Houses or units, which makes the best investment?

Investors have debated for years on which is the smartest investment, houses or units? Here we explain the pros and cons of each option to help inform your strategy.

With data from CoreLogic and more than 25 years of experience in observing the property market, DPN offers insight for investors as to which choice produces the best long-term returns.

Units

According to the ABS, single-person households are projected to increase sharply over the next decade. As more people want the convenience of living in or near cities, units offer a practical choice.

The pros of units:

Lifestyle factors, such as proximity to work, cafes and restaurants.
Maintenance is taken care of by the body corporate, therefore less time and effort is required than with houses.
Units are cheaper than houses in many cases, so the entry point is lower, with less of a deposit needed.

The cons of units:

Many capital cities already have an oversupply of units, which leads to difficulties finding tenants and / or lower rental yields.
It’s harder to get loans for smaller, studio units due to their limited appeal impacting resale values.
Unlike a house with land, investors can only do minimal renovations on units, subject to structural approvals from the body corporate.
Units are subject to strata and body corporate fees.
Unit investors don’t benefit from land appreciation.

Houses

All data shows that houses generally accrue greater long-term capital gain than units. As an example, the capital gain for Sydney over the past 25 years equates to a 7.6% annual growth rate for houses. For units, the annual growth rate was lower at 6.3%.

The pros of houses:

Houses come with valuable land ownership which always appreciates, therefore both the land and the building itself attract capital gain.
Houses offer investors the ability to increase appeal by making structural changes or building a brand new home, to achieve higher rent and increase overall capital gain.
Regional areas are experiencing residential growth booms that benefit today’s investors.

The cons of houses:

Older houses may incur more costs for maintenance than units. However, building a new house requires minimal repairs and investors qualify for depreciation tax breaks.
Houses generally require bigger deposits than units. This is dependent on the location though, as regional houses are often cheaper than city units.

All data shows that houses generally accrue greater long-term capital gain than units.

The key is to conduct thorough research, as there isn’t just one property market, and there are pros and cons with each choice. However, the data shows that houses deliver the best long-term returns when you select the right house and area.

For more comprehensive information, see: Units or houses: the eternal investment question.

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SOURCES:

CoreLogic 25 years of housing trends report; news.com.au, Non-compliant buildings creating generation of 'mortgage prisoners'

Conduct thorough research
Weigh the pros and cons of each choice
Data shows that houses deliver the best long-term returns when you select the right house and area

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