Hello. My name’s Ben Everingham, and I’m the Director here at Pumped on Property. Today we’re going to talk about, should you buy a unit as your first investment property? My name’s Ben Everingham, and I actually did buy my first investment property in Sydney about seven years ago now. That first investment property was a unit. Like most people that grew up in my area, it was literally about five kilometres from my home and where I grew up. I bought that investment property with my two best friends from school, so I’m definitely a prime candidate towards this belief that units can perform extremely well.
Units can be a lot of fun, and I have absolutely no problem with investors looking to buy a unit as their first investment property. Today’s video is really going to explain some of the positives and some of the negatives associated with buying a unit that I’ve learned as I’ve become a little bit more sophisticated as an investor and as a buyer’s agent, and helped our clients move into different marketplaces and begun to understand the data and the performance of certain types of properties. For example, brand new versus houses, versus townhouses, versus units in different markets around Australia.
Let’s start off, as always, with the positives. One of the major reasons I bought my first unit as my first investment property was, one, there was a first-time home owner’s grant available, which made it very easy for me to access that property. Secondly, it was a lot more affordable than houses in the area at the same time. I think we picked up that first unit for 360-odd thousand dollars. Again, as you can see, divided by three people, when you’re talking about coming up with a deposit, it was relatively easy to do. As easy it is to do when you haven’t really learned how to save, I suppose, and it does take time to get that first one, but they’re super, super affordable.
In most marketplaces units are on average anywhere between 50% and 70% of the value of houses, so for somebody that’s got their heart set on getting into the marketplace it can mean you can sometimes get in a lot sooner, so that affordability’s a huge thing. They’re also super easy to add value to. Basically, we bought down a really, really run down unit that was in a nice complex with a couple of pools, and spas, and all that stuff, but the actual unit hadn’t been touched since it was originally built 30 years before. We got stuck in. One of my mates was a builder and renovated that property up after about a two week period and added a huge amount of value to it because it was the first time that it had been touched.
Just simple things like ripping up the carpet, replacing it with some nice flood boards, repainting, redoing the bathroom, adding cupboards to the bedrooms, replacing the light fittings with some more nice stuff, just tidying up the balcony to make it look and pop a little bit more and to make it a little bit more of a usable space. There’s so much potential in units to manufacture value by just buying something that’s a little bit dated and fixing it up. Because they are small, they generally are fairly affordable to renovate as well. I think we ended up spending $15,000 total for that renovation and did absolutely everything in the unit except for the kitchen.
Another great thing about units is that the rental yield’s generally higher than houses, which is fantastic for first-time investors because I don’t know many people in the marketplace that really want to be pulling money out of their pocket week in, week out. With a unit, especially if you’re young and you’ve got ambitions to buy a property and then jump overseas and do some travelling, or buy a property and then start your career, who wants to be paying hundreds of dollars a week on a negatively geared property? Units on average have a better rental return than houses. Again, it’s probably because of that cost base is lower, but the actual property space is still meaningful.
I can see units in many of Australia’s marketplaces where investors are getting between four and a half and six and a half percent return as a gross rent return on those units, which means after tax and depreciation in the benefits of holding the property they can definitely pay for themselves, which is fantastic. They’re always super, super easy to maintain. That is one of the things that I was attracted to when I bought it. There’s no garden maintenance. The body corporate completely looks after the outside of the house. Also, you pay the body corporate and your insurance is covered, so it eliminated a huge amount of the unknowns and costs associated with holding that first property for me as an amateur investor. I think that easy maintenance and low maintenance is sort of buy, renovate, and just set and forget is a really, really powerful strategy for first timers so that they can get on with their life or get on with saving and moving forward in the direction of that second property.
There’s also some negatives associated with buying units. I’ve personally felt the pain of most of these things myself. The first thing is in some areas they can really underperform, so the thing about units and great markets is that developers will bring on product until people stop buying them. That can often mean you’ve seen it before in areas like Darwin, in the Gold Coast, in parts of North Queensland currently, in parts of Sydney, definitely parts of Brisbane, definitely parts of Melbourne this oversupply of units.
The difference between a stable environment where there’s the right number of properties for the right number of renters and the over supplies just one unit building really, and all of that product rushing onto the market at the same time. You’ve got to be really careful because they can often underperform when looked at in comparison to houses. One of the reasons I lean towards houses now personally is because there’s that land value component, which is where long-term in certain suburbs lies.
There’s also negatives associated with buying units, and the first one that I’m going to talk about is in some areas units can underperform. The reason they underperform is slightly unknown to me, but for some reason people in Australia continue to value houses over units. I think it’s got a lot to do with probably the component and the scarcity component. A huge amount of what you buy with the unit is the building or the asset value, which depreciates on a sliding scale over time where the land is the thing that actually increases in value and helps you create capital gains.
When the land component on the property type that you’re purchasing is less than the building type sometimes they don’t always perform as well. It’ll be interesting to see over the next 20 years in Australia that as houses become more and more expensive if people do move towards those more affordable unit options. In the current cycle, I’ve looked in the data and about the last three years in both Sydney and Melbourne houses have outperformed units on average by 3% at least per annum. When you compound that extra three, or two, or one per annum over a long period of time and you’re building a decent size portfolio you might actually be missing out on millions, if not multiple millions of dollars’ worth of potential value.
It’s extremely easy also for units to become oversupplied, so a huge amount of markets in Australia right now have an oversupply, which is 2016 when shooting this video. If you go back three, four years there was a complete undersupply, so it’s the nature of developers that bring on brand new product until people stop buying it. Then it takes a period of time for all of that unit stock to be washed out of the market and to be rented by people that move into those areas or that want that type of product and then the cycle begins again. Unit markets are probably a little bit less stable than houses because a big percentage of people that live in units are actually renters in a transitionary, and it’s affected by things like supply and demand a little bit heavier than houses in some markets.
The third in regards to some of the negatives is the value inherently in a lot of properties, I mentioned before, is really in the land, which means houses generally appreciate a little bit better over the long term because of that inherent additional land component. Again, there’s some research and some [inaudible 00:08:27] just in Australia that have got access to some data where they think units in the right sorts of suburbs perform just as well as houses. I completely agree, but we’re talking about really nailing our research to make sure that if you are going down that unit path you’re moving forward with the right option.
There’s also a limited ability to add value with units, so like I said in the positive, you can a unit that needs a renovation and add huge amount of value to that property. After you’ve done the renovation there’s not much more you can do, and so you kind of got to sit there and either wait for capital growth or talk body corporate body into adding value to the outside of the property so that all of the units in the apartment block increase in value.
Another thing that I’ve personally felt the pain of is unstable holding costs. Obviously, the holding costs with the unit are generally higher because you’re paying for strata or body corporate, and sometimes those body corporates, like I felt the pain of in that first unit that I bought with my friends in Sydney, was when we bought the body corporate fees were relatively stable at about $600 per quarter. By the time we sold that unit they had risen to $2,000, $3,000 a quarter because it was a big unit a heap of units, and a lot of infrastructure in terms of pools, and spas, and gyms, et cetera. It meant that those costs over time creep up and they start to ask for these special levies. Once they started to do that I realise for me personally it was a good time to get out and that’s what we decided to do.
The last negative point that I wanted to touch on to finish off today’s video was really around the effect that other people that are more motivated to sell a property than you in your own unit block can have on the valuation of your property. The way that the marketplace in Australia and America currently values any type of property is generally based on a huge amount of things, but the major thing they look at is current market valuations for that type of property and recent comparable sales so they can compare this two bedroom unit in this suburb versus this two bedroom unit just down the road.
Sometimes when you’re in a bigger unit block like I originally purchased in, I think there was 130, 140 units in it, which is, again, a big lesson that I’ve learned in terms of the type of product that you buy. Now if I am going to buy a unit I’m looking for small six packs, 12 packs of units where I’ve got more control over the outcomes and less of a process between the top and the bottom of the market. What I’ve found in owning a unit in a complex of 130 to 150 units is that there’s always somebody motivated to get out of a property or experiencing financial hardship out of every 130 properties.
That meant every time they’ve got a record price in those units, because they were nice units with city and water views, basically, there would be somebody else in the block that needed to get out and was selling for a discount. The valuer could only come in and base the price of our unit on the lowest common comparable denominator in our building, which meant valuations in terms of capital growth can sometimes be amazing if there’s been a good run and sometimes be not so good if there hasn’t.
These are all little tips and tricks that I’ve learned from, obviously, purchasing some different properties. I think there’s definitely value in getting into the marketplace sooner rather than later and buying something like a unit or a townhouse product. You’ve also got to be aware of the positives and negatives associated with it. I hope this video added some value. If you’ve got any questions at all I’d love the opportunity to have a quick catch up with you and answer those questions or even help you design a strategy during one of our complimentary strategy sessions. Simply go to www.PumpedOnProperty.com, and click strategy session. From there you and I can really go into where you’re at right now and where you’re looking to go, the things that are holding you back, and develop a concrete action plan for moving forward.
Really appreciate your time. Look forward to talking with you soon, and until next time stay hungry.