“Our house, in the middle of our street
Our house, in the middle of our”
Oh, it’s you again – how’s it going!
HAY quick question: how much wood can a wood chuck chu… oops, sorry wrong blog, let me start again…
How much does it cost to purchase an average house in Sydney?
The answer is… a little over $1,000,000.
So how much does it cost to purchase an average apartment in Sydney?
But it’s at those levels because someone is willing to pay those prices. Supply versus demand people (read an earlier post here).
You’d think why would you bother? Sydney’s not the only place in Australia.
Why can’t you look inter-state (where it’s cheaper and more affordable)?
Why can’t you rentvest (renting where you want to live, investing where you can afford)?
Why can’t you turn to alternate investment classes altogether (shares, businesses, BITCOIN)?
Why can’t you… no wait, of course you can, no one is stopping you, but you’re here because I suckered you in good with the title (bastard!).
So a house or an apartment?
The house gets you the coveted land component but an apartment is a much cheaper option. Both have rental income potential, both have growth potential.
Which one makes for a better buy, a better investment?
If I knew that, I probably wouldn’t be sitting in this dimly lit room listening to 80s music and trying to conjure up catchy titles.
I’d be out there screaming “buy, buy, buy”.
BUT there’s a few things to consider when comparing houses versus apartments.
The “Great Australian Dream” has traditionally been to buy a quarter acre block with a good-sized house and decent backyard for the kids to play in. You took out a mortgage and with your steady 9-5, paid it off over 20 or 30 years.
That dream in Sydney has surely been scattered – you try and find a quarter acre of prime residential land in Sydney, and I’ll give you a good price for your 1,011sqm, deal?
You see, one of the most important principles is that land appreciates and buildings depreciate.
A lot can be done with a thousand square metres of pristine land, but there’s a catch.
The price of securing such a piece of Sydney will give you a nose-bleed.
Ever wondered why the price of housing increases in the long-run? Because the value of the underlying dirt is increasing every year (on average).
The building on the other hand, loses value – because of wear and tear, because of everyday use and because once it’s there, not much can be done to change it (without spending more money) – a window is a window right? Not like it can suddenly turn into a door overnight.
An apartment though, has much less land content for obvious reasons, let’s say as an example you have 10 apartments on the same quarter acre – 1011sqm divide by 10 equates to 101.1sqm per lot (a very generic example).
If you’re living on the 3rd floor – how do you own land? Are you a magician, where’s the land content?
In Australia, apartments (and the older style units/flats) are governed by what’s known as the strata scheme.
The strata scheme dictates every owner’s entitlements and is ruled by the owners corporation – i.e. every owner has a say in the decision making of the strata scheme.
The owners corporation makes decisions such as whether pets are allowed, which contractors are hired to clean, maintain and repair, reviews owners requests etc.
Every owner chips in a strata levy (tax) to pay for the running of the owners corporation into a strata fund (admin/sinking fund) based on their “lot entitlement”, usually calculated through the value of their land content!
So you could be living on the 27th floor in the middle of the city, BUT you still own a bit of the land the building sits on via taxes raised by your fellow owners – marvelous isn’t it.
So the real crux of the issue is not whether land content is more important – but land value.
There are places all over the world but why are the most expensive cities most expensive?
Because the value of the land in London, in New York, in Hong Kong, in Singapore is what gets you – land appreciates remember!
You could replace a building in the heart of Manhattan for a finite number – but the value of the little bit of dirt it sits on just keeps on rising.
This is why it is so important to understand that land value not land content should be the true comparison when we are discussing houses or apartments.
The land it’s sitting on, how valuable is it and how likely is it to keep on being valuable – it’s why the old adage, location, location, location is so true – because you can’t change a properties location!
But that’s not all surely, there are heaps of other factors to consider?
Of course there is, for example… oh, what’s that? It’s getting late? OK that’s fine – promise you’ll come back later on to find out what they are?
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P.S. As always, the posts are opinions and thoughts of yours truly only – you should really obtain professional advice regarding which strategy works best for you. Remember that every person’s circumstances is unique so seek specialised advice!