Many investors have heard the phrase ‘land appreciates, buildings depreciate’
While there is certainly merit to this comment, it is just not that black and white.
The important thing to remember is not all land is created equal.
It is not necessarily the size of the land that is important but more so the location and availability of the land that creates demand and therefore pushes prices up (capital growth).
A better question to ask yourself when starting out on your process of purchasing an investment property for long term capital growth may be ‘Where should I buy?’
Doing your research and purchasing in the right markets (i.e. State, city, suburb, street and finally property) in high demand areas with a good history of capital growth, close to employment generators and lifestyle drivers including; shopping facilities, cafes, public transport and quality schools will be far more valuable than basing your purchasing decision on ‘a house or unit’.
Now obviously as you research some of these high demand areas in capital city locations you will see quickly that houses may become unaffordable for you, very quickly. In this case, an apartment may be the best choice.
Overall, in Australia, if we look at the past 5 years of capital growth of 2 bedroom apartments compared with 3 bedroom houses, the capital growth rates are very similar. Both floating around the 4.7% mark annually. Although it is worth noting that the 2 previous 5 year blocks of growth have seen houses outperform units somewhat. Obviously this is a very broad statement as it considers all markets throughout Australia, and as we know, all markets perform vastly different at different time periods.
This again comes back to the location and availability/scarcity of the land. Homes located in the fringe areas of our cities may have substantial land content, however, the demand for these properties may be far less desirable than even a small portion of land divided up between 4-6 units in city locations close to lifestyle drivers. This demand could lead to an increase in prices (capital growth) that would outweigh the growth on the ‘undesirable’(plenty of supply) large portion of land in the city fringe suburb.
It is also critical that you consider the wants and needs of the demographic in the area. Are areas full of busy young professionals living ‘cafe culture’ lifestyles going to want a big 5 bedroom 800sqm block to maintain? Unlikely.
Now this is not to say that Units are a better choice than houses. There are certainly plenty of suburbs around Australia that you can purchase affordable homes in desirable locations that are likely to perform well.
Obviously, there are positives and negatives to both units and houses worth considering-
Houses-
Advantages-
-Land to building ratio
-Outperform units over the long term (on average)
-Potential to add value through development
-Potential to add value through renovation
-No body corporate fees.
-Demand from families
Disadvantages-
-Can be more expensive to hold in terms of maintenance, rates etc.
-Location. Generally not located or affordable for the average investor in inner city suburbs.
Units-
Advantages-
-Price
-Location
-Low maintenance
-demand
Disadvantages-
-Small land content
-Risk of oversupply/lack of scarcity
-High up keep costs- body corp fees etc.
-Pricing benchmark. Your unit’s worth depends on what others In the block sell for.
-Less opportunity for value adding. You are restricted on the approval of other owners before doing any external/ common property works.
The most important factor when beginning your process of purchasing an investment property is not whether it is a house or a unit.
It is selecting a property in the best market you can afford in an area with high demand, a good history and projected future of capital growth with strong lifestyle and employment drivers.