When it comes to choosing between units and houses for investment, the decision isn't simple. In this comprehensive analysis, we dive into the pros and cons, historical data, and real-life examples to help you decide which property type is the better investment in 2024. You'll also learn about key factors like location, return on investment, and unique property features that could significantly influence your financial success.
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Units versus houses: which one is a better investment?
In this article, I want to cover:
I also want to share with you exactly what my thoughts are when it comes to buying property today. If you're interested in what my thoughts are, definitely keep reading.
When it comes to houses versus units, which one is better?
I'm going to tell you the short answer, which is: it depends.
Let's jump into some numbers and look at what the pros and cons look like, because at this point, if you're seriously considering a unit or a house, you pretty much know what you're getting, but there might be a couple of things you're not aware of.
What we've got here is the Ray White Economic Update by Nerida Conisbee, who is a chief economist at the Ray White Group:
I want to go through her thoughts about houses versus apartments, and look back retrospectively 10 years ago: which one would have been better?
According to Conisbee:
One of the key points around buying an apartment is because you want a location.
Now, if you looked at, say, Sydney and you wanted to be about 2 to 5 kilometres away from the city, it would be almost impossible to buy a house for the following reasons:
In that case, if location is important to you, you may decide you need to buy an apartment.
I would challenge you with that and say there's no reason to buy—you can also rent in that location. (Now, if you want my deep dive around renting versus buying, you should definitely check out this video I made a couple of days ago, and I think it's going to bring you a lot of value.)
Another important factor that she's brought up in this argument is around return on investment (ROI).
When you go out there to purchase your own place, you're really finding a place you want to live in—that's emotional. But what people do—humans are greedy and we all do it—is say: Well, if I can live here and I get the bonus of the property going up in price, now I get the best of both worlds, right?
Well, yes, in theory, you're correct, but that's like finding a unicorn: to be able to find a property that you can live in, enjoy, and it’s the best asset type in that area, and it also happens to be the best location for growth, which is really quite difficult.
Right now, when you're looking at most apartments where they're getting built out, it's not like it was, say, 10 or 15 years ago where you could only build, say, 50 to 60 apartments.
Now, what happens is, in those locations, a tower will have 300 on its own. There's usually like 10 towers also going up around them, so the supply that can come onto the market is so much greater now than it was in the past.
Now, let’s look at the price trend of a $500,000 home in 2014.
What we can see is they seem to follow the same direction. However, the results are completely skewed.
When you look at what they were in 2014 to 2015, you pretty much see they're about the same at this point, given that you purchased at the same price point.
However, what you can see is that 10 years later, the house, on average, would be worth $920,000, whereas the unit is about $700,000.
That is a big difference because, in 10 years, that’s the difference of more than $200,000.
If you think about $200,000 over 10 years, that would be $20,000 a year in tax-free equity. This means you’d have to be making an extra $40,000 pre-tax to be getting those kinds of gains.
This is why it’s so important to:
At the end of the day, real estate is a location game, but I would go a step further and say it needs to be unique because there are some units out there right now that are performing way better than houses.
I'll tell you an example because it’s so logical.
Let’s say you go and buy an apartment that is a set of maybe 50, 60, or even less than 100, and there are only those 100 that can look out to the water, or something is unique about this location. If the council or developers come in to build out more, they would be inferior because they may not have prime position to the beach or location views that no one else can get.
In that case, those units are unique, and they will see price appreciation.
Now, if you compare that to, say, a house, because someone has come onto this article and said: Yes, I knew it, houses are better than units, let me go and buy a house. If you go and buy a house in one of these estates that are new, they’re all going to look the same, right?
We all know The Truman Show—you go in, and all the houses look the same. It looks like a set.
People justify buying a house there because it’s a house, and they think it’s going to outperform a unit. Well, in this case, which one do you think will perform better?
I’m in the camp that the unit is going to perform better because it’s unique and it’s something no one else can get.
When you think about these cookie-cutter Truman Show type estates, if you can’t buy that house, you buy the one next door, and guess what?
The biggest issue with something like this, when it comes to houses as well as units in big blocks, is that if yours is not unique, then all it takes is for a couple of people to sell due to outstanding circumstances, and unfortunately, that is the comparable the bank, agents, and buyers are going to use to justify the price your property is worth.
Trust me, it's not fun when it happens, and as we approach the next correction, we’re going to see a lot of this playing out.
If your property is unique, yes, it’s harder to get a valuation because there are fewer comparables. But it also means you can approach different banks to get the best valuation.
If your house is similar to others that have sold recently, it doesn’t matter which bank you approach – they’ll all defer slightly, but the reality is they’ll use the same data.
Conisbee also reported that:
This all comes down to location and what the area offers.
Take Sydney, for instance – it’s a massive city with various suburbs. Some councils allow more development depending on their zoning, while other areas offer unique views or proximity to the beach, skewing the numbers.
Here’s a breakdown of house price growth in major cities:
Although Perth's growth might seem less impressive, keep in mind it came off a significant high at that time, which explains why the numbers appear lower.
Also, Perth has had a lot of underinvestment in infrastructure, but the government is now starting to invest, which is creating exciting opportunities.
When comparing units to houses in each of these cities, we see that units consistently underperform.
As a first-home buyer, you might only be able to afford a unit, especially if you rely on homeowner grants. However, I’m critical of these grants because they often lead people to make poor decisions.
Let’s look at Rouse Hill in northwest Sydney as an example.
Houses in Rouse Hill now have a median price of $1.48 million, with 7.6% growth over the past 12 months.
In 2018, the median price was $910,000, so that’s a $500,000 increase in just five years – a fantastic outcome.
However, many buyers assumed that units in Rouse Hill would see similar growth due to factors like the new metro line and town centre. Unfortunately, the opposite happened.
Meanwhile, the median price for units is now $650,000, down 6.7% in the last 12 months.
If you had bought a unit five years ago for $641,000, you would have made no money.
When factoring in inflation and the cost of living, you’d actually be going backward.
While the rental yield for units sits at 5%, once you account for strata fees, it’s not nearly as attractive as it seems.
Compare that to houses in the same area with a rental yield of 3.1%, and it becomes clear why a balanced portfolio is essential.
Having a portfolio that includes affordable properties with capital growth and rental income is key. This approach has helped me scale my portfolio while others get stuck at one or two properties.
For instance, let’s move from Rouse Hill to Parramatta, which is often touted as Sydney’s "second CBD." It’s a desirable area with plenty of dining and lifestyle options.
The median house price in Parramatta is now $1.5 million.
If you bought in 2018 for around $1 million, you’d be sitting on a $500,000 gain.
However, the rental yield is only 2.3%, meaning it’s not generating the income needed to scale your portfolio, which is why some people are selling up to buy higher-yielding properties.
The same issue applies to units in Parramatta. Although they haven’t dropped in value over the last 12 months, if you bought five years ago for $628,000, you’d now be losing money once you factor in inflation.
Finally, let’s look at Melbourne’s CBD, often considered the hub of the city.
While unit prices there may appear to be recovering, the reality is that over the past five years, you would have lost money if you bought during the peak. This highlights the importance of location – picking the wrong property in the wrong area can be disastrous for your financial future.
Now, you might be thinking: Ravi, you’ve shown me how units underperform, so should I avoid them altogether?
Not necessarily.
In certain cases, units can outperform houses, depending on the location.
For example, I have two investment properties in Newcastle West, both units. I was strategic about these purchases – I identified that they had unique features, like water views and proximity to transport, and the surrounding infrastructure was being developed.
Over the last 12 months, these properties have seen 30.6% growth, which is abnormal. Over the past five years, the value has increased from $657,000 to around $800,000.
But not every unit in the area has performed this way. The difference is that mine have water views and are in a boutique block, making them more desirable.
If you’re considering buying a unit purely to take advantage of homeowner grants, be very cautious. Without a solid strategy, you could end up losing money.
If you need help crafting a strategy, don’t hesitate to reach out.
Book a FREE discovery call with my Search Property team.
Thanks for reading!
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