Do houses or units make better investments?

Are you trying to determine if you should invest your hard-earned money in a unit or a house? In some property markets, a house may be the better option, in others a unit may provide healthier gains.

Instead of focussing on the individual property itself, concentrate on what the present-day market is doing. Consider the capital growth occurring in the area where you plan to invest and be aware of what is happening in the general economy.

Here are some tips to consider.

• Investing in a unit
• Investing in a house
• Ongoing expenses
• Depreciation

Investing in a unit

• Units can offer an affordable entry point into the property market in locations that may be beyond an investor’s budget if they were looking at houses. Highly sought-after (inner-city) locations are more attractive to tenants, offering higher rental yields and investment security
• The potentially lower price point may also allow an investor to build up a diversified portfolio quickly
• Strata scheme: insurance, maintenance and upkeep are provided by the body corporate whereas if you own a house all maintenance issues are your responsibility. However, be aware that big apartment complexes with features that tenants are drawn to, like lifts and swimming pools, will force the body corporate fees up considerably

Investing in a house

• Land value: an advantage when considering buying a house is the value of the land. Land appreciates over time, so even if you can only afford to purchase in a regional or an outer suburb, it could be a wise choice

For example: The value of a $500,000 house, might be split between $200,000 for the land and $300,000 for the value of the building. In comparison, a $500,000 unit has a smaller land size, therefore may not rise as much in value.

• Houses also have the advantage of being easier to renovate and change structurally – units often require permission from strata body
• Houses can increase the amount of living space quite easily. You can turn a two-bedroom home into a three-bedroom home with an extension and increase the value dramatically

Ongoing expenses

Council rates are usually higher on a house and you will also be required to pay land taxes on an ongoing basis. With a unit or apartment, you will have to account for strata fees quarterly for the life of the investment, including any special levies that may be raised.

Depreciation

When looking at depreciation deductions, there are several factors that affect the final calculation. These include the purchase price of the property, the construction commencement date, the settlement date, the land value (where relevant), and the value of fittings and fixtures located within the property.

When considering depreciation for either property type, it is important to understand that units or apartments that are purchased off the plan are brand new and you can claim depreciation on plant and equipment. If you are purchasing an older building this will affect the availability of plant and equipment deductions. You can also claim depreciation on assets that are considered ‘common’ property, i.e. swimming pools, lifts, gyms, fire extinguishers and their common areas.

Due to the amount of infrastructure involved in the construction of a residential unit compared to a residential property, your overall claim can be greatly impacted based on the type of property you choose to invest in.

Regardless of the property type, property investors should always contact a qualified Quantity Surveyor specialising in tax depreciation, such as BMT Tax Depreciation, to assess the depreciation deductions available for an investment property. A BMT Tax Depreciation Schedule maximises the deductions that can be claimed for depreciation over the life of a property. By claiming their full depreciation deductions, property investors can greatly improve the cash flow of any investment property, regardless of whether it is a house or unit.