1 Property in Sydney v multiple Australia Wide?

Hi everyone.. I'm trying to understand the strategy here and hope someone can enlighten me

I listen to a lot of property podcasts and do a lot of reading and read about investors stories and I've noticed a pattern.

Investors all seem to be buying cheaper under $400k properties all over the place all over Australia rather than just 1 or 2 properties in Sydney. Why is this the case?

Just making up a scenario here... nobody ever talks about how they own just 1 investment in Concord in Sydney worth $2.3m which is going up in Value $10k per week. Everyone speaks about how they have 5-10 properties Australia wide which are probably growing in value much less than $10k per week and this is where I'm confused. Sure the yield is probably 6% v Concord's crappy 2% but the growth isn't as high.

I want to know why is the chosen strategy the one where you buy cheaper houses everywhere rather than just 1 house in a good inner ring Sydney suburb?

If you had say $2m to invest and wanted to build a property portfolio to retire on in 10 years time would you buy 1 house in Sydney and start from that or 5 houses interstate and start that way instead?

What is the strategy behind the multiple under $400k properties v the Concord house.. .. Is it because $2.3m is too high a figure to start out with and too hard to get finance and too hard to hold cause of this low yield? Is this why everyone favours the cheaper property strategy to build on?

What if you already had $2.3m and CAN buy in Sydney and just hold.. Then which is the favourable option?


-Frank

 

I have 5 (1 existing unit, 3 OTPs, 1 house) in Sydney.

Cheaper properties dont necessarily mean low rent, so higher yields are appealing. Also being able to distribute risk by buying into multiple non sydney cities. If you had 5 properties in Sydney and your need to sell was badly timed with a down cycle, thats no good. Better to have 15 scattered around the country so you have options to sell one thats in a market peak.

However buying in Sydney early can get you good capital gains. Even if the price of a shoebox is double that of two nice 3bedder houses in other cities.

 

It all comes down to risk and holding all your equity in 1 dwelling, 1 market vs having exposure to a few markets. Also comes down to your risk profile and strategy you want to employ.

Ultimately it's a risk management consideration. Imagine after 7 years your 2mil in 1 dwelling hasn't increased much at all.

 

The people who start building a portfolio at the same time they can get their hands on $2m can be rounded to none. When people start building a portfolio, they can generally purchase at around 400-700k (with a lot less people able to get 700 than 400). So they get one, after a couple of years they get some equity and buy another, and so on.
And not much of the population has a 150k per person salary that can afford to pay their own rent plus the interest on a bank loan on $2m that is not covered by the 2% yields (1.5% after holding costs) - that's $60k/yr holding costs on top of your own rent - and that is without actually paying it off.

I think your question should be

If I had $2m to invest and I can pay 60k/yr in holding costs - which is better 1 property in Concord or 3 properties somewhere else?​

I can't answer this, but properties under about 600/700k are lower priced due to lower demand, which means lower capital gains (but higher yields), and this is a lot worse the lower you go such as below 500k. So if I had the choice and was able to pay holding costs, I think I would start at 750k. Above that I have no idea.

And also, with that much money, I think you are in a much more comfortable position to do some development. For example, I can't buy a middle ring property that is 800sq AND borrow enough to have it demolished and put 4-6 townhouses in because the bank won't lend me that much money. If you are in a good position, you might consider using your position to manufacture equity in a way most people are not in a position to do. Money makes money..

And listen to Leo ^^
Always listen to Leo lol (not kidding btw).

 

Similar to what @Anthony Brew mentioned and couple more points:

- easier to afford loans of $400k than $2.3Mn
- repayments @7% with only 2% would burn a hole in your pocket when you have a family of four, single income, / school going kids, and you have to pay rent (for example)
- when you have 5 props - you can spread across regions which are booming when Sydney is moving sideways, and also do yield play, Reno-play, capital appreciation play etc., and try different strategies.
- if you have one bad tenant or PM you are screwed. If you have 5, you would probably become better at managing them (I hope this about myself through constant learning)
- you also spread risk with the banks
- you can sell one or two as required, and change strategy or free up serviceability

May be a hundred other reasons which I am yet to figure out

 

Whilst I agree with the post I did have one client in this situation. Young couple who inherited a major windfall of about 2m. We had this very discussion. They sided with risk minimisation and balanced yeild by building a nationwide portfolio of circa $500k properties.

and to further Leo's point, if you are living on the rent from that 1 dwelling and the tenant stops paying, how to you handle that? Bit stressful.

 

I'm in a similar situation not quite $2m but I have an inheritance of $1.5m and can borrow another $500k... But I'm so stuck with what to do its driving me nuts. I've been doing a lot of reading and listening to podcasts but still don't know what to do.. Do I,

1. Buy a house in Western Sydney , Blacktown surrounds Maybe and put a granny flat on it. Total cost $950k and then buy a $500k Property outside of Sydney? No Mortgage..

2. Two Houses with 2 Granny Flats in Western Sydney and a $500k Mortgage.

3. Buy house inner west up too $1.5m targeting growth.. Possibly Marrickville. No Mortgage.

4. Start a portfolio Australia wide like what most people seem to be doing.

5. Use my position to manufacture equity like what @Anthony Brew suggested? Maybe buy an $800k property in Sydney.. Do a Reno, hold it a few years and Flip.

I'm curious as to which of these options would some of you choose if in my situation?

My current job only pays my living expenses, there is no money left over for anything in fact I sometimes get into the red on the credit card.. .. I do however own my own home. (Unless I use equity for the above)

I'd like to retire in 10 years tops too..


-Frank

 

I think this should be its own thread - you will get a lot more in-depth responses that are specific to your circumstances. There are some pretty cluey people on this forum.
Also be sure to make your initial post in the thread clear and concise with headings like:

Situation
Current investments/asets/cashflow
Goals
Constraints (kids/etc)
Age
Salary (and if likely to go up esp if young)
Spending
Debt risk tolerance
etc.​

Also, someone in another thread suggested a 3 month or 6 month term deposit to give you some time and breathing space to learn without the pressure of having to feel like you need to invest quickly to void rash decisions with so much money on the line.

By the way, how do you own your own home if you are usually in the red with your credit card each month?

 

I might re post it in another thread , thanks for the tip..

In regards to how I own my family home.. Wife's parents downsized a few years back and gave her some money which we put towards paying off our loan.. Then we sold that and recently bought elsewhere..


-Frank

 

@Frank Manno I think you would do well to go on a holiday. I mean this in the nicest way possible.

You've received a monster windfall. Use some of that to go visit all these other places everyone else is talking about. Brisbane is lovely this time of year. Adelaide is beautiful with its churches, Perth is as dead as a doornail...which for a lot of people here screams opportunity....look I'm a baby at this too but hand on heart there re some fantastic places out there that you should see.

Sydney is an awesome city but it is at peak crazy and there are other places around filled with different opportunities.

Jump on a plane and go travelling! If after your trip you still want to invest in Sydney then by all means go for it. You'll be able to make a better-informed decision and you would have had a nice holiday to boot...

 

Posted it to it's own thread.. I didn't delete the original as to not confuse everyone with the responses that follow.. Thread is here: Advice on how to invest $1.5m in property market.

 

Sounds like a plan thanks Hammer


-Frank

 

If you pay for my flights and accommodation you can take me along. I can be helpful ...

 

If your goal is to retire in 10 years you'll need to get working on building a passive income stream.

Given your strong equity position have you considered dual occ/dual living properties, commercial property or shares for income?

 

I was in this situation - one big house in sydney - never intended as an investment property but turned into one. I was renting nearby. I felt totally exposed with so much equity in one place - if I was without tenants, the mortgage was over $8000pm on top of rent of over $4000pm. I ended up selling and less than 2 weeks after the contract was signed, the tenants gave notice. such lucky timing. (the tenants did not know it was for sale, done off market, no inspections at all).

it took the new owner about 5 weeks to secure a new tenant. that would have resulted in many sleepless nights for me. also if the sydney market flattens or even readjusts somewhat as predicted, i would have had all my eggs in one basket.

 

This is what i would do.

Assuming you want to remain in Sydney, set aside $500k of the $1.5m for a deposit on a future downsize PPOR/forever home. Hopefully that doesn't cost more than a mill (seeing you can/want to borrow no more than $500K). That limits you to an apartment/villa in the middle/inner ring. Pay it down as best you can and as quickly as you can.

With the balance, buy 1 mill worth of diversified blue chip hi yielding, stocks or LICs.

Both are exy at present IMHO so wait. When the opportunity presents itself, go all in.

In 10 yrs or so I think you'll achieve your goal. And it'll be tax effective.