Houses vs Units
One of the most common questions when starting or expanding a property portfolio is which type of property should be invested in.
Both houses and units have their own unique benefits and drawbacks from an investment perspective. On top of this, your individual investment strategy, financial position and (importantly) the market in which you’re buying can all play a crucial role in determining which type of property is the better fit for your portfolio.
So, is there a clear-cut answer when it comes to which property type makes the better investment?
Generally speaking, house prices are higher than unit prices, and this initial cash outlay can be an important consideration for buyers looking to purchase an investment property.
Units offer a more affordable entry into the property market which may make it easier for first-time investors to begin their property journey and they also offer opportunities for more seasoned investors to leverage their lower price point to quickly purchase additional properties in different areas.
However, there are other key considerations you need to take into account when looking to purchase a unit that extend beyond the initial price point.
Rental yield vs capital gains: why you need to consider your strategy
Understanding your property investment goals is an important consideration when choosing between a house or a unit and typically, property investors are either looking to increase their wealth through capital growth or use the property to generate an additional income stream through rent.
When purchasing a house, land value makes up a greater portion of the value of that investment.
This plays an important role in the property’s long-term growth, as it’s this land that can continue to grow in value over time, while the building itself depreciates, however, not all houses are equal and it is important to consider the location you are intending to invest.
For example, a house situated in a tightly held, established suburb in closer proximity to the CBD will often offer a higher land value component than a property situated on the outer fringes where the market is more oversupplied while there may be additional stock coming on stream from new developments.
Unlike houses, units have a much smaller land component attached to them which can significantly limit the capital growth available, although, this also varies between locations and style of construction.
For example, a unit or villa close to the CBD on a small strata lot (e.g. 200-300sqm) could have a higher land value (in real dollars and/or as a percentage of property value) than a new house and land package on the city’s suburban fringe and for investors looking to generate passive income, the rental yield of units have historically been seen as a more lucrative option.
Both houses and units have additional fees and levies that accompany each property type and contribute to the overall cost of ownership and maintenance costs are an inevitable aspect of property ownership, whether it be the general upkeep of the property or addressing unexpected repairs so, having a cash buffer on-hand to rectify these issues is always important.
Units aren’t exempt from ownership costs with additional expenses coming in the form of strata or body corporate fees (usually paid quarterly) or, additional amenities like pools, gyms and communal areas which face increased strata fees that allow for the maintenance and repair of these features, and need to be factored into your holding costs when making a purchase decision.
Regardless of which property type you purchase, a strong understanding of local market demand, supply factors and careful property selection are critical for ensuring the long-term success of any investment.
When choosing which type of investment property to purchase, the decision ultimately rests with the investor and the strategy and risk that they are willing to accept.
The success of any property investment strategy relies on selecting a property that fits your needs and appetite while also considering these needs in the context of the wider market in which you’re investing.