inner city Brisbane apartments

If the apartment is in unique position (example, overlooking a river or very close to the beach), you'll do well.  I have got two apartments which are in good locations.  I'm sure I would have done a lot better if I invested in land because it is the land that goes up in value, not the building which goes down in value.  Some people think that a well located inner city apartment will do better than house and land  on the fringes of capital cities.

I don't like fully furnished apartments for 2 reasons: one, tenants don't look after the furniture; two, most tenants already have their own furniture.  If you want the apartment to be fully managed by an onsite manager, you are going to be up for higher management fees.

I personally won't buy any more apartments.

Hleung stated,

I'm sure I would have done a lot better if I invested in land because it is the land that goes up in value, not the building which goes down in value. I really don’t know who started this story, but I believe that it’s time someone gave the other side to the equation. There are two main approaches that people can take when deciding to invest in property and we should first understand these differences.   We can enter into a long term investment or speculate.   For most full time working Mum and Dad investors, the long term investment is the best option.   On the other hand (and I really think that this type covers the majority of investors on this site) some people enjoy speculative investment.   This type can be varied but usually centers around a value add scenario or development.   Don’t misunderstand me, both types can be viable, however I stress here that with speculative investment, in most cases you simply buy yourself another job and pay more tax (both personal and Cap gains). As the statement above is more often than not related to long term investments lets analyse the facts a bit further.   While it is fair to say that I have not researched Inner City Units compared to Outer Suburb Houses (I will try to find the time to do so), but from here, I am going to rely on figures that I have previously researched for the suburb of Coorparoo in Brisbane.   We are going to look at a ten year period from 1994 to 2004.  Now the first thing we must agree on is that as we are attempting to analyse which is the better investment we must get rid of all emotion (virtually impossible for the majority of investors) and consider the rate of return on the actual money that we invest in the property.  
The Assumptions 
Information                                                  House                                    Unit
Median price 1994                                       $160,000                               $120,000
Purchasers Income                                       $47,000                                  $47,000
Capital Growth Rate                            9%                                           7.15%
Inflation Rate                                                     6%                                           6%
Median Rent return 1994                             $165                                       $150
Median Rent return 2004                             $275                                       $248
Management fees                                            8.25%                                     8.25% Rates                                                              $1,800                                    $1,200
Building Insurance                                         $400                                       In BC Fees
External Maintenance                                   $1,000                                    In BC Fees
Body Corp Fees                                           Nil                                            $1,200
Borrowings on Int only at                              6.5%                                       6.5%  

Using the data above in a Property Investment Analysis projection we find that over ten years the results are as follows. 
Information                                                  House                                    Unit
Purchase Value 1994                                   $160,000                               $120,000
Value2004                                                     $378,778                               $239,388
Equity                                                             $210,795                               $112,871
Investor Contributions
Over 10 years                                                $33,722                                  $8,581  

However, when we started this analysis we stated that what we were looking at was the rate of return on the dollar that we invest, so that in order to make the investments equal we need to divide the House investment of $33,722 by the Unit investment of $8,581 which will give us a coefficient of 3.93.   We must then multiply the Equity of $112,871 by the 3.93 which would give a figure of $443,583. In other words if an investor had to decide whether to contribute $33,722 into a house investment in order to make a gain of $210,795 or a unit investment to gain $443,583 – should the value of the land increasing and building decreasing have any bearing on the decision? 

I’ll leave you to make that decision, but hasten to add that there is more to a good investment than land value.

Jon

hleung wrote:

Your figures are interesting and you make some good points, Jon.  I think that we need to take a macro approach rather than concentrate on one suburb which may not typify potential returns on houses or units. It'd be good for others to get involved with this "debate". 

Over the past 2 years, I've read books and gone to seminars run by what I call the "gurus" of residential property investing, namely John Fitzgerald, Jan Somers, Steve McNight, Margaret Lomas, Michael Yardney and Dympha Boholt.  From the principles that I've learnt, I've decided to follow one strategy rather than pick bits and pieces from a number of strategies.  Although I'm reasonably flexible, I don't have the skills or the time to keep on jumping from one idea to another. I basically follow John Fitzgerald and Jan Somers, namely buy mainly house & land and hold for the long term.  

Hi perryjud,
I believe that your calculations are a little light on.   By my calculations (and working on your income being $50K) the annual shortfall on this purchase would be $14,686 pre tax. or if you were to apply for a variation certificate you can reduce this to around $8000 a year.

As for projected capital growth rates, thats just what they are – someones guess.   I preferr to work on past figures actually achieved and on the unit in question, I have worked on a conservative 7% growth.   The pre tax rate of return is 43.27%  and the equity built over 10 years would be $304,746.   Your total outlay over 10 years would be $52,108.

The question that you have to answer is, for an investment of $52,108 of your money over ten years to create an equity base of $304,746.(or $207,172 after Cap gains tax)   Is that good enough?   If the Government told you that for every $1 that you saved they would match it by $3, would you think that it was a reasonable deal?

Jon

Perryjudd,

I can do better than that, if you would like to send me an email, I will reply with a full Property Analysis (6page report) which should answer all of your questions.

Jon