Cam McLellan: Never Buy Apartments!

Merry Christmas guys!

I'm just reading the book "My Four Year Old Property Investor" by Cam McLellan and I really like it. Plenty of good stuff for a newbie like me. However, his views on apartments are completely different to my previous understanding. As he's a very wealthy investor, I thought I should take his thoughts seriously. What's everyone's thoughts on this? Here's the excerpt from the book:

"Australian tax law says a building has a life of 40 years, after which it theoretically needs to be replaced.

Let that sink in and never forget it. Wealth comes from land. The only purpose of a building is to gather rent to help you cover land holding costs.

Now let's talk about buying property for long term growth. I'd class a long term investment as a property that grows in value for 150 years plus. That's because I'm not investing for myself anymore. I'm doing it for you and your kids.

This is why apartments are always bad investments.

In talking wicked witch bad!

Apartments are a flashy investment. There's something cool about the thought of owning one. I should say that I build hundreds of apartments each year. But they don't meet my long term criteria. Even if apartment prices rose faster than medium density housing (25-80 homes per hectare), I still wouldn't buy one. Because I know that in 40 years it's going to be a slum. The building will age and sell below market value so a developer like me can profit by knocking it down and building again.

If you buy an apartment, think how much land you get with your purchase. Divide the size of the land by the number of apartments. You don't end up owning much land, which is why there's so little potential for long term appreciation.

That's why I buy medium density housing that continues to grow in value over the long term. Even if you eventually have to replace the house you still have a sound investment.

People talk about land content ratio (LCR), but don't worry too much about this calculation. If you're buying a house (or even a unit or townhouse) on a reasonably sized block for a suburb, it can still be a worthy investment. Here's a rule of thumb to guide your decisions. The total floor area of all buildings needs to be less than the land. In other words, the LCR must exceed 1:1 (i.e. 100%)."

 

That's all well and good. I've read the book also. I should disclaim I was a H&L guy beforehand.

But the question is, does what he is saying make sense to YOU?
Does it fit YOUR strategy? There's no saying you can't buy an apartment and sell later for profit. He's talking about a buy and hold strategy that "grows in value for 150 years plus". 150 years is ten times longer than the next 15 years.

 

I'd much rather go for the house on land for the long term. As long as you can pay all the holding costs. As cities get bigger, the demand for well located land rises. As population increases, people have the choice of sucking up high prices for well located land, or they have to go far out for cheaper land or buy an apartment somewhere. Developers can buy land that once housed one home/one family into something holding many apartments, paying a premium to do this as they can also still make a profit.

Should the landowner accept, they'll get a massive payout. They could also develop it themselves and possibly make a lot of money doing that.

The apartments though.... Our cities can continually keep reaching upwards in many sites. Developers can keep building. There is not the land scarcity factor you get with houses.

Therefore i'd go for the house on land....
Starting out in Sydney though, that's very difficult. I do encourage house buying, as long as you can keep on top of the mortgage, renting out rooms etc. whatever can help. A sister of mine bought a very spacious townhouse with good land content, and they had a room rented out by a friend for a while. They paid off their home by age 30, then they bought a huge home on huge land in 2012 right before the latest boom. They've comfortably doubled their money and the new PPOR (worth ballpark near $2 mill now) would hardly have any debt on it. Just terrific for them.

 

Thanks mate.

But he seems to be so much against it! He says NEVER!

However, check this apartment in Doubleview and previous sales. It turns out it almost doubled in value every every 10 years.

 

Thanks Gockie. Very insightful.

Would you class villas and townhouses as good investments as well?

 

They are ok, but go for the house on full block of land if you can... You have much more flexibility on what you can do with the land down the track, with townhouses and villas you don't have that ability.

 

They grow just as much as houses generally but just not worth the hassle of dealing with strata which you have little control over. Also value add potential is limited.

He's right about the building life too, a lot of people underestimate this. Yes, major works need to be done for houses too but you are free to do the works provided you have the cash, good luck getting 20-40 knuckle heads together to pay 10k each for a special levy if something major needs to be done to a unit block. If they don't pony up the cash you can't even sell because no one wants to buy into a basket case.

 

That is a very valid point
The last 29 purchases have all been land only
The last 2 tenders (i missed out on) have been land only
The current deal is land only
My 2017 goal is land only
Great posting !

 

However you still own land with villas and townhouses and hence you get good CG over time?

 

Sure they both have their merits. Some people love apartment life. Proximity to amenities, no lawn mowing etc. Make your own path.
Remembering the rule land appreciates buildings depreciate is what Cam pushes. It makes sense.

Watch the Wealth WOD series Open Corp did on YouTube if you like the book. Some good info there too.

Merry Xmas too.

 

Thanks Beano.

When you say land only, do you actually mean land and house?

 

Anyone that says to never buy a certain stock type to all audiences would make me rapidly lose interest in anything else they say on the subject. Need to take into account individual circumstances.

I would have a few mil less equity today if i listened to him.

 

I should have read this book when i was school ...could have gone straight to my current strategy

 

Land only (lessors) ...the tenant (leaseholder) owns the depreciating building

 

Thanks Leo.

I think it would be interesting to look at real data, such as capital growth of apartments vs houses over the last say 20 years. Are these data available?

 

What happen to the value of the land content during the same period?

 

I'm sure it is though I've never bothered.

I'm not particularly a unit person these days but i know many people who buy them and do well, helping them move along to achieve bigger goals. When you look at stats it only takes into account growth over a period of time ( sometimes not even that accurate) but can never take onto account the 'X factor' - which is the investor and what their vision for the investment is in terms of buying price, add value, specific location etc. That often can make a huge difference.

 

Fair call. I have an apartment I airbnb... it's got strong cashflow and a great location, great neighbourhood. That one is an absolute keeper for the forseeable time being.

 

It goes to show there is money to be made everywhere!

 

Do you put apartments, villas and townhouses in the same "basket"?