3 x $430K houses or 2 x $650K houses or 1 x $1M houses

Hi All,

I have $390K to invest. I was initially intending to:

Option 1: split the $390K into 3 x $130K, with each $130K (covering a 20% deposit + expenses) giving me affordability to purchase one IP of ~$430K ($448K total price upon including fees).

With purchase price capped at $430K, this of course limits me to purchasing these three properties in regional areas (example, Tamworth) where rental returns can be strong but capital growth may not be strong.

Therefore, I'm wondering whether I should instead:

Option 2: split the $390K into 2 x $190K, where I estimate that each $190K will give me affordability purchase one IP of up $650K (~$679K total price upon including fees).

This would allow me to buy these two properties in more expensive areas (example, Maitland area, Newcastle outskirts), where the rental return won't be as strong but the capital growth is likely to be stronger.

Option 3: allocate the entire $390K toward the purchase of one IP, where I estimate the $390K will give me affordability to purchase an IP of up to ~$1M (perhaps more, I'm not real sure on this).

This would get me a 4 bdm, 2 bath house in nice suburb in a large city, such as Fletcher within Newcastle, where again rental return wouldn't be as strong but the capital growth is likely to be the strongest of the 3 options.

In researching the most common mistakes to avoid I came across the adage, "cashflow keeps you in the game, but capital growth gets you out of the rat race".

Obviously I can aim to purchase in areas of highest possible capital growth for all three strategies, but I'm still left wondering which of the above options is the smartest play for kicking off my investment portfolio that will hopefully one day get me "out of the rat race".

I would therefore be very appreciative of shared insight or strategic suggestions. Thanks.

 

Have you considered investing outside of NSW where your dollar will go a lot further? Perth or Adelaide?

 

Absolutely. Perth and Adelaide are both on my radar. This would be consistent with my original strategy (option 1), as I would likely look to pick up three IPs at up $430K each across Perth and/or Adelaide.

 

I would choose option one (which sounds like your original strategy). I like the idea of purchasing multiple properties across multiple states. This allows you to diversify capital and in the long run hold more property in terms of dollar value ( 3 x 430k = 1.29m). Moreover, given rental yield has an inverse relationship with property prices you will typically have greater yields across your portfolio. This of course comes with greater holding costs as you pay multiple rates, insurance, etc. but I don't think this outweighs the increased yields.

At 430k it is becoming increasingly difficult to purchase established housing within 45 minutes of a metro market but you still have a few options at the moment (Adelaide and Perth as you mentioned). Then you would also have regional options to choose from. A common concern is that choosing this option could lead to sub-par capital growth. In my experience and based on the research I have done I don't believe there is a correlation with more expensive property outperforming cheaper property (on a percentage basis).

All in all, I think you have already devised a sound strategy, and now it's just a matter of pulling the trigger. I would recommend doing this sooner rather than later as property prices continue to soar in smaller metro markets reducing the opportunities you would have at your low 400s price point.

 

Thanks for the input, Branden. 3 x $430K IPs was indeed my original strategy. Yesterday, however, I spoke to a buyer's agent in Perth (who is highly recommended here on PropertyChat) and I queried him about whether I should go for 3 x $430K or 2 x $600K properties. His recommendation was 2 x $600K properties, as he says $550K - $600K is currently the sweet spot for getting into high performing suburbs, whereas $430K limits me to buying into lower socioeconomic suburbs. He said they typically don't touch these suburbs but he'd take me on board if that was how I wanted to proceed. Additionally, $13K for a buyer's agent is a big expense against a $430K property. That obviously only applies to buying either 2 or 3 IPs in Perth though. So it's a tough one and I'm still torn.

 

I agree a higher price point opens up a lot more opportunities. However, you need to consider how this impacts your overall strategy. I'm sure having a larger budget in most cases would be more beneficial, however, if it doesn't necessarily align with your plan it may not make sense.

In saying this, whether you buy 2 vs 3 properties would likely lead you to hold a similar amount of property with slightly different holding costs. So if you decide to purchase 2 over 3 then it might be the compromise you have to make in order to purchase better quality assets.

 

From visiting home opens. The $400k market has a lot of buyers at their limits and desperate to buy a house. The $500K/$600k seems to have more thoughtful buyers

 

I agree, the BA's thoughts have some validity. Yes $430k can purchase an IP in Perth which is why I suggested it but it can be in a rougher area and it is very very competitive at the moment and areas that were $400k only 6mths ago are now $450k etc. The higher price bracket still generates good yield in Perth and generally not as competitive and most likely will generate a better tenant.

 

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