All properties in one suburb

Hi guys,

I'll try to keep this simple, interested in your views and input on any aspects as I've overanalysed this to death.

We've done a couple of small developments in the Wollondilly shire (outer South West Sydney) and after another new build scheduled for next year and just selling one which settled this week, we will own 5 houses all within cooee of each other.

Should I be concerned being that all our eggs are in one basket quite a way from the city centre?

We've been trying to sell what is our PPOR but the market here is now dead. Selling would free up around, say $680-$700k for a future development or other investment, but I'm coming to terms with possibly just keeping them all instead, at least short term, so our figures would look like;

Total property value $3,250,000
Borrowings: $1,225,000 (plus offset buffer of $275k so total limits $1,500,000)

Keeping them all, we'll have hit the borrowing ceiling leaving no capital to jump on any other opportunities as they may arise, which may not matter as we are happy to have a break for a couple of years anyway. In some ways it will be good to be forced to sit on our hands!

Getting out and back into another future deal costs money, plus will mean potentially a large cut to the asking price of the PPOR to effect a sale soon as well.

There are also CGT benefits in selling the PPOR now (shifting it maybe to the new build) rather than renting it out.

We're heading off to travel a bit next year so all properties will be rented.

Thoughts? Anyone have any insight on the future of the Wollondilly and it's possible growth prospects? This is my biggest concern, the opportunity cost of being in what many consider to be barely more than a regional centre.

Thanks all.

 

Probably depends more so on what your 'end goal' is, what are you trying to achieve? Did you complete the developments for profits or cash flow from rental incomes?
Diversification is always a good idea, IF the market tanks in Wollondilly you'll have all your eggs in one basket.
Ps. As Wollondilly is a shire it's hard to get any information on it, which suburb(s) are your properties located?

 

Give me a sec, I'll pull out my cards...



In all seriousness, it's a matter of following the numbers.

Do the math, work out what your profit % is. Say ROI of 7%.

The question then becomes, can you find a deal that can make you a larger return than 7% (take into account buying and selling costs).

It's a rule of thumb to diversify areas, try and catch the waves of growth. Rules of thumb are like a cook book. Gives great recipes, however when you learn the fundamentals, you can add your own ingredients into the mix to maximize the flavor that best suits your taste.

If an area makes sense, why stop the race half way. In fact, you may find better deals by becoming an area expert in 3 suburbs or so.

One of my mentors seems to ONLY invest in Camden/Narellan. Literally owns at least a dozen properties just on 1 street. He simply changes asset class / investment method as the market changes. Resi - Commercial - Resi - Development - Subdivision - Commercial. Etc.

What do you know about the growth prospects of Wollondilly? If you were to sell... then what?

 

I have something similar before so I hope what I did may help (not advises and not sure if it is the best)

1. Only ever sell PPOR, never sell IP if you are buy and hold.
2. Sell PPOR if you ever consider renting it out
3. If you have all in one suburd, and it has been doing well, and you see all the pros of that location (park, transport, nice suburb, near amenity), there is no reasons to worry. Only if you see your current IP may drop over your selling + rebuying cost, then you will consider, otherwise, forget it.
4. You can start exploring other suburb, state, or country if you are comfortable with, and doing it slowly. All you want is to make educated investment, not a must have or must do formula.

 

Hard to answer that question as no one knows if the types of houses will outperform (income and CG) other choices.
If you can sustain a dip and you feel the overall performance will be better (future wise ) then ok
It has been proven a diverse portfolio reduces risk.
Where are your other investments eg shares, term deposits , commercial properties, land investments located and are your house a high percentage of your investments (like over 20pc of your investment income) ?

 

I wouldn’t be selling my PPOR in the current market just because you are turning it into an IP. The reality is the growth has already been done since it was PPOR so their will simply be no CGT considerations.

Selling however to diversify is definitely something I would be looking into. I don’t know anything about that area but 5 properties in what you noted as barely regional is hugely risky!
Who is buying their? Is their much construction?

What will happen if Labor gets in and scraps NG on existing builds. Will their be any demand for your properties? Like wise it could be an opportunity to build something new which may appeal to investors but you could do that anywhere.

 

Diversification is not necessarily a good solution for the sake of it.

I know many Sydney based builders that are millions and never develop or invest oursiy Sydney.
Far richer than any on PC.

So if you are comfortable and know what you are doing nothing wrong. Apart from missing Land tax threshold of other states.

 

Do you think Building/developing (& then selling for profit) is a pretty different strategy to buying/building and holding for capital gain? With developing, you're creating the 'growth' (and realising it by selling straight after finish), so maybe diversification is not as necessary as someone who is buying/building 5+ properties in the one suburb and intending to hold for capital gains?
Assuming there are other suburbs with same/similar reasons to invest, similar price bracket etc. etc.
*Edit: I realise the OP is developing and holding in the one 'shire' might be different suburbs within that shire though?

 

Developing to sell and developing to hold are a little different. But imo the feaso has to stack up regardless if you're holding or selling otherwise risk isnt really taken into account .

Also developing all your stock in 1 market absolutely carries additional risk even though you may be selling . What if the market you're developing in changes ? That would definetly affect your bottom line and losses magnified by the concentration .

Diversification is useful but it depends on the situation and there are many ways to do it. No fixed rule on this one.

 

Warren Buffett famously stated that "diversification is protection against ignorance. It makes little sense if you know what you are doing."

He also said put all of your eggs in one basket, and watch that basket very closely.

 

Cool, was he talking about property when he said that?

 

He was talking about diversification as an investment principle. Presumably asset class agnostic.

 

Presumably...
With a bit of digging he also said he recommends 98 - 99% of investors should extensively diversify - and he does not have all his investments in one company or asset class..

 

I suppose it depends on what you call diversification. I know some investors think people who are all in stocks are not diversified. Others would argue that it depends which companies you own.

Fair point though, good chat.

 

Thanks Lindsay, initially the plan was to build, hold and travel for a bit with the income. Other stuff happened to put a stop on that which lead us to return and buy another block to subdivide, maybe a stupid decision at the time, in hindsight. The properties are in Thirlmere. The shire seems to be holding up price wise against the falls of Sydney at the moment which is promising. I feel like we didn’t get the over inflation before the brakes were hit.

 

My guess is long term wollondilly will be fine or maybe even more sought after due to its “rural living” stance, still only an hour drive to Sydney CBD. Council tend to make life difficult for developers out here so far, which means we have less new houses in our towns than many other shires on the outskirts. But our public transport sucks and we are very behind in culture and innovation.

If we sold, we’d probably end up buying what we know and doing another small subdivision after prices stabilise. In the same area haha.

 

No other investments, wholly solely these properties, hence my concern

 

We’re in the Sydney basin, just right at the edge. A few new estates so stuff is happening. I believe the NG proposals are for existing not new builds?

 

Some Stats On Thirlmere that I could find, not sure if this helps at all but I'll put them here anyway;