Should first time investors invest in a unit or apartment? What are the pros and cons associated with units/apartments vs houses?
Ryan: Alright. Ivan is saying, “Hi, guys, great channel. For the first-time investors, would you guys recommend investing in a unit or an apartment in Melbourne with a $400,000 budget? Thanks.”
I’m just going to get the Herron Todd White up for units. I’m just going to bring this up to show you guys. So, you can see this is the Herron Todd White month in review report, and if you look, this is particularly for units. If you look at the peak of the market, you’ve got Melbourne at the peak of the market. Coffs, Gold Coast, Newcastle, Central Cost at the peak of the market there. They’re putting Sydney as starting to decline. Then we go Brisbane units starting to decline as well.
When you compare that to houses, like Melbourne says approaching peak of market and Sydney is saying peak of market, but they’re not declining.
Ben: The problem here with units is that Melbourne is completely oversupplied with units, as is Brisbane. Sydney’s about to bay, like there’s pockets of Sydney that are already completely oversupplied. Perth’s oversupplied with them. Canberra’s oversupplied with them. Darwin.
These developers went crazy when they could access easy money cheaply and now there’s a problem. I would not be buying a unit in Melbourne at the moment. I think that money could be much better spent, whether if you really want to buy in that marketplace, buy the Residex report, look at which suburbs you can afford for $400,000 that are as close to the city or as close to the beach as you can possibly afford around Melbourne and then buy a high-quality house, or worst-case scenario, buy a townhouse in a small townhouse complex of maybe 6-12 townhouses.
Ryan: Yeah. You’ve got to realize when you’re looking at investing in an area, and this is a really good question to bring this point up, is that the housing market and the unit market can be very different and the unit market, over the time that I’ve been watching the markets, the unit market does tend to be, seem to be, more volatile in terms of you, all of a sudden, get these massive influxes of these massive high rises that have been released in a particular suburb, and all of a sudden you’re going from units being really good to units being oversupplied just because these large developments have gone through and finally come to fruition.
So, you need to be really careful with units because I have seen so many people purchase and then end up with an oversupply. You see it even worse in Sydney and Melbourne and stuff in mining towns when they’ve done them there, and then all of a sudden, there’s just this flood of properties and flood of units.
You have to remember, when you buy a unit, especially when you buy one of these really big ones in a complex where there’s 100 units or more, there’s almost always going to be more than one unit in that unit for sale at the same time, and those units are all almost identical to each other. It’s very hard to find a unit that’s going to be different.
So, you’re then not just competing with other houses in the suburb. You’re competing with other units that basically look identical to yours. And if you have someone in that unit block that is going through a messy divorce or has some sort of financial issues and they need to sell their unit quickly, and so then they take a big discount to sell their unit, that then brings the value of your unit down as well. So, there’s other risks to consider as well, apart from just oversupply. But yeah.
Ben: Yeah, I completely agree. It’s not just the other units for sale in the block. It’s the fact that someone out of 100 is always going to be going bankrupt or divorced and they’re always going to sell an express sale and the future value of your units … Sorry, when I say units are more like small blocks where apartments are more like the high risey stuff, 100-plus properties. Apartments are more … There’s always going to be someone forced to sell 10, 20, 30% below market value and it’s always going to affect the valuation.
I look at the data. As Ryan said, it’s more volatile. But even more than that, in the last 30 years in Australia, houses have outperformed units in Sydney, Melbourne, and Brisbane by at least 1 if not 3% more per annum on average.
Now, that might not sound like a lot, but if you look at buying a $400K unit today in Melbourne that grows on average by 3% per annum versus a $400,000 house let’s say in North Brisbane that grows by 6% theoretically over the next 20 years, the difference in that same $400K in terms of your net position is $500,000 difference. 500 grand cash in 20 years just by getting a 6% return as opposed to a 3%.
So, when people obsess about buying below market value and making 5% on the way in, it is not even something that I think about anymore. It’s more about what am I costing myself by not having the highest-performing, best possible product I can afford right now.
Ben: It’s the opportunity cost over the long term that people kill themselves with and end up on the pension with.
Ryan: Yeah. We both like houses, so obviously take our advice with a grain of salt because we prefer not. I just don’t like that units don’t give you the level of control you want, like often you need body corporate approval to do specific renovations within your unit or apartment if they could affect structural things. My mum just did a renovation to a bathroom and she couldn’t move the toilet because the sewer line goes down the one spot of the apartment, so she couldn’t have the bathroom oriented the way that she wanted. That’s just one thing. Body corporate fees, which you can’t control.
I know you had that unit in [inaudible 00:05:50] or something where they upped body corporate massively. Was that you?
Ben: Yeah, they went from $1000 a quarter to $6,000 a quarter. My mum had a unit at Cronulla Beach and she sold it luckily about a year-and-a-half ago when the market was topping out. Literally, the person who bought it off of her gave [inaudible 00:06:15] and said, “I’ve just stung for a $60,000 sinking fund levy because they wanted to replace the lift in all of the balconies on the building.”
That’s the problem with apartments. They’re all nice and new now, but 15-20 years from today, everything will need to be upgraded. Are you prepared to get that call in the future at some point, where someone’s asking you for something that you don’t want to give them or don’t have?
Ryan: Yeah, and to not have a say over it as well.
Ben: Three people were forced out because of that sinking fund and they sold those properties for $200,000 below what my mum sold hers because she wasn’t forced to sell.
Ryan: Yeah, cool. So, hopefully, that has been helpful.
Well, I hope you enjoyed the answer to this question with Ben Everinham from Pumped on Property. We’re really having a blast doing these Q&A sessions with you guys, so keep the questions coming.
If you’re at the point now where you’re ready to purchase an investment property, but you think you might need some help, then Ben is offering free strategy sessions to On Property listeners. Simply go to onpoperty.com.au/session and you can book a time with Ben and you can go through where you’re at, where you want to be, and what your next steps are to get there.
Again, that’s onproperty.com.au/session. Thanks so much for watching. Until next time, stay positive.