It’s a question that divides investors – is it better to buy a house or a unit?
While both have the potential to be solid investments, the option that will best suit you depends on a variety of factors including your investment strategy and adversity to risk, and property prices in the suburbs you are considering investing in.
The saying ‘land appreciates and buildings depreciate’ gives many investors the impression they should favour houses over units. Also, if you’re buying a property to renovate, you have to consider more factors.
The value of a $500,000 house, for instance, might be split between $200,000 for the land and $300,000 for the value of the building.
In comparison, a $500,000 unit has a smaller land size, which will therefore not rise as much in value.
Pros of houses
Houses also have the advantage of being much easier to make renovations and structural alterations to – units often require permission from strata.
While houses give you the added benefit of land that can appreciate over time, units can be a more affordable option.
Depending on the area’s demographic, units can be a more attractive option for tenants, especially in suburbs where house prices are particularly high. For instance, in some of the more expensive Australian suburbs, a house might cost around $1.5 million to buy.
While that can give you land – which will appreciate – few people will be able to afford an optimum rental price of around 5 per cent ($1,500 per week) beyond the short-term, and you might only end up securing rent of 2.5 per cent ($750 per week) as only a limited amount of people can rent it at that price.
Researching on the median area price
When it comes to choosing between a house or unit as an investment, you should always opt for those that are within the median area price, located 5-10km from major cities, with at least two bedrooms and a lock-up garage, as these will be the easiest to tenant.
When considering properties to add to your portfolio, it’s important to diversify with a mix of both houses and units across a variety of locations to help protect you from too much of a shift in the market.
Tips for investing in units
Consult an independent valuer
Securing an independent valuation is essential before investing in any property. Even experienced investors can fall into the trap of making an emotional purchase 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 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.
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 strata fees will be higher.
When starting your unit search, keep track of the properties you have viewed.
Seeing 10 open houses a day can be overwhelming and confusing when you’re looking back at the details a few weeks later.
To gain an understanding of the market, construct a simple spreadsheet and compare the price guide to the selling price.
When you go to inspections, make sure you also get the size of the property (internal and external), the anticipated rental return and other important numbers to ensure you’re comparing like with like.
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.
Using a buyer’s agent is a great way to leverage your time and quickly find the investment property that’s right for you.
Chris Gray is CEO of Your Empire, a buyers agency which builds property portfolios for time-poor people – searching, negotiating, renovating and managing property on their behalf. Chris’s team buys 1-2 properties a week and often spends $5m+ a year renovating on others behalf, providing a unique insight into market conditions and buyer and seller sentiment. Chris hosts “Your Property Empire” each Monday on Sky News Business channel, where he interviews various heads of property research companies and major industry figures. Chris is a qualified accountant, buyers’ agent and mortgage broker. For more information, visit www.yourempire.com.au, www.chrisgray.com.au and follow Chris on Twitter: @ChrisGrayEmpire