When it comes to residential property investment, the debate as to whether a house or a unit is a better investment remains a contentious one.
Both have exhibited strong performance in markets with strong fundamentals in past growth cycles. There are several factors that hold significant influence over which is a more suitable option, based on the market conditions of the day.
In this article, we'll take a look at some of the key considerations when choosing a unit or house, as well as the pros and cons for both dwelling types.
Entry Point
According to the latest Domain Group House Prices Report (December, 2019) the national median house price was $809,349 while units are $565,024 [1].
At a national scale, the differential between these two dwelling types is quite vast. Units are often more attractive to those who are unable to raise the initial capital required to purchase a house. .
If we take a look at Australia’s two largest markets; Sydney and Melbourne, house prices grew by 6.8% and 8.7% in year-on-year terms, respectively.
This marks the end of deteriorating prices, with values increasing annually for the first time since August 2017.
The result is even more impressive given the fact that the main share of growth has been realised in just two quarters.
Should this trend continue, house prices are on track to surpass previous highs as early as the March 2019 quarter.
As price houses continue to grow, it's expected that unit prices will follow, placing further pressure on affordability in these markets.
As price growth continues to outpace wage growth, markets with a lower entry point will become more attractive to those seeking to break into the market.
What type of investor are you?
Before selecting your first or next investment property, take careful consideration on your financial position, your overall investment strategy and your appetite for risk.
Scenario: Let’s say you’re looking at purchasing your first investment property, you have the maximum borrowing ability of up to $1,000,000 and your overall strategy is to build a profitable property portfolio over the long term to derive a passive income to retire on.
Option 1: Purchase a house worth $1,000,000 in the Sydney market today that offers strong capital growth prospects based on past performance, but offers a poor weekly rental yield resulting in a negative cash flow for the investment from the beginning.
Option 2: Purchase two units worth $500,000 each, in markets that also offer strong capital growth prospects but offer a healthy cash flow from the beginning.
Purchasing one property with a high entry point and a poor rental yield limits you to one property, whilst incurring a negative cash flow from the outset.
Having the option of securing two investment properties offering a healthy cash flow reduces the overall risk from day one, allowing you to build a diversified property portfolio quickly.
To build a property portfolio that generates a passive income, the key focus for asset selection should always be a combination of growth focused properties that provide a strong cashflow position.*
Now, let's assess investing in a house vs a unit.
House Pros
Additional floor space: Houses usually offer a generous floor plan that will attract both tenants and future buyers. This size factor may increase the overall demand for the property.
Price premium for land: Having additional land value may also assist with the overall capital growth of the property. Land can appreciate if there is limited supply, and as the population increases, the demand for land can also increase. In any market investors should conduct careful research into the suburb to determine if there is a limited supply of property being offered to buyers.
Flexibility: There's no owners’ corporation or strata laws when you invest in a house. There may also be the opportunity to add value to the property with future renovations or additional landscaping.
House Cons
Ongoing maintenance: With more floor space and additional land comes ongoing maintenance of the property. The potential maintenance and upkeep of the property needs to be factored into the projected cash flow.
Higher costs: The landlord insurance and council rates for a house are generally much higher than for unit owners. In some cases, landlord insurance can exceed what you would pay in strata for a unit.
Unit Pros
Affordability: Units have a cheaper entry point compared to houses. This can assist investors securing an investment property sooner rather than later. The median unit price is significantly less than the median house price for all capital cities in Australia.
Less maintenance: The maintenance and care of a unit building and surroundings is the responsibility of the body corporate, not you.
Location: Many units are built near city centres, allowing for closer proximity to transport, schools, restaurants and employment nodes. Making the property not only attractive to tenants, but also to future buyers. Having a unit in close proximity to a thriving CBD will assist with potential demand for the market and the property.
Unit Cons
Strata/Owners' corporation by-laws: Unit owners must abide by the rules imposed by the owners’ corporation This includes factors such as not hanging washing over the balcony or not having pets in the property. If you want your unit to be pet friendly to attract more potential tenants and future buyers, you may need to seek approval prior too engaging in this activity.
Fees: You will also need to pay a fee to the owners’ corporation to cover shared maintenance costs, so remember to take this into consideration when conducting a cash flow and considering the overall costs.
Less space: Units generally don’t offer as much living and outdoor space as houses. Even though this can be a positive for some buyers and tenants, it may also deter others.
Summary
Now that you’re familiar with some of the pros and cons, consider the purpose behind your investment and your overall long term strategy.
Cash flow and capital growth prospects are equally important and should be considered whether investing in a house or a unit.
Always conduct your own research and due diligence when reviewing a property for potential investment and make sure you understand what the market is demanding, whether that is a unit or a house.
Jarryd Gauci – Property Investment Consultant
P: (02) 9939 3249
References
[1] Domain Group House Prices Report (2019)
*Disclaimer: When considering purchasing property, it is always prudent to seek the advice of an appropriately qualified professional to determine which strategy is most appropriate for your individual circumstance.