Town House or House?

[noodles]

My wife and I have been looking for a PPOR since the beginning of the year. Our goal is to buy a home to live in and to also claim the increased FHOG. We plan on living there for a few years and then rent it out. From there, my goal is to buy more property by drawing on increases in equity or from our savings.

Initially, we looked at houses around the 300-350K mark, but there are just so many buyers out there that a decent house would immediately get snapped up as soon as it comes out on the market.

We recently put a deposit to buy a new 330K town house (torrens title) in Leumeah, NSW, that is currently being built by Mirvac. We wanted a house that we liked and that was within our budget range, but the market is so intense that we're willing to settle for a town house. However, my concern with the town house is that it may not grow much in value as a house would, therefore limiting our ability to draw out equity.

What are the pros and cons of owning a town house as an investment property? Is this a good step in the direction of property investment?

Thanks in advance for your replies

 

[BV]

A townhouse as a rental should have higher yield
The CG should be similar if you spend about the same $ amount.

Now with the low interest rates you can afford to borrow a bigger amount.
However, rates will go up again so count on paying a mortgage at 8%

Since you are only just starting out you don't need the funcy house or the bigger space.
Go for something small which you can pay down quickly.
Having a smaller PPOR mortgage allows you to
have a life
have kids
and the most important, it allows you to concentrate on buying more IP's

I know there are a lot of FHB's out there.
Don't leave it any longer because you'll end up paying more.
IMO go for something that needs work, they are less popular with FHB's
and you can fix it slowly as you save up the money.

Good luck

 

[AUSPROP...]

I think in this guy's first video....

http://vimeo.com/3876018

he argues that prices of large family homes will soften, peaking in 2015 whislt the downsizer market will benefit. Changing demographics means old beliefs may not hold true.

 

[tubs]

Its land, not bricks and mortar that goes up in value.

I firmly believe in houses on land, rather than townhouses because you own more of the thing that goes up in value.

A townhouse on little land, and a house on more land in the same suburb at the same price would not go up at the same rate. The towhouse would go up slower because it is being held back by a depreciating house value. After all, given a choice between a townhouse built today and an identical one built 20 years ago, you'd pay less for the 20 year old one. The actual building has gone DOWN in value.

 

[AUSPROP...]

be careful with the belief that buildings depreciate. The house I am in cost me $350k to build 8 years ago and to build it again now would cost $1.1m (just the build, no land).

also with land, if it is zoned single res then within reason it doesn't tmatter how big or small the block is, it's a single dwelling block. e.g. I wouldn't give you one cent more for a 980sqm block as opposed to a 750sqm block as it doesn't add one ounce of utility for me, if anything it's just more to look after - just my opinion.

 

[MichaelW]

I think in this guy's first video.... he argues that prices of large family homes will soften, peaking in 2015 whilst the downsizer market will benefit. Changing demographics means old beliefs may not hold true.

Its land, not bricks and mortar that goes up in value.

I firmly believe in houses on land, rather than townhouses because you own more of the thing that goes up in value.

This is a bit of an ongoing debate. I personally am with Ausprop on this one though. I believe it is the old demand/supply tension that sets the price. I believe big old quarter acre blocks with shacks versus modern low maintenance townhouses at the same price point have completely different end customers. I agree with the first guy above that the changing demographics mean the latter stand to benefit more in the medium term.

My personal buying preference is for the former though, as I like the value add potential they have. But I am not your average downsizer buyer. Be careful not to extrapolate your personal buying behaviour into the market norm. You need to use some demography analysis to determine the likely market make-up and end product most likely to be in demand.

Just my personal opinion. But one I am acting on with my development for the affluent downsizer market on the Northern Beaches.

Cheers,
Michael

 

[sparky23]

When we bought our townhouse brand new in Mandurah 3 years ago we paid $295,000, in less than a year it was bank valued at $395,000 and another year later at $495,000. Of course this was boom times and the latest assessment is back down to $395,000 which is still fairly respectable all things considered.

There are quite a few townhouses on the estate I work at and they have gone up a lot in value over the last few years, I would say at the same rate if not faster than the houses. I would be looking for one on its own title however and stay clear of body corporates.

 

[noodles]

AUSPROP says:
large family homes will soften, peaking in 2015 whislt the downsizer market will benefit
....if it is zoned single res then within reason it doesn't tmatter how big or small the block is, it's a single dwelling block.

Thanks Ausprop, very informative

BV says:
Don't leave it any longer because you'll end up paying more.
IMO go for something that needs work, they are less popular with FHB's
and you can fix it slowly as you save up the money.

Point taken. I don't have any DIY skills though. We're expecting a second child, so for now we're looking for something in good nick without too much work.

Sparky23 says:
I would be looking for one on its own title however and stay clear of body corporates

What do you mean by its own title? Whats body corporates? Why is it a bad thing?

 

[BV]

Point taken. I don't have any DIY skills though. We're expecting a second child, so for now we're looking for something in good nick without too much work.

You don't need the DIY skills
Anyone can do cleaning and painting, for the rest you employ professionals.

When you find something ask them for early access so that you can do the cleanup, replace the carpet and paint. Most are reluctant to let you in before settlement.

Ask to put it in the contract and if they resist then tell them that you will send professionals to paint and replace the carpet.

Anything else major like new kitchens and bathrooms can be done later,
It's inconvenient when you are in the house but it can be done.
If you get early access and you are proactive you may have time to do the bathroom and kitchen as well.

Or you could go out and buy a new house all together...

 

[GerMonkey]

Wouldn't a house offer a higher capital gain even if the rental yield is lower?

 

[deejay]

What do you mean by its own title? Whats body corporates? Why is it a bad thing?

The poster you quoted was talking about the difference between strata title and torrens title. I'll give a broad-brush idea of the difference here, but I don't know all the finer points of this because we avoid strata. I'm sure someone will correct me if I get something wrong.

Strata title basically is where you own a defined part of a building (a flat), or a self-contained building (townhouse) which may or may not include shared walls. You don't, strictly speaking, own the land. What you own is a common interest in the land.

That means you don't control the land, and unless it's a self-contained building, you don't control the building (maybe not even then - I think it varies according to the fine print). The majority of owners can vote for or against something and you can't contest it. They can vote for an expensive and unnecessary upgrade, committing you to many thousands of dollars, and you have to pay it. You need their permission to do things that affect the structure, even things as simple as installing reverse cycle air or a new vent. They can make bad decisions, like choosing the wrong kind of insurance or insurance with poor rates or insurance with exclusions you consider inappropriate, and it's out of your control. You can't exploit opportunities in the land (eg, extending or subdividing).

So we choose not to buy strata. We would consider a majority of flats (giving us a controlling interest) or preferably the whole block (to give us control of the land), but we would never buy a single.

Now, you can get townhouse-style homes that are torrens title, and that's a whole different ballgame. With torrens title, you own a defined block of land with its buildings. There is no common property, except dividing fences (for detached) or walls (for semis). You have control over your bit. You insure it yourself, you can do what you want with it or to it, within reason.

Obviously that control is not absolute - like any house, you are still subject to council, and sometimes your neighbour if there is impact on a shared wall or fence on the boundary. And there might be covenants obliging you to maintain the same look and feel as your neighbours. But it's the same kind of control you get with any house. You just have a little bit less land than your standard house.

So how do you know if it's strata or torrens? The agent can tell you, and it might be in the ad, but a simple quick-and-dirty test is - is there common property? Is there a single driveway that serves multiple residences? If so, it is almost certainly strata. (There are exceptions - it could belong to the rear townhouse and be a defined legal right of way for the others - but I believe that is not usual). If the townhouses each have their own driveways to the street, they could easily be torrens.

Now, there are advantages to strata. Lots of people choose them as a "set and forget" option - a lot of the maintenance is done for you. Some people feel there is more certainty about maintenance costs, although that can be overridden by vote. I'm sure there are people who prefer strata who can talk authoritatively about the advantages - they're just not compelling for us and our personal balance of risk/advantage.

 

[noodles]

thanks

Thanks for your reply deejay

We've checked and the title is definitely torrens title. There are a few restrictions, i.e the appearances. But I guess that's not a bad thing, as it keeps the look and feel of the community.

Ausprop says
I think in this guy's first video....

http://vimeo.com/3876018

he argues that prices of large family homes will soften, peaking in 2015 whislt the downsizer market will benefit. Changing demographics means old beliefs may not hold true.

AUSPROP do you have anything else to back up what you're saying. There's not really enough in the video to go on.

 

[AUSPROP...]

AUSPROP do you have anything else to back up what you're saying. There's not really enough in the video to go on.

nope. it's just my opinion and not worth a whole lot. Just think about demographic change, marriage break up, busier lives, increasing fuel costs vs telecommuting, ageing population, increasing migration etc etc and make a call on where you see hosuign styles going. You may make a completely different assessment which is cool. After all - there is a baby boom rolling out. Personally my family will need the 5x3, but there is no chance of going more than 15kms from the CBD.

 

[The_Bludger]

It depends on your strategy. Do you have one yet?

 

[BayView]

I remember one of the points Marg Lomas brought up in her books was you need to establish what the type of building is being sought in the given area you choose to invest.

No good going for a 1 bed unit out in the FHB belt if everyone is a young family with 2 kids looking for a cheap house with a yard.

Do your research on the area first, then decide what the property type is you should target.

This is what we have endeavoured to do with each of our purchases.

It means you will have strong tenant demand and strong buyer demand should you wish to sell.

Then pick a good location. Then, make sure it has some depreciation (built after 1987)

 

[Alex P Keaton]

Having a smaller PPOR mortgage allows you to


and the most important, it allows you to concentrate on buying more IP's
Good luck

I agree. My loan is only 3 times my gross income, which enables me to save a lot and invest sooner.

 

[BayView]

Wouldn't a house offer a higher capital gain even if the rental yield is lower?

Not always.

We bought our current PPOR in 2000, and one of our units in 2003.

As of Nov 2008, they had both doubled in value.

Based on the purchase price, the PPoR rent return is currently 5.4%, while the unit is 13.37%.

I wish I had 10 of the units and no house.