flats vs house

Are you talking about the complete block of flats, freehold? If that is the case the flats every time. It’s not the house that makes houses better investments than units, it’s the land underneath. With a single unit in a strata titled investment (flats, townhouses, apartments ect) you only get a fraction of the value of the land underneath. With a house you get the whole value of the land underneath. The buildings always depreciate, it’s the land that goes up in value.

With multiple flats you’ve got a much higher density of people living on the one piece of land, and higher density means higher yield as each person pays for at least a bedroom. More bedrooms means more money.

If the flats are run down you also have a lot more creative strategies for releasing value. With a renovated, nice house there’s not much you can do to unlock value. You could renovate the flats one by one and increase the rent each time and hold on, or you could strata title the lot and then sell them off one by one when the market is ready to accept them. Don’t flog the lot off at once or you’ll flood the market.

Problem + solution = profit. Where’s the problems, and what are the solutions?

Tell you what, you buy the house and I’ll buy the block of flats.[biggrin]

_____________________________
‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnight

Hi, Milly

With the immaculate house, it might already be at its best selling price and there is not much you might be able to do to release value with minimal outlay.

With the block of rundown flats, a new coat of paint and some general maintenance could quite quickly bring up its value and even rental yield.

Of course, with the house, there is minimal work while with the flats, there is more work to be done. Depends on what you are comfortable with doing.

All the best.

Daniel Lee [specs]

Just to add to that…

The price of anything is determined by the supply of the thing and the demand for the thing.

The supply of land in any area is fixed. You can’t create more land. The supply of houses is not fixed. You can build pretty much as many houses as you like. Even on the one piece of land – it’s called a highrise.

The demand for land varies with many factors, be they lifestyle, aspect, amenities and infrastructure, plus the allowed uses of that land. That’s why changing the allowable use of a piece of land can dramatically change it’s value – it just gets put into a different demand category. Land in cities is really only useful for putting properties on it, whether they be commercial or residential. As all land supply is virtually fixed, then the price is determined only by demand.

Remember a building is just a way to enjoy the land and keep the rain off your head. A tent works just as well, but the council won’t let you live in one. The value of finished houses should never exceed the cost of the land + the cost of the building. As the building gets older it loses value, but this is generally offset by the rising value of the land as more and more pairs of feet are in the country with a demand for land. If the value of finished houses exceeds the cost of the land + the cost of a building, then developers move in and start building on vacant land, until the market is brought back into equilibrium. The reason new houses generally cost more than old ones is because the old ones have lost value. If you don’t think houses lose value take a look in Bunnings on the weekend and observe the people madly trying to keep houses as new as possible to preserve value. It’s like the difference between a classic ferrari and a commodore. The ferrari owner does nothing to make sure his car keeps it’s value. The commodore owner spends lots of money on accessories and still falls behind. Reason : no more classic ferraris, and another commodore off the production line in 10 minutes time.

The reason that people don’t generally knock down houses is because it is not generally economic to do so. The cost of a house + the cost of the land + the cost of removal + the cost of a new house is generally more than a similar house in the same area, and rational property investors won’t demolish. Often old, small buildings on large blocks of land are demolished to make way for either larger houses, or multi-dwelling buildings. This helps unlock the value of the land and lets it get taken up by the demand better. In a way by putting a house on land, it actually devalues the land as it can’t easily be used for something else. Because you can live in a house the value roughly what the house is worth, but, for instance, you turned your land into a dump you’d devalue it further than vacant land.

The reason those victorian terraces are worth so much is not because of the building, it is because of the value of the land underneath, even though they can’t be knocked down. You can see this clearly because the value of an unrenovated building costs about the same as the value of a renovation less than a renovated one. ie unrenovated building + land = renovated building – cost of renovation + land.

When you buy an apartment in a building of 100 you are buying 1/100th of the land value underneath, and you are buying 1/100th of the building. As an example (these are just guesses):
land : $5,000,000
apartment building (100 units) : $20,000,000
total valueof building and land : $25,000,000
Your apartment :
1/100th of building : $200,000
1/100th of land : $50,000
Rough value of apartment : $250,000
But 80% of your apartment is a depreciating asset, and only 20% is an appreciating asset.

Now look at a house :
Land Value : $300,000
House Value : $250,000
Total Value of house/land : $550,000
55% of your investment is an appreciating asset, and 45% is a depreciating asset.

Over 10 years this is going to make a big difference!

Like most economic concepts, it’s happening around you every day, but you don’t really see the mechanism working. Yet everytime you buy a property, the first thing you look at is ‘what else can I get for my money – is this the best deal for me?’ By everyone doing this, those properties with the highest land value component always perform the best.

Sorry about the long post!

_____________________________
‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnight