[First IP] Cheaper vs Dearer? Cashflow or Capital growth? Regional v Capital?

Hi all,

I'm an aspiring property investor who's been lurking for a few months here educating myself. I now want to take the plunge, but want to test with you some of the ideas that have formed in my head.

With the seemingly boundless amount of sheer information, wisdom and insight to be found in PropertyChat, I have decided that I want to get involved in this hot market sooner rather than later. So I decided to engage a buyer's agent to help in not only buying my first investment property interstate (I'm based in Canberra), but also in giving me some guidance and education.

Just based on what cursory reading I've done here, I decided to start by looking at BAs in NSW with a view to purchasing a property in a regional hub. This was initially inspired by the book I've read by Steve McKnight (0 to 130 property in 3.5 years), and though I have seen many say that much of the strategies therein are now outdated, I also feel like I've seen enough people who still see merit in buying positive cashflow properties in regional areas.

So I got in touch with a couple of BAs, and the first one seemed to confirm my initial thinking. We had a good, lengthy conversation but if I am to summarise the key takeaways, they would be:
- Buy in regional hubs with good fundamentals
- Buy a cheaper property for the first IP, as it will be lower risk and much quicker to turn into positive cashflow (able to pay down the debt quicker)

The second BA that I spoke to however, while also being very detailed and helpful in his advice, seemed to promote a different approach:
- Good suburbs in capital cities (notably the northern suburbs in Sydney) cannot be beaten in terms of capital growth prospects
- Capital growth is the more effective strategy than focusing on positive cashflow in terms of the compounding growth long term
- Buying a more expensive property in an established area is low risk due to the better growth prospects, and will provide better returns in the longer term, rather than 'diversifying' by buying multiple cheaper properties in regional areas that have lower prospective capital growth rate.
- That said, if I want to buy a relatively cheaper property, then Adelaide is also a good choice.

Both of their ideas seem to have merit, but I do not have the experience or knowledge to separate the wheat from the chaff, so I am now turning to you.

1. If you had $1 million, would you buy one property that maxes out your budget OR multiple smaller properties?
- I feel this inherently also includes the question of 'Regional v Capital'. Are some good suburbs in Sydney vastly superior to regional areas? Is Adelaide the better choice than regional NSW?
- I've only looked at NSW so far, but I've also seen many of you here talk excitedly about Brisbane/QLD. If I am to engage a BA, which areas should I look for as their expertise, given the current market conditions/prospects?

2. I've seen it said in many places that it is no longer as easy to find positive cashflow properties, or even if you do the growth prospects are so poor they are not very good investment choices.
However, I find the notion of negatively geared properties very unattractive for the obvious reason that I have to make up the shortfalls out of pocket while there are never any guarantees that the value will rise.
So I want to be able to buy properties that are at least cashflow neutral (if not ever so slightly positive) while being able to maximise capital growth potential. Thoughts?

 

- Bad Deal
- Good deal
- Great Deal
There's always plenty of all of the above available all over the country.
Knowing the difference not so much.
On the good side, rising tide lifts all ships.

 

Buy and hold is a bet on the future.

you have to decide what you think the odds are. If there is no capital growth on capital or regional property, you lose either way. If both go up, capital is likely to perform better (capital growth not taxed until you sell). If regional goes up but capitals dont (imho very low probability event).

personal opinion only. If there is the income to handle the cashflow, houses in capitals even if negative cashflow, but only if you believe there will be capital growth including redevelopment potential). Old houses in suburbs do have better yields.

but of course different for each person.

 

There is only one answer and that is you need BOTH.

Don't be a fool and think only chasing CG will work and dont be a fool thinking that only chasing Yield will work.

You need to find properties that provide a balance that both are present. They are not mutually exclusive.

 

You need to look at what works for you.

When we started we were on a very small income. The only thing we could afford was a home on the very outskirts of Sydney which was cf+ when we bought. It worked out great, with good CG, so we continued buying cf+ property.

The reason I prefer cf+ is that it doesn't take away from your income. It pays for itself. If you buy on the outskirts of a large city, the tide will lift it, along with all the more expensive homes when CG comes along.

I've bought regionals as well, and while you do get both CG and cf from a regional, there is often a longer wait for growth than there is in the cities.

If I was actively looking for something to purchase right now, I'd be looking in Qld, Adelaide or Perth.

Good luck

 

Thank you all for your insights. I think I'm getting a better idea of the kind of perspective I should be having. One thing I'd still be keen to get your views on is - even if I broadly settle on the area I'd like to invest in, is it better to get one expensive property or multiple that fits within my budget?

 

With $1m you could buy a $3m commercial property yielding say 7.5% funded at say 2.5%.
So we have rental $225k
Interest $2m @ 2.5% $50k
Net profit before tax $175k pa

If you have some equity in your current portfolio so you could a million out then we could have a $6m property

rental of. $450k
Interest $2m @ 2.5% $50
Interest $3m @2% $60
Net profit before tax $340k pa


If your parents have some equity ($10m) in their current portfolio so you could lever off their portfolio then we could have
A $40m property

rental of $3m
Interest $2m @ 2.5% $50k
Interest $3m @2% $60k
Interest $34m @2.5% 850k
Net profit before tax $2,040k pa

 

ohh

 

Yep! That's what I'm thinking too.

 

Ohno

 

'Expensive' is a word which has led many investors astray.

Buy value. Buy value. Buy value.

As long as your financial situation can handle the neg cashflow comfortably.

I would also suggest buy add value ability. You don't need to be a developer to add value to a home. But you need a home with add value potential if value is to be added.

My broad recipe:

1. Invest according to your risk tolerances/financial situation
2. According to your goals
3. Buy add value deals
4. Buy high demand OO areas OR ripple areas.

 

Please excuse my ignorance but could you further elaborate on this? I have not thus far considered commercial properties at all but if my understanding is correct you seem to be suggesting that I could buy a property that is worth several times more than the amount I can borrow. Do loans somehow work differently with commercial properties?

 

1. I’d buy 1 for $1M as you can buy in a better suburb for strong capital growth in the city or big regional areas such as Newcastle/Central Coast/Wollongong.

There are plenty of smaller regionals showing capital growth I’m sure but generally over the long term you’re better off in the areas above.

In my opinion $500k won’t let you buy in a good enough suburb.

2. I have IP’s in Newcastle and Central Coast that I purchased in the last 2 years and both are cash flow neutral.

With rental market so hot and interest rates so low you could easily buy in these areas and be neutral. Not sure about Sydney I don’t have any experience there

 

Correct

 

1 mil cash with a loan of 2 million.

That's 3 million mamacitas in one asset. For a newbie looking for his first IP...

No one is talking about risk tolerance for this guy....I doubt even @PapayaJam is aware of the risks even if he/she did have the capital.