth area

I would suggest that less land but more growth could be similar to more land and less growth.

But there’s more to investing than pure capital growth – you also need to take rent into consideration as that is the key to cashflowing the mortgage needed to finance your investment. If you can’t cash flow it, you probably can’t hold it.

The rent you’re going to get on a property will mainly depend on it’s current value and the suburb you’re buying in. To take both the extreme’s above of Kellyville and Bondi, both properties should get you around 4 -5% rent (so the statistics say), so no real difference there. It’s when you come to buying higher value properties that things start changing. Would you buy a $1.5 house in Bondi or 3 x $500k units?

Well most people that can afford to rent a $1.5m house can often afford to buy one and as most people are emotional about their own home they would buy. This means that there isn’t that much demand for expensive properties and that often drives the rent down to only 2-3% or $600-900/wk. (Executive rentals do get higher rentals but that is a niche market and often you are more susceptible to volatility in rents).

Compare that to buying 3 x $500k units and getting 3 x $400-500/wk = $1,200 - $1,500/wk.

In this case what you would need to weigh up buying a house and getting maybe 12% capital growth and 2-3% rent or buying 3 units and getting 10% growth and 4-5% rent.

The answer for most people will come down to cash flow. If you buy the expensive house and are paying a mortgage at around 9% interest and are only getting 2-3% rent you have to fund the difference of 6-7% (=$60-70k per million dollars borrow before tax for a potential capital gain of $120k). However a number of units would only cost you 4-5% (=$40-50k per million dollars for a potential gain of $100k)

My current personal strategy is to buy within 5-15 km’s from the city as I am buying for capital growth rather than rent return. If I was in Sydney or Melbourne I would buy a unit but would buy a house if buying in Brisbane or Perth.

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