- Houses and units have advantages and disadvantages
- Units are more affordable but you don’t have full control
- Houses generally produce better capital growth but are expensive to buy
If you’re thinking about your next investment property, you’re probably considering a house or unit. A question we often get is, “What are the differences between these two, and is one better than the other?”
Although this is a fair question, let’s unpack the difference between houses and units and investigate them further. The property you are investing in may reflect what is currently available on the market and the amount you have budgeted for that particular investment.
However, remember that the main idea of investing is to get the right return for your dollar.
What makes a unit a good investment property?
Units are often a great choice for people who are just starting to invest in real estate. They are generally less expensive than detached houses and are easier to maintain. Here are some key points that could make a unit your ideal investment:
- Affordability – Units are less expensive to purchase. When you look at the median unit price in most capital cities, it is significantly lower than other properties.
- Low maintenance – Properties that require less maintenance are ideal for many tenants, making them an attractive option.
- Higher Rental Yield – The rents the units attract are significantly higher than what you could receive for a home based on how much you need to invest (when calculated as a percentage).
- Prime location – Units are usually located in desirable locations (CBD, tourist areas, etc.). You will notice that the units are generally in an excellent location for services, such as public transport and entertainment options. If you only look at the positives, the units seem perfect, right? However, buying a unit for investment purposes has some disadvantages.
What are the disadvantages of investing in a unit?
Units often come with layering requirements. This may mean that you are not in full control of maintenance schedules or unit renovations.
In a layered scheme, you usually have one vote for each unit you own in a complex, and there are discussions and votes about what can happen in the complex.
For example, if some landlords think the parking lot needs to be redone and enough people vote for it, you’ll have no choice but to cover your share of the cost. This relationship can make it difficult to control your costs, especially if many unit owners are owner/occupiers.
When choosing a unit for an investment, you should study these additional costs thoroughly before deciding to buy. If you’re not interested in diplomacy, a unit with a strata deal attached could be problematic.
What makes a house a good real estate investment?
Houses are often considered a good option for long-term rentals because an entire family can occupy them. Here are some more reasons why you might consider a home as your investment:
- Capital Growth – Houses are great for capital growth and they often perform better than units. If you choose a house with a large lot, there is potential for subdivision.
- Family Oriented – Homes tend to attract families or people looking for larger spaces (e.g. pet owners), which can broaden your network of potential tenants.
- Choice of maintenance schedule – As you are the sole owner of a single block of land, you can choose when maintenance takes place and who performs the work.
- Renovations – You can renovate a house to increase its value. However, you may need to check with local councils regarding major renovation projects.
What are the disadvantages of investing in a house?
There are many advantages to owning a home as an investment, but there are a few disadvantages. As the sole owner of the property, you are solely responsible for maintenance costs, which can be expensive. For example, if the water heater is out of order, you must replace it as soon as possible, which can be expensive.
Houses generally have a higher price and they will require a significant portion of your total investment. However, this is often offset by the potential return through improved capital value.
Choosing between a house and a unit for an apartment building
There are no real hard and fast rules for choosing between a house and a unit as an investment. Many investors like to specialize in one or the other, but the best option is to choose a property based on its location.
Ideally, you want an apartment building that can attract the ideal tenant. Researching the location where you want to buy can be the difference between buying the ideal property and buying something that is difficult to find a tenant for.
A good option is not to focus on one unit or a house, but to find a property that most renters want in that area. Choosing a property that will provide good capital growth is another ideal criteria you may want to consider.
Although it is difficult to predict capital growth in specific locations, you can consider the following:
- Infrastructure spending
- Economic activity
- Population and Wage Growth
- Vacancy rate
- Rental yields