Units vs. Houses: Which Is A Better Investment?

By September 11, 2018 No Comments

It’s an age old question. Which makes a better investment, buying a unit (villa/apartment/townhouse) or a freestanding house?

The type of property you buy really depends on what you are trying to achieve, for example, is the property for shelter (your home), to earn income (rent) or to build your long-term wealth (capital growth). Both units and houses have their place when it comes to investing.

Before worrying about whether to invest in a unit or a house, consider these three factors first, which are even more important than the type of dwelling:

  1. Economy select a location with a good economy and strong employment growth.
  2. Location – choose a suburb with a high level of demand from prospective tenants. Near a CBD (inner city), beach or river.
  3. Affordability – the property must be affordable to buy and also hold into afterwards. The gross rent should equal at least 5.0% p.a. (of the purchase price) where possible.

The aim of property investing is to make money. It’s no good if the property you select doesn’t grow in value for 5 or 10 years, (regardless if it’s a unit or house).

Often, the suburb you select will dictate what type of dwelling you should purchase. For example, inner city suburbs with attract young professionals and DINKS (double income no kids) will tend to have more units, than houses. Conversely, suburbs which are ideal for families may have more houses.Give the people (tenants) what they want and you can’t go wrong.

Suburbs that are experiencing gentrification are those which were previously ‘ugly duckling’ suburbs but now, thanks to government spending and property developers, may see older standalone houses being demolished to make way for higher density housing (units etc).

There’s a common thought with property investing that it’s the land component of a property that goes up in value over time, not the actual dwelling (building). The building actually goes down in value over time because of wear and tear and age; that’s known as ‘depreciation’. However, as an investor myself, I would much rather own 1/10th of a fabulous location (even if it’s a unit) than 100% of a mediocre location (house with more land).

Units can be a great entry into the property market and allow an investor to grow their portfolio relatively quickly, as prices are generally a lot less than houses.

The maintenance costs of units can also be less. For example, when buying a house you are solely responsible for all maintenance and repairs, including major repairs; if your roof needs repairing it could cost you $15,000! But, when buying a unit, those costs are shared amongst all of the unit owners in the complex through abody corporate structure.

Before investing in a unit be sure to check what body corporate (strata) fees are payable each quarter. Fees from each of the units’ owners are combined and then used by the strata manager to maintain and repair the ‘common areas’ of the unit complex such as the driveway, carpark, gardens, water/council rates and building/liability insurance. Strata fees can deter some investors, but they are not bad, they are simply a way of combining a smaller contribution from a number of unit owners, for economies of scale.A problem arises when strata fees are too high. Look to pay no more the $2,000 – $2,500 per annum in strata fees, otherwiseyou start to exceed the cost of general maintenance costs of ahouse!

Other tips for investing in units:

  • Keep strata fees low buy avoiding unit complexes with a lift, pool or gym. Those cost a lot to replace/repair and therefore increase the ongoing strata fees.
  • Make sure a professional strata management company is in charge of the complex management (which includes the accounting) to avoid any issues amongst the units’ owners.
  • Buy units in smaller complexes so you don’t have to compete with so many other property owners when trying to rent out your unit.

Regardless if you buy a unit or house, always make sure you obtain professional Building Inspection and Termite Inspection reports. Whilst they can cost in the vicinity of $400-$500 each, they are worth their weight in gold to know if there are any underlying problems with the dwelling that you want to buy. A property may look good ‘to the eye’, but you can’t possibly know what the internal condition is like unless you get the reports done. Imagine paying hundreds of thousands of dollars for a unit or house which is riddled with termites. No thank you!

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Disclaimer: This information provided is general in nature. It is based on the knowledge and experiences of the author and not intended to be taken as financial advice. It does not take into account the objectives, financial situation or needs of you or any other particular person. You need to consider your financial situation and needs before making any decisions based on the information. You may have to modify the information and do further research, for it to suit your personal financial situation. Therefore, before acting on the information, it is recommended that you consider its appropriateness to your circumstances or consult a financial adviser, tax adviser or legal professional to assist you in doing this.