Last week we determined that you would need somewhere between $1.25M & $2.5M worth of property owned free & clear to produce you a living passive income of $100,000. You need a lot less property if you buy high yielding property – check out the website under my signature below. Or you need a lot more property, if you go with more conventional capital city property.
This week let’s dive a bit deeper in to what type of property you want in your portfolio.
Before we do though, I want to share with you that I will mix up the content of my blogs from week to week – sometimes a bit about investing or property and other times we will work on our mindset and beliefs and our goals and actions. Because 90% of your success results will not come from what you learn about property, it will be about what you do about property. And you won’t do anything unless you believe you can. That’s why we work with your inspiration.
There really are only two types of residential property to consider – that is you will be buying houses or apartments. It’s an age old discussion about what is better – bottom line is they are both good, but our answer to what you buy is – you will buy what will be what is best for you.
When asked by my investors “should I buy a house or a unit?” I know what they really mean is “which will make me the most money?” Again, at the risk of sounding like a broken record, there is no absolute right or wrong answer. Houses and units, though both are real estate investments, each have different characteristics, advantages and disadvantages.
It is worthwhile acknowledging however, that over the last 30 years or so, the great Australian Dream of a home with a big backyard has been the type of property in most demand by Aussie families. Therefore it was the type of property that has had the highest growth potential, since it had the highest demand. The difference in investment returns in historical terms between houses and units has been in favour of houses by approximately 2% annually.
I did say historical returns. When you invest in property, you are not buying history, you are in fact buying the future, or explained another way, you are buying a future income and capital growth stream. You must realise that what produced an outstanding result in the past may not necessarily hold true for the future. It is important to understand that the type of property that was in the highest demand in the past is changing rapidly.
The Australian Bureau of Statistics calculates that by 2020, households that have two people or less will be approximately 80% of the total population of households. This has a profound effect on the type of property we should be accumulating since the family style home will be in far less demand than previously. Units, apartments and townhouses will assume more prominence than before and the population will far more readily accept and expect to live in this style. Particularly property located on transport lines (rail, bus) and closer to the city – we just don’t want those long waits in traffic anymore.
I am not saying that you should not buy houses, but I maintain that your portfolio must include some of all types of property – and consider the future demand from people wanting to rent your property.
Another common question that creates confusion is the misconception that houses must appreciate faster than units because they have more land. After all, it is the land component that increases in value, while as the building ages it lowers in value. Therefore, the bigger the block of the land, the better right? My answer is always the same – not necessarily.
Consider this – given the choice between buying a 1000 sqm block located 30km north of the CBD in a new sub-division and a 300sqm block just 4km east of the CBD in an established redeveloping suburb, both of which are single residential lots and valued at $350,000 – which would you buy? The answer every time would be the smaller block, that is, if you were buying for investment reasons.
You may choose the larger block away from the city for lifestyle reasons (like bringing up your family) but the closer in block will undoubtably have stronger capital growth over the long term. So I put to you – it is not how much land you buy, it is where that land is located. The inner city location is going to have a far more limited supply of blocks than fringe suburbs, where if demand increases, the developers just rub their hands together and create more blocks.
Units then, will have a higher proportion of their value in the building itself, since the blocks or land component is far smaller. This means that units tend to have higher proportionate depreciation allowances than properties with a high land value. Units therefore have a lower land cost component and there is an argument that more of your investment dollar will be returned to you by way of higher rental yields.
At my stage of investing, I am focused much more on yield since I have built a sizable portfolio using a capital growth strategy (negative geared & land) but what I want now is steady relatively passive income that will pay for my lifestyle. You need to determine where you are at in the investment cycle – building wealth or building income. If its wealth, load up on ore houses. If you want income, you could consider having more units in your portfolio.
And why are we doing all of this? So you can do what you want to do rather than what you have to do.