Download Podcast

In This Video:

00:33 Three (3) golden rules of property investment
01:28 How the three (3) golden rules of property investment relate to houses and units?
06:40 Buy 5-10km from the city rule

Good day everyone Daimien Patterson here from Integrity Property Education. Today’s blog video is about Houses versus Units.

Which one should you buy? Some people like units, some people like houses. Let’s do some analysis and talk about it.

Three (3) golden rules of property investment

First of all, we need to understand the golden rules of property investment. There are three golden rules of property investment that I think are really important.

  1. Buy where it is booming, buy where the market is going up. This is why we are investing, to make money and the big money is made in capital growth. There is no doubt about it. That is where the thousands of dollars are made not the hundreds of dollars.
  2. You must make sure your properties pay for themselves. If you are going to make sure that your properties pay for themselves, then you need to look at the cash flow. We will talk about that in a second.
  3. NEVER EVER SELL! When you sell your investment property, you kill the goose that lays the golden eggs. If you don’t know how to get money out of your property without selling it, then you need to know more about finance.

How the three (3) golden rules of property investment relate to houses and units?

So let us talk about how it relate to houses and units. If you are going to buy where it is booming actually in a lot of cases, it might lean towards units because often the factors that create booms is the reduction in supply and increase in demand. So often in the city suburbs, have a reduction of supply because they are already built up, but depending on the zoning. You can see an oversupply of apartments build that can create a problem. Sometimes apartments are good and sometimes they are not so good in that regard.

Here‘s one thing that we know about t capital growth. It is actually the land that goes up in value, not the building itself. In fact, the building itself goes down in value we get to claim the depreciation on it every year on tax. It is the land that is valuable and if you have a look at a lot of the city properties, the actual value is in the land component not the building itself. When people buy in the city houses, they are not the house over, because the house is worthless. In the grand standard things, it is the land that is worth so much. So if you buy an apartment, what are you actually buying? You are buying a very small portion. If you’ve got 300 apartments on a block of land, you are buying a very small portion of the land; you are buying 1/300 of that portion of land whereas, if you would buy a house all the land is yours. That is very important in terms of a long-term capital growth because remember that is where the big money is. So from a capital growth perspective, houses are going to win hands down over units every day of the week anywhere.

Now let us talk about rule number 2 make sure that they pay for themselves. Then why do they have to pay for themselves? Oh yeah sure we can have a couple of negative properties but guess what? If your properties don’t pay for themselves, you are not going to earn money. Some people say “oh yeah that’s okay I got a good income I’m not going to service those properties that are negative cash flow”. But here is the thing you still going to run out. The guy who got 10 properties that are performing 5% capital growth every year is going to make more money than the person who got 2 properties of 10% per year because the person who got 2 properties of 10% accumulates 20%. The person who got 5 properties accumulates 50%. If you have negative cash flow of properties, then you are not going to be able to buy more than a couple, because it will chew up all your disposable income and the bank will stop lending you money. The properties must pay for themselves.

How do we know if our properties are going to pay for themselves? There are 9 factors associated with or whether our properties will pay for themselves. A lot of people just focus on rent and they do so foolishly because the 9 factors make a difference.

What are they? Get a piece of paper and draw a line in the middle, two columns, income, and expenses. On the top of your income column, you may want to write these down:

  1. Rent received
  2. Tax return received, it is very important

On the expenses column, we’ve got all heaps of things. We’ve got:

  1. Loan repayments
  2. Body corporate fees
  3. Rates
  4. Insurance
  5. Rental management
  6. Maintenance
  7. Depreciation

It is very important to consider all these factors.

With an apartment, we usually have a very big body corporate fee. When you buy a house there is no body corporate fee. All of the others expenses are about the same. Why would you buy an apartment when you can buy a house that doesn’t have a body corporate fee and it’s got the same rental yields and all other costs are relatively the same?

What we analyse thousands of property opportunities every month on behalf of our clients, thousands of them literally tried to pick the very best. We know time and time again, units just don’t stack up when it comes to cash flow. Anyone who owns a unit knows what I am talking about. A body corporate are nasty. As time goes by, and the building is over, body corporate fee keeps going up particularly when they want to increase their sinking fund, which is the fund they put all the long term maintenance money into the pool.

If we are never going to sell our property, golden rule number 3, what sort of property do we want to have long term? Do we want to have an apartment? Or do we want to have a house? What’s got more flexibility?

Over the life of the property, we are going to improve it, refresh it every 20 years or so. Make some renovations, things like that.

With an apartment what have you got?

You can put a new kitchen, a new bathroom and that’s it. The rest of the complex is at the mercy of the body corporate committee and whatever the other owners want to renovate.

When you got a block of land, you can do whatever you want. You can extend it, re-landscape it, repaint it. You can build a new one. You have complete flexibility.

If you are never going to sell, if you are going to buy properties that pay for themselves, if you are going to buy where it is booming, houses are definitely the way to go. You just can’t argue with the logic and the numbers.

Buy 5-10km from the city rule

Some people end up buying units because they believe in this rule that says “You buy 5-10km from the city” the only thing that they can afford is therefore 1, 2 bedroom units close to the city. Can I tell you that is a trap? It is a fallacy. All suburbs perform the same. Capital growth wise, just over time just like a ripple effect that usually occurs in the city goes now pushes out over time. They all perform the same because they are all relative to each other.

Don’t fall into that trap. It is not right the 5-10km rule is a myth. It is all in the cash flow. Remember the three (3) golden rules. Buy where it is booming, the properties pay for themselves, never sell. If you are going to follow these three (3) rules, houses are going to serve you better than units.

That’s it for me today.

Leave your comments below