Good Day. My name is Ben Everingham, and in today’s video, we’re going to talk about should you buy a house or a unit, and the positives and negatives about both options.
Hi, there. My name is Ben Everingham, and I’m the Director here at Pumped on Property. We’re an Australian-based buyer’s agency that have helped our clients buy tens of millions of dollars worth of extremely high quality property. In today’s video, we’re going to talk about should you buy a house or a unit. I suppose there’s pros and cons associated with every option, and there’s no such thing as an absolutely perfect investment in Australia. It really is important to understand the good things and the bad things of houses and units.
Let’s kick it off with units, and let’s talk about some of the positives. I suppose from my perspective, the positives associated with buying a unit is it’s a very simple investment to manage because you get the outside of the building completely taken care of, and because you’ve got a body corporate that looks after certain maintenance-related issues, certain insurance-related issues. It can be a sort of buy, set, and forget style asset. That’s one of the positives.
Another positive is there’s plenty of un-renovated units throughout Australia in small blocks, so there may be an opportunity in the right market at the right time to go in, find one of these older units, give it a lick of paint, give it a bit of a facelift or a cosmetic renovation, and get a much better rental return, and even a much better valuation on the property.
Some of the other positives associated with buying units is location. A big part of a property’s future value or future desirability is based on supply and demand. Units can be in great locations. There’s plenty of examples of waterfront units, or units close to the waterfront, or units in great positions in cities that have access to amenities and the things that people care about as renters and owner-occupiers in the future. The locations of units can sometimes be more premium than houses, and they can obviously be extremely affordable, which is the next thing that I wanted to talk about.
On average, units are significantly more affordable in most suburbs throughout Australia than houses, which gives people in an era of unaffordable housing options, the opportunity to get into the lifestyle that they’re looking for. There’s plenty of examples in Sydney, in Darwin, in Brisbane, in Melbourne of people buying really high quality units over the last 15 years, and those units really appreciating in prices. The capital growth on units can still be positive. And units often have actually, because they’re a little bit more affordable to buy, and because there’s not a huge amount of affordable housing options in Australia’s metro markets can actually sometimes have better rental returns on them than houses as well, which is another big positive.
On the flip side of the positives associated with buying a unit, units also have some negative things. One of those negative things for me personally is the fact that you’ve got a strata-related fee or a levy, which is collected by a body corporate in most instances. That can often mean, unfortunately, that you’ve got a limited amount of control over what that fee is going to be on a quarterly, six monthly, or annual basis. I’ve personally owned units or apartments where I bought in when the strata fee was $2,000 a year, for example, and by the time I was selling the property because they were raising money for some big works, those fees were more like $10,000 per annum, which can dramatically affect cash flow and actually make you come undone unless you’ve got a plan for those times where you’ve got an income which can support those sorts of things as they come up. The fact that there’s those fluctuations around those sorts of things isn’t ideal.
The other thing is that in the period that I’m recording this video, which is 2017, it’s no secret that some areas like Parramatta in Sydney, like Melbourne CBD, like Brisbane CBD, like Darwin CBD, and Perth CBD is all oversupplied with units. Because there’s developers in the marketplace, and because there’s people speculating, obviously when times are good, development occurs. They bring that product to market, and they sell that product. It also means that, unfortunately, that product can be oversupplied like we’ve seen in the Gold Coast in the past as well, like we’ve seen in Canberra in the last five years as well. So you’ve got to be really careful with what you buy.
Another one of the cons associated with buying a unit, or the negatives, is really the fact that your unit’s valuation is generally going to be affected by the person who in your complex is prepared to sell the product at the lowest price. What I mean by that is let’s say you buy in a complex of sixteen units, and at one time or another, one person out of every sixteen in a two-year period is probably going to come into some hardship or have the motivation to sell the product cheaper than you would sell it for yourself. So that can mean, let’s say you own a unit worth 500k, there’s a like-for-like unit in the building, but because of financial hardship, that person’s prepared to sell it for 400 grand. They do sell it for 400 grand because it represents great value, but then your valuation on your product is affected by that lower sale. I’ve seen this happen time and time and time again.
Another negative is obviously there’s a lot of very, very average builders and developers and speculators in Australia, which have created some really, really average product in recent times. From a quality perspective, from a fittings and fixtures perspective, from a floor space perspective, it’s just been shocking. So you’ve got to be really careful. There’s a lot of investor grade stock on the market at the moment, as opposed to owner-occupied grade stock in the marketplace. So it really does matter what you buy when you’re talking units, and you’ve really got to be careful from that perspective as well.
Obviously there’s some positives and some negatives associated with units. There’s plenty of other things to consider if you’re thinking about that asset class. Another one of the negatives from my perspective may be the fact that historically since we’ve been capturing real estate data in Australia, units have consistently in Sydney, Melbourne, and Brisbane underperformed, underperformed houses in terms of capital growth over that period of time since we’ve been recording data. So if you’re looking for an asset class purely from a capital gains perspective, then it probably makes sense to buy the asset class that one, the Australian market’s valuing right now, and two, has valued in the past.
In terms of the second step, should you buy a house, there’s also negatives and positives associated with a house. We’ll start with some of the positives associated with buying houses. Obviously in relation to the last point, on average in most major metro markets, they actually do outperform units over time from a capital growth perspective. I also like the fact that you can increase the yield on houses by adding bedrooms, adding bathrooms because there’s more floor space or more land component space. That’s another big positive. In terms of the valuation of properties in Australia, land is tied to value. The unit is the depreciating side, the land is the appreciating side of the equation. So there’s more land value associated with the product you’re buying, which means land values rise, the entire deal rises if it’s in the right location at the right time. I love the fact that, as I talked about a moment ago, add value through granny flats, through subdivisions, through increasing the density on house blocks by adding bedrooms and bathrooms, by cosmetically doing things to a house that adds real tangible value to the value of the property longer term.
Some of the negatives associated with buying houses is really around holding costs. There’s obviously going to be a maintenance component. Sometimes rates can be more expensive because there’s a higher land component. Water bills, electricity bills, etc. because it’s a bigger area with bigger usage, it can be a little more expensive. Obviously, land taxes can be significantly more expensive over the longer term as the land value rises with the price of the property. Houses aren’t always created equal as well. There’s plenty of very, very average suburbs and markets in Australia with very average either investor grade type of product, so very average product, as opposed to the high quality product that actually ends up performing better over time. There’s a lot of brand new product coming onto the Australian marketplace at the moment. House and land packages, etc. which unfortunately sometimes can be completely overvalued. That can be a negative, and there’s a lot of examples of people getting themselves into sticky situations in recent years in mining towns with brand new product or places like Perth, for example, or the mining areas of Gladstone, Mackay & Rockhampton in North Queensland where they paid a premium because they thought it was going to continue to rise. They bought at the wrong stage, and property prices have come down.
There’s a heap of different things to consider when buying houses and buying units. I hope this video has give you a few different ideas to think about in terms of the positives and negatives associated with each. There’s so many more examples of great videos and also great resources online in relation to this topic. I hope you got something out of it.
Until next time, stay hungry.