Is it better to buy inner city unit or outer suburbs house?

This question is really something I would like to hear everyone's thoughts on. Or is it too broad of a question? I'm wondering if going forward with slowly building our portfolio, whether we would be better off buying blue chip properties close to capital cities but most of the time I would say our budget would limit us to units. Or whether to buy further out and manage to secure a house on a good size block?

If our overall plan is Buy and Hold, which would be a better strategy for the future of the portfolio or is a mixture of the above the best way to go?

At the moment we have a 400k budget for our second IP and are looking in Sydney. Hubby would prefer to buy something closer to Sydney CBD because that is what he feels more comfortable with, but many Somersoft members think out west could be worth considering for a house.

I guess I am just interested in hearing what other's opinions are on this topic and obviously this would apply to any capital city as in the future we would be looking elsewhere for additional IP's.

I look forward to hearing what you guys think. Thanks.
 
What's wrong with outer city units? Your budget could possibly buy you two and you might find the yields surprisingly high too. There was a thread here a while ago debunking the "inner city grows faster than outer suburbs" argument. Having said that, these are all generalised statements and you obviously need to look at specific suburbs and properties.
 
as bricks and morter depreciate, my thoughts are buy the land as the building is there to service the loan, and hold the land, held long enough you could put two units on it later.
 
In terms of land value I would look not just at land size but what % of the the overall value is the land component.

An inner city unit although on much smaller land would be sitting on more valuable land in general.

Other things to take into account.

Ability to add value, holding costs, ongoing maintenance.

In many inner city areas one bedroom apartments / units are in demand as they are the cheapest way to buy / rent in that desirable area. But in some areas there are a glut of apartments and you would not experience the same price / rental pressure.
 
In terms of land value I would look not just at land size but what % of the the overall value is the land component.

An inner city unit although on much smaller land would be sitting on more valuable land in general.

Other things to take into account.

Ability to add value, holding costs, ongoing maintenance.

In many inner city areas one bedroom apartments / units are in demand as they are the cheapest way to buy / rent in that desirable area. But in some areas there are a glut of apartments and you would not experience the same price / rental pressure.

Or to put it another way.......
....... Would you prefer 1 square metre of land in the CBD of Sydney or 5000 acres "out the back o' Bourke"?
 
My attitude is that I prefer blue chip inner city tenants to battlers in the outer suburbs. But maybe thats just my fears about rent defaults and property damage holding me back.
 
Personally, I would definitely be considering the "westie" suburbs of sydney... and i have some pretty good reasons (in my opinion):


  1. Yield is strong - currently 5-6%
  2. Blocks of land are quite large, usually 500-750sq.m
  3. holding costs are much lower, due to lower purchase price and higher yield
  4. Rental vacancies are hardly an issue, as many more people rent out there (much more demand)
  5. Value adding is easy - usually a coat of paint and a very basic cosmetic touch up is all thats needed, making it VERY cheap to value add. Compared to "blue chip" areas where you would have to do a whole new kitchen + bathroom + pergola out the back to get any decent value-adding
  6. It is one of the biggest growth areas in Sydney
  7. There is a fair bit of infrastructre development going on out west, and a lot of industry moving out that way
  8. These areas experienced some of the strongest growth during sydney's last boom
  9. Prices have dropped in these areas a bit in last couple of years, but are starting to level off and in some places are growing now.

The area i am particularly targeting is Mt Druitt through to St Marys suburbs, and surrounding areas.
The problem with most people looking at these areas is that you have to leave your emotions at home and look at them in a completely financial mindset.
 
Well said Witzl, seconded on every point. I've just purchased in the west at a lower price than the original 2002 sale (good depreciation remaining) with a yield over 7% and a hundred meters walking distance to a train station that puts you in the middle of the city in 30 mins. There are some very compelling reasons to buy out there.

Re tenant defaults and damage; risk is minimised with an effective PM, you have four weeks which should cover any defaults and in the worst case (major damage) landlord's insurance is a good start.
 
I was about to post a thread on a pretty similar topic! I am in the same situation in Tasmania, however I have one other issue to bring to the mix. This will be my first purchase. I'm buying as an IP, with a buy and hold strategy and plans to reinvet equity etc. Obviously what I can afford gets smaller as I get closer to Hobart itself.

I'm wondering if it's better to buy a smaller place to begin with, or even one with some development potential, so I can "learn the ropes" of owning IP without over extending myself, then look into the larger investments the second time around.

Or go hard (figures permitting of course) and get a larger place first off, putting myself at more risk but with a larger, and faster, reward.
 
1-1 draw

IMHO, there is no correct answer to this question. Different property types can suit different strategies, so I don't believe one is superior to the other.

If you look at the countless stats around capital growth (and I am assuming Melbourne not Sydney because I don't know Sydney), both inner and outer suburbs (and different property types) have performed well over the past 10-15 years.

Ultimately it will come down to what suburbs you know, your financial capabilities, the strengths/weaknesses of the specific property you are looking at.

I have had some experience in outer & inner burbs (with house, apartments & townhouses), but I am not sure whether my 7 years in the property market is sufficient time to make a categorical statement about which one is better.

However, I 'feel' as if a property closer to the CBD is a better choice. You know, its the vibe of the thing. :D
 
I've decided to find out through direct experimentation. I am selling my inner city units, and am looking to buy an outer suburban house.

Cheers,

The Y-man
 
I've decided to find out through direct experimentation. I am selling my inner city units, and am looking to buy an outer suburban house.

Cheers,

The Y-man

You reckon thats a wise move ?
With your experience Yman..I'm sure you have many valid reasons for doing that.
May I ask where the units that you have decided to sell are located ?
I am currently on the verge of getting an inner city apartment. Your wise comments are very much appreaciated.
 
IMHO, there is no correct answer to this question. Different property types can suit different strategies, so I don't believe one is superior to the other.

If you look at the countless stats around capital growth (and I am assuming Melbourne not Sydney because I don't know Sydney), both inner and outer suburbs (and different property types) have performed well over the past 10-15 years.

Ultimately it will come down to what suburbs you know, your financial capabilities, the strengths/weaknesses of the specific property you are looking at.

I have had some experience in outer & inner burbs (with house, apartments & townhouses), but I am not sure whether my 7 years in the property market is sufficient time to make a categorical statement about which one is better.

However, I 'feel' as if a property closer to the CBD is a better choice. You know, its the vibe of the thing. :D


I've always liked your post. Always fair, never biased ..with the right justification with every comment/view that you make/present.
 
You reckon thats a wise move ?
.

Time will tell! :D

With your experience Yman..I'm sure you have many valid reasons for doing that.
.

Don't count on it.... it could be "just for fun" :p

But yes, there are some interesting hypothesis going around in my head that needs experimental proof.

May I ask where the units that you have decided to sell are located ?
I am currently on the verge of getting an inner city apartment. Your wise comments are very much appreaciated.

Have sold this year in
Thornbury
Fairfield
Abbotsford

Trying to sell (but not succeeding!!) in
North Melbourne

Will be selling shortly in
Coburg
Prahran

Cheers,

The Y-man
 
Have sold this year in
Thornbury
Fairfield
Abbotsford

Trying to sell (but not succeeding!!) in
North Melbourne

Will be selling shortly in
Coburg
Prahran

Cheers,

The Y-man


Wow...what are the reasons that made you think of selling? Esp, in Prahran ?

Did you not experience capital growth at all ?

I've got a friend who is finding for inner city apartments- like the suburbs you mentioned. Perhaps you can provide more info.
 
However, I 'feel' as if a property closer to the CBD is a better choice. You know, its the vibe of the thing. :D

Like Mabo? :p

I was looking for that sort of response though, cause I know there isn't a right and a wrong answer. Especially from people with experience (as I am a newbie), the feel you have for a particular issue can be just as important as all the research I can apply.
 
After spending some time looking at stats, I have a definitive answer for you.

The stats I have been working with are the entire of Melbourne suburbs, as sourced from Australian Property Monitors. I collected long term average median price growth and yield for each suburb, and for houses and units.

For houses I then removed anything with a long term growth average under 10%, and then removed anything yielding under 4% (yes, I know suburbs don't really have "yields", but the yield metric provided at least puts us in the ballpark for high yielding properties).

For units I discovered that I had still LOTS of suburbs on my list! I needed to tighten the criteria to thin down the list a little. So I upped the minimum requirement for long term capital growth to 12%! [1]

This leads me to think that if you just go around buying random houses or units, you'll do better on the units (high chance of hitting a high yield / high growth property) - and your holding costs will on average be less too. [2]

However, thinking about this further I realized that you need to place more emphasis on "growth soon" than "long term growth", when starting out.

There is NO POINT buying and then holding for five years with no capital growth, just because you expect the property performance to eventually revert to the long term growth. No, you need to generate more equity quickly, not hunt for the best long term deal.

Not to a silly degree ("Sell at a loss and make it up on volume"), but you need to find a suburb that will work over the long term (there are LOTS) and then an individual DEAL which will allow you to create value and draw down on it as quickly as possible.

This will let you get more skin in the game faster than any "houses vs units" strategic planning.

So what I look for are areas that I think have favourable short to medium term conditions for high growth. This includes:
- under-performing areas compared to their long term averages
- low holding costs (If you have more lines in the water you get more fish)
- infrastructure and planning which will drive population
- areas where the "suburb stigma" is coming to an end

I believe these factors will drive short/medium term growth in an area, and allow me to grow the portfolio over time much faster than worrying about the type of assets I'm buying. You buy individual deals anyway, and I believe there are good deals in most kinds of assets.

I hope that helps - It's just what I currently think. :)

Oh, the definitive answer? It is "whatever works for you".

Footnotes:
[1] You need to understand WHY median prices move. In some suburbs you will see lots of new stock come on the market over a short period of time, which will drive up the median. But the value of the existing stock may not move at all! It's just the new stock driving the median up. I believe this happens more often with units, where many drop onto the market at once. On paper this suburb may look like it is booming, but in actual fact if you buy an old property it will not be increasing in value, and the new properties will be depreciating - who will buy your 1 year old house for more than the brand new one next door?

[2] I wouldn't advise you go around buying random houses and units anyway, so this "units or houses" argument needs to come down to real deals on offer to be of any use. You will find great deals in both camps.
 
Did you not experience capital growth at all ?
.

Opposite - plenty of decent capital growth (the CGT is a bit of bugger though!), to the point where I can "swap" a 2 BR apartment in one of these suburbs for a house on say 700-800 sqm in the outer burbs....

Cheers,

The Y-man
 
murtagh said:
However, thinking about this further I realized that you need to place more emphasis on "growth soon" than "long term growth", when starting out.

This is a very wise and true point!
I am in a similar position to Shuttergirl - looking for a 2nd IP to kick start the investments and build equity fast. I has chosen these particular areas because i feel, to me, they offer the most flexibility to add quick equity by either buying at a bargain price, or being able to do some value adding, or that the area is undergoing gentrification (losing the stigma).... and in many cases you can get all three in the one property :)
St Marys is my favourite for this at the moment, but the bargains arent quite as good there as they were 6 months ago, based on my footwork.

Of course... this is just my opinion!!
 
G'day Shuttergirl

Either will work. I think you need to find suburbs that will move well and buy in them, what ever you can get that's within your budget.

Personal preference is for land content as I think it has a better very long term future. But nothing wrong with buying units and getting land later.

Sorry I've not been much help on the unit v house issue but thems the breaks.

Cheers
Graeme
 
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