Units versus houses: Which is the better investment?

It’s a perennial investor question. And most investors have an opinion on what is a better investment option. So rather than give my own opinion, I thought it would be an interesting exercise in the question of ‘what makes a better investment, units or houses’ to explore my company's personal investment portfolio and how the portfolio has performed over the past three years.

When I am faced with the question of ‘what investment option performs better units or houses’? The answer is always presented with the caveat of ‘its depends where and what you are buying’.

One of the biggest advantages of investing in units is the fact that you can invest for less. Meaning you can potentially enter the market without having to muster up a larger deposit. On average, units typically present a gross yield around 1-2 per cent higher than free standing houses. (Though body corporate fees can eliminate this yield gain if you don’t invest wisely). Units also typically require less ongoing maintenance, as much of the maintenance is covered by your strata company. The potential draw backs for units, however, are elements such as unexpected building maintenance (special levies) – you only own a small portion of the land in which the unit complex is situated, thus when the land appreciates you are only exposed to a small amount of capital growth.

With regards to houses, the advantages are typically the disadvantages of units. You don’t have any body corporate fees, your land is 100 per cent yours and you will access a greater land appreciation than units typically. Though the drawbacks from houses are equally the benefits of units. They typically require far more maintenance from the owner (yard care, external/internal maintenance), houses typically demand a lesser rental yield than units in the equivalent areas, it requires a much greater deposit to invest in a house over a unit in a similar area, also land tax can be an unexpected pitfall for many investors not factoring this into the investment.

Pure Property Investment's (PPI) portfolio is somewhat balanced between units and houses. We don’t only buy one or the other, rather, we look at the fundamentals of suburb demographics, purchase price, vacancy rates, potential yields, transport and infrastructure. These factors will dictate what we buy and when.

PPI has investment heavily in the NSW and Queensland markets over the past five years. To date, our portfolio consists of 45 per cent units and 55 per cent houses. After spending some time crunching the numbers on how our units and houses have performed over the past five years, the results may be surprising to some.

PPI unit (NSW and Queensland) performance over the past five years: 38 per cent growth (7.6 per cent average annual growth).

PPI house (NSW and Queensland) investment performance over the past five years: 31 per cent growth (6.2 per cent average annual growth).

Now obviously the NSW and Queensland markets have performed significantly differently over the past five years (but we’re very bullish on our Queensland investments over the next five years). Although it does provide a real insight into what an objective and targeted investment strategy can achieve. As always, the key is the right investment type, at the right price, with the right demand and future prospects.

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