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Units Are A Bad Investment? · The Follio Property Podcast

• 0:05
  Welcome to I Call Bullshit Property Podcast, where we separate real estate fact from fiction. I'm Rhys, and in every episode, we uncover the truth behind the property market's biggest claims and trends. Joining me is our resident expert, Lachlan Delahunty. He's seen it all and isn't afraid to call out the bullshit when he sees it. Welcome, Lachlan. Thanks, Rhys. What have we got today? Yeah.
• 0:25
  Today we have units are a bad investment. Firstly, I think let's unpack that. What is a unit? Yeah, good question. What is a unit, Lachlan? What is a unit? A unit comes in three forms. So high density, medium density and low density.
• 0:45
  So you can, in Perth, what does that look like specifically? High density would be the form of apartment. So they still get labelled units because obviously back in the 70s and 80s, everything was a unit. Medium density we define as between 20 and 50 units. So it's still in that sort of apartment slash unit category. And then lower densities is typically sub that when you're specifically talking about units. It's interesting you say...
• 1:12
  apartments and they get classified as units. When I'm speaking to people in Perth at the moment, when I say units, that's immediately what they think of, apartments, and I have to almost reverse engineer it and say, no, actually, a unit is, you know, a townhouse, a villa, or a duplex can be an apartment as well, but.
• 1:29
  It can be. It incorporates it all because when you look at data, it's houses versus units, right? So look at anything that's not a house, an established house on a standalone title, that's classified as a unit. When we look at it as a business, I look at a unit that typically is lower density and I refer to apartments as high density. And the reason I say that, I think it's quite interesting because –
• 1:51
  The statement is units are a bad investment. But if a lot of the people I'm talking to from a day-to-day basis are assuming units are an apartment, that could be, you know, it's not the whole asset type of what a unit is. So I thought it'd be good to clarify that once we start to unpack it because, yeah, not all units look and feel the same or have the same land component. Yeah. Or the same density as you were talking about as well. Yeah. The big thing for me is units don't offer high capital growth.
• 2:17
  Do you agree? I don't. So they do offer a level of capital growth, albeit it underperforms when it can compare to houses. So historically, when you look at Australia, houses have tracked for the last 30 years between 6.5% and 7% long-term compounding growth. So that's year on year, somewhere between 6.5%, 7% growth throughout the entire cycle since data was produced in the late 70s. When you look at units...
• 2:47
  in, you know, encapsulating everything you discussed, it's about 2% below that historically. So you're looking, you know, across the board anywhere from three and a half to four and a half, depending on the markets you're in. But so for Perth, for instance, Perth houses have now tracked at six and a half percent. At the start of the cycle, it was closer to six, but we've had a pretty good run. So it's now at six and a half percent where units have been, you know,
• 3:11
  around four and a half for this period of the cycle. When we started buying in Perth six or 70 years ago, it was about 4%. So in theory, over the long term, units have produced a 2% lower growth rate in comparison to houses.
• 3:25
  Yeah, which is interesting because when you – that isn't a hell of a lot of difference really in terms of growth. And if you think about the entry level point, I'd imagine a unit is going to be significantly cheaper to enter the market than a house. And especially looking at, you know, Perth's obviously gone on a run. Adelaide, Brisbane's gone on a run. Sydney's been on that run forever now. And entry point for a house is almost unachievable for the majority of the, I guess, punters out there at the moment.
• 3:54
  Yeah, and it makes for a different asset class to get you into the market, right? And that's the hardest thing to do at the moment. You've also got to understand that there's a cash flow benefit, which I'm sure we'll talk about in more detail. So, albeit your long-term compounding growth is 2% less, throughout the period of holding that property, your cash flow may be 2% higher.
• 4:13
  And that's looking at the cohesion. And this is what we look at when we look at commercial property, right? Commercial property is very much a cash flow heavy asset in terms of we buy commercial assets to get exposure to cash, to income. So when we look at growth rates for commercial property, typically the growth rates are similar to that of units. They're 3.5% to 4%, but your cash flow is 6%. So you're buying that asset for cash flow.
• 4:37
  So that nets out year-on-year returns about 10%. With residential houses, it's about 6.5% to 7% capital growth, and it's 3% to 3.5%, sometimes 4% cash flow. So it still nets out 10%. So units are still in that equation where your capital growth may be 3.5% to 4.5%, but your cash flow, sometimes you can get up to 5%, 6% for those apartments that we're talking about. So that's the sort of contrast in comparing.
• 5:03
  And diversification, I guess, is key, especially if you're looking to build out a portfolio. If you want to sort of manage some of that cash flow, it doesn't seem like the worst idea to help with the cash flow, but still have an asset that has some capital growth perspective as well.
• 5:19
  Certainly. If you're trying to get into the market, but you have cash flow constraints, so you may have, you know, a healthy deposit, but you've changed jobs and cash flow doesn't allow for serviceability, then you may have to consider that. That's still getting into the market is better than doing nothing, particularly if you time it right. So absolutely, it's a really good solution for that. And equally, you know, we spoke about this topic in a previous podcast, but about that time in the market.
• 5:47
  What you'll find when a market goes through a growth run, and what we've seen certainly in Perth as a good indication, is the housing market typically is the first to go. And if you look at Perth, the real growth run for the housing market was really between 2022 and 2024. We've seen a steep uplift of growth over that.
• 6:06
  two-year period, which continued to go into 2025 and will go beyond that in my belief. But there was a real lag from the apartment market. And in this scenario, it was two to three years after that. And what happens is the same thing happened in Brisbane. Houses go on a serious run and the gap between housing and apartments gets to the point where people start to see value in the locality that they can buy for a unit or an apartment in comparison to a house.
• 6:33
  And not everyone wants to get pushed out into the urban sprawl and into the outer suburb areas. So naturally get drawn back to location. And that's what we're seeing in this cycle. The unit market has followed with a pretty serious run.
• 6:45
  Yeah, definitely. And I think in terms of the affordability, once the houses go on that run, most first-time buyers or young first-time investors are going to be capped out of the market from a house perspective. Initially, that was what they've been trying to get into over the last 12, 18 months. So it feels like it just needs a bit of an education piece about units being a viable option as an investment or as a first-time buyer. But affordability naturally kind of pushes
• 7:15
  And, you know, obviously from previous cycles you've mentioned there's been a lag, but it feels like affordability is obviously the key one, but also a bit of education. Okay, this is actually my entry point to get into that suburb I want to get into or get into this area that I want to get into. You're exactly right. And one of the key considerations that people get caught up in, they're like, I don't want to pay strata fees. I've heard so many horror stories. That was the big thing, strata fees, the word...
• 7:39
  It's a dirty word. It's just a dirty negative word. I've never lived in a unit, so I have no idea what strata looks like, just the negative connotation behind it. You're the expert. What's the strata fees? What does a strata do? Well, the strata's incorporating all the amenity, essentially, that's in these complexes. So the simple answer to that is smaller complex typically come with less strata fees because you're not paying for the amenity. So as soon as you get...
• 8:08
  larger complexes where you've got pools, you've got lifts, you've got common areas, albeit those things are fantastic to have. They come with a strata tax, so to speak, right? And that can be anywhere from a couple of thousand dollars a year up to, you know, there's one particular complex here locally in Perth, which is, you know, $25,000 to $30,000 a year just in strata fees, but there's a lot of amenity with that.
• 8:32
  So when we come to investments, obviously, it's all about cash flow. The lower strata fees, the better. And in some scenarios, you can get strata that doesn't – a strata complex that has no strata fees. And that's typically a server strata complex. So for a first-time buyer or investor, when they're looking at these units, will they know what the strata fees are going to be roughly as a percentage or is there any ad hoc fees that are –
• 8:55
  incorporated if, I don't know, if something breaks within the complex and then all the tenants have to band together to pay it, would it be investor or homeowner, would they know exactly what they're in for or is there going to be some hidden costs along the way?
• 9:10
  No, there's strata minutes. So things to consider when you're buying a strata property is always look what's in the surplus fund. So particularly if you're buying in a larger, older complex that you know is going to have problems, right? It was built in the 70s or 80s. It's four stories. You know, the roof looks like it's going to fall off. Okay, we're going to replace the roof at some point. I can see that clear as day.
• 9:30
  First thing you want to do is get the strata fee. So the agent's selling the property, has to disclose all that. It'll be all in the strata documentation. But there's also strata minutes when they meet. They have to record everything at the meeting. And in that, we'll have essentially what's in their bank account. And some complexes have a couple hundred thousand sitting there for when things go wrong. So you get a bit of confidence. Okay, I'm not going to have to buy this property. The roof falls off. And then all of a sudden, I'm 10K in to help everyone else fix the roof that I had nothing to do with.
• 9:57
  So that's important, understand what's in the kitty. But as part of that, you'll see exactly what work's been done through the minutes, what's been done historically, what decisions have been made and what your contribution in terms of your strata fees, where they're going to.
• 10:13
  And that's things such as driveway maintenance. There may be an on-site maintenance man to fix up any of the problems that pop up from time to time. There could be gardening maintenance. So someone's paid to come out there and mow the lawns and take the bins out. So you just want to understand what you're paying for.
• 10:30
  But the smaller complexes and typically, you know, you can get survey stratas up to sort of four or five that have a common driveway, but there's actually no strata fees payable because everyone owns their independent allotment. And when we're looking to invest, where budget allows, it's sort of how we work back. Ideally, you know, you're buying some portion of land. That's where people probably get misled with strata or units or apartments like, oh, we're
• 10:55
  Now we want to buy land. We just bought a property for a client that was a strata asset, one of three, that had 1,000 square metres of land associated to that overall title lot. So in essence, you're buying 330 square metres of land in a super desirable location under a million dollars. If you try to do that...
• 11:16
  In a non-Strata environment, you'd be paying 50% more for that product. So there's value in that and that's what I think people have realized. It's fascinating because I wouldn't have, when I hear Strata, I wouldn't have thought of a land component value. In my head, just when you're looking at. Well, that was Mount Lawley, right? So you tell me where you're going to buy 350 square meters of land, a three by one.
• 11:40
  for $100 million. It doesn't exist. It was $860. If that was a standalone home, you're paying one and a half for that. So I'm kind of reading between the lines here. Strata, although it's perceived as a negative word, from an investment standpoint, shouldn't deter the average.
• 11:56
  Just understanding and being comfortable because you're paying typically for a service or you're paying it for a reason. It's not money that's going to nothing. It's to keep afloat the property itself. And those maintenance contingencies that we spoke about earlier when we're talking about costs of holding property that comes with maintenance contingencies.
• 12:15
  Well, that's what the strata is. You're not going to have to fork out typically more than that because you're paying that in your strata fees to account for when hot water systems go, when the air conditioning goes, when the roof needs repaired. So you're not paying for nothing and that's important to understand. From an investment standpoint, would you say units attract a riskier tenant?
• 12:32
  No, I wouldn't say it's a riskier tenant because it really depends on... And this is just me assuming a lot of these tenants coming into units, just moved out of home, young friends living in together, maybe a bit riskier in terms of...
• 12:48
  stability with their jobs, how they're going to look after the property. And this is generalizing. I know, you know, that's going to be a valid entry point for some families in certain areas as well, but I'm just thinking more from... Yeah. But there's an argument that suggests that the renter pool is much larger, right? There's a lot of, you know, a lot more people out there that are typically looking for one bedroom to two bedroom units, houses, billows, than there is four to five bedroom family homes. Right.
• 13:13
  So you've actually got a larger scale of tenant pool to draw from. In terms of that profile, is it more riskier? Probably got a younger demographic typically, which may come with some job insecurity potentially, may come with that perceived ability not to look after it the way you would like. But that all comes down to your property management and make sure they're vetting the quality of the tenant. And regardless whether you've got a family or whether you've got an individual...
• 13:36
  student in your home or unit, vetting them through reference checks and understanding their previous history and all those sorts of things becomes paramount. Any units that you see as a complete no-no? You wouldn't touch, obviously we've gone through and there seems to be a lot of positivity from what's coming across at the moment from yourself. So units do seem like a good investment from what I'm hearing from you, but is there anything that you perceive as, you know, I wouldn't touch that with a 10-foot pole?
• 14:03
  Yeah, absolutely. So high density, stay away from. And define high density. Typically north of a complex of 30 is getting to medium to high. So anything above 30, I'm not personally comfortable with. Anything above 50, I'm certainly steering away from.
• 14:19
  New-built apartments in particular, they're flashy, they look great, but you're typically buying a brand-new car off the shelf unless the market's really running. You may take a depreciation hit in terms of prices coming off. Things that you need some additional uses with the property, so making sure you've got a car park, making sure you've got a balcony, making sure you're not getting the smallest unit in the complex, all those sorts of things come into play.
• 14:49
  investors going into the market and buying one unit in a complex of 100 with no car parking and no balcony. It's like, okay, you're buying pool on the exit of that if it's not an investor. And when the market's cool, investors come out of the market, okay, I've got an occupier that now doesn't have a car park and doesn't have a balcony. You're starting to reduce the buy pool of that asset. So that's a big no-no for me. In comparing the two, when you say, where's my preference?
• 15:16
  I'm always of the belief if you can buy established and budget allows, we can get an established property over a unit, then that's certainly the preference. And the stronger the land value, typically history would say that you get more capital growth, the closer you get to land value, but understand the offset of that is the cashflow.
• 15:34
  So if you look at a pure land value asset, and that's in its rawest form of vacant land, okay, arguably, then you'll get more capital growth, but there's no cash flow, so then you can't service it. So that's not typically a viable option. An upgrade from that's a development site that you may gain a small yield from, so it might be 2.5% to 3.5% rental returns.
• 15:54
  Again, you might get a significant capital growth in that asset, but your cash flow may not be able to support it. So there's sort of, there's levels and then you step it up and you get more of an established home where 60% of the value is the land versus 40% of the improvements right through to the degree we just discussed that one bedroom, one bedroom, one bathroom apartment where 99.7% of the value is in the improvements and 0.3% of it's actually in the land. And that's what concerns me because you've got no underlying land value in those scenarios. Yep.
• 16:23
  I mean, the oversupply thing you mentioned earlier as well from a department standpoint, the amount of people I've spoken to, particularly in Melbourne where there was an oversupply and I've got burnt by off-the-plan purchases and it's almost set them back now from, A, they're selling at a loss. So, you know, financially it's impacted them, but B, it's going to be hard for them to now re-enter the market because they got burnt from an oversupply issue and off-the-plan. What about yourself? Have you...
• 16:53
  You know, you're obviously a savvy investor yourself. Do you look at units in your portfolio or have you had them in the past before? First investment was exactly that. Off the plan, townhouse. Maybe it was you that was telling me the story. Again, when I thought I knew it all, and I certainly didn't overlay that, I bought it at the wrong time in the cycle in a regional area. So all the things I'd advise a client not to do, I did myself.
• 17:14
  And the problem was it took me seven years before that property got back to the value that I paid for it. And during a period where I was at university, money certainly wasn't freely. I was just trying to buy a pint at the pub. So that seven years was really costly. And it's that opportunity that cost me getting into the market and getting further with the progression of my portfolio.
• 17:35
  So the things that I learned from that is, again, timing the market when you're looking at different types of stock. I did get a benefit of cash flow, so it didn't cost me a lot to hold that. So I understood that, okay, I wasn't gonna be able to service a huge debt without that rental come. So there's an argument suggest if I had a time that better, if I had bought that five or six years after the fact, when the timing was right in that market, that could have been a very viable investment for me.
• 18:02
  So it's just understanding the different frameworks. But you're right, it's all, you know, you said before, supply and demand and scarcity typically make for better investments. If you buy in markets where demand exceeds supply and you can buy an asset type where there's scarcity and it can be in the form of a unit as well, own-occupied type units certainly do appeal, then you're typically going to see growth in that particular asset.
• 18:28
  What about spruikers? I mean, that's just a keyword since I've been in the real estate industry that I hear. And not just the real estate industry, when I'm talking with potential customers out there. Spruikers, first thing that comes to mind for spruikers is off the plan purchases. And it feels like,
• 18:46
  well, it feels like it. People have been burnt from in the past. What are some, and they're still out there. They're still out there, I mean. In droves, in droves. A hundred percent. And it's interesting. They do have a similar sort of tone of voice and what they're pitching. But for a potential investor out there that is maybe talking to a spruiker, what's some top tips from you to avoid or to make sure what's going to be a red flag?
• 19:09
  When you're trying to get advice from any profession, it's important to firstly understand how they remunerate it. So that's the first question I'd ask in those scenarios because you need to understand and not all these product salespeople that are selling off the plan have malicious intent. I don't think a lot of them do, but it's understanding where the narrative is coming from.
• 19:33
  So how they're remunerated, okay, what are the fundamentals that are driving their decision-making in terms of giving them advice? And thirdly, do they have that particular asset that they're selling in their own portfolio? That's the first thing anyone should ask. And I get excited when clients ask me about my portfolio, show us the makeup, I want to know. And I'm like, fair question. If we take a position in Melbourne, do I personally have a property in Melbourne? If I can't answer that with yes, then who would take my advice on that?
• 20:02
  Same when we started buying in Perth in 2018. Trying to buy, being a property advisor, buyer's agent in the Perth market in 2018 was a very difficult challenge, right? Because it just came off eight years of negative growth. So anyone that thought you could make money in property thought you were just another spruiker, you know, another of these used car salesmen trying to plug a product. And specifically, you can make money in property in Perth was, you know, it was impossible.
• 20:29
  So at that time, you know, trying to pitch that product, you know, and our product is established home, blue chip, you know, typically blue chip family homes was, was really, really difficult. But the one thing I could fall back on is I took a really strong position personally in the Perth market 2018 and 19 because the data, you know, as we track markets, we use data to do that.
• 20:48
  I was really confident. And so in those conversations, I could look a client in the eye and talk through my portfolio and why I'd made that decision, which gives them ample confidence. If you come from a place of data and you're doing that personally, then that shows you've got faith in what you're recommending. So that would be the third piece is really understanding that was a long-winded answer. Yeah.
• 21:09
  But understanding how they get paid, what's their narrative or incentive for voicing that. You want to see that they're backing what they're pitching, I guess, as well. Without a doubt, yeah. So you heard that. Ask to see their portfolio before making a decision. Absolutely. I understand their narrative. And if they believe in it, they should have bought one for themselves, one for their mum and dad, and one for their family and friends. If they've done that, they've got full confidence in the market and the asset type that they're selling or buying.
• 21:34
  What about qualifications? Is there specific qualifications out there that, you know, can people have to go through an ethics test to sell types of investment advice or is it all unregulated? The property industry, in essence, is extremely unregulated and it's concerning. So essentially for a lot of people, they just require a real estate sales course, which can take two weeks to achieve. Often a lot of these spruikers that you're referring to don't even have that
• 22:01
  And it's becoming a real problem and there may be a Royal Commission into this space over the coming decade. I hope there is because it needs to happen because there's a lot of ill advice taking place. And the way to get over that is looking for qualifications, ideally a property degree at a minimum overlaid with a PIPA, so it's Property Investment Advisory of Australia that gives professionals the legal rights to give property advice, particularly when building portfolios.
• 22:30
  Without that, anyone in our firm has to be fully licensed for that people course. Without that, you just become potentially another spruiker and that is concerning. Okay, so...
• 22:42
  Thanks for that. I think that was, it's good to understand that because I think, as I said earlier, the perception I had before entering the industry, also from the conversations I'm having with potential clients out there, units, you know, go back to the initial statement, units are about investment. A lot of people think apartments, a lot of people think spruikers, a lot of people think off the plan. So it's good to understand what to look out for, what to avoid and maybe some areas to look at. From your perspective, so you mentioned earlier,
• 23:09
  You want to be in those owner-occupier appealed areas, low density potentially is preferred. A lot of medium density. A bit of a land value component. What sort of areas would you be, if you were looking at purchasing a unit, where would you be looking at the moment? And what type of asset type would you be looking at as well?
• 23:28
  Yep. So if we went locally in Perth, is that what you're sort of alluding to? So again, areas that are dominated by own occupiers. So Mount Lawley was a great example. You know, 78% of the suburbs made up of own occupiers. So buying units in that area appealed to a range of different tenant demographics, but more importantly...
• 23:47
  When you go to sell it, there's a huge buyer pool for that. You've got downsizers, you've got young professionals trying to get into the area. So you open up that buyer pool and that's what we're looking for. So that would be an area leading, say, in the north, an area such as Duncraig. Albeit there isn't a lot of units there. It's a lot of established properties. If you can get into a Pabri or something like that where there may be one or three or a duplex, I think you're safeguarded by the fact there's enough.
• 24:12
  own occupiers looking to get in the area for school catchments, you know, ocean proximity, good amenity, those sorts of things all come into play. So again, looking for A-grade localities that have own occupier appeal. What is own occupier appeal? School catchments, amenity, you know, city or ocean proximity, those sorts of things become really, really important to de-risk the fact that you're buying more improvement value than you are land value. And that's really
• 24:42
  Cheers, Val Lachan. So we've touched on Strata, which I've actually educated myself on Strata because coming into this, I'm still probably a bit of a newbie on that. We've looked at the yields perspective, which was a very positive frame rate. We've looked at...
• 24:58
  high-density apartments being a higher risk and spruikers being out there, types of things to be looking out from that perspective. So we've kind of covered some negatives and some positives. So Lachlan, what's the verdict? Units are a bad investment. Fact or fiction? Do you call bullshit? I call bullshit. I think there is a place for units in an investor's portfolio, particularly when serviceability or cash flow is required to get into the market or to continue to build out the portfolio. Yeah.
• 25:25
  But again, understanding what you're buying and understanding that the capital growth may not be as significant as an established property, the long-term fundamentals are still good. So I call bullshit on that, Rhys. Thanks, Lachlan. Make sure to join us next episode. Stay informed, stay curious, and keep going out of bullshit.