NSW Just follow the purchase price

My first post, so be kind.

After much reading and listening to property podcasts, I am eager to hear this forums position on my recent revelation on the question of Where to buy?

This question is prefaced on the following :
1. Ignoring timing the market
2. Capital gains as the objective
3. Long term capital return
4. Ignoring cash flow

As the title suggests, I have conceded that the best option for maximum capital return is to purchase a property to the maximum borrowing capacity (but still keeping a buffer in place) at the time of purchase.

 

Following this logic if you can afford to finance a $3 million home then that is what you would buy? When does risk management come into play? In general more $ equals better asset which will (probably) be in good demand from owner occupiers in future... so I am not disagreeing with the basic premise but you have to decide how to take a concept like that and apply it to real life.

 

The condition stated is within my borrowing capacity.

To clarify if I could only afford $700,000 then I would do my due diligence on all properties before deciding.

 

How much time do you have? And what about future purchases? You seem to be saying buy once and buy as high as you can.

 

Yes you did say that, and I asked that if your borrowing capacity was higher, then would you automatically go to the max?

I have seen some investors buy 1 expensive asset because it is what they can finance, and others buy multiple cheap ones because they feel more comfortable with this.

If you want any kind of capital city property and finance is well under $1m you will probably do better focussing on 1 good one.

If your goal is long term capital return and you are not overly concerned with cash flow (however I am skeptical because almost everyone is) then yes get the best asset in the most supply constrained area you can (ie bigger house on bigger block near city, trains, beach etc) - stuff they are not making more of.

If like most you want to balance cash flow and growth and risk it might be possible to pick up 2 cheaper ones and still get some growth, it really depends....on a number of personal factors as well as whether you are talking about gross gains or percentage gains. I have had cheap properties that had amazing percentage growth but the gross numbers were still smaller than my more expensive properties for example.

 

The question applies to both short or long term.

The point being that so much talk is about where to buy. If you just spend what you can afford and acquire two or three very good properties over a lifetime the capital gain is better than multiple low value properties and possibly lower capital gains.

 

My personal risk profile is to avoid regional areas for various reasons. Your comment about “and still get some growth “ hints to the heart of my question.

For any given investors unique situation, I feel it is the better choice to spend what you can afford when deciding where to buy?

 

Buy where the hipsters are.

 

That’s a tough one hipsters are everywhere now

 

1) Don't put all your eggs in one (asset class or selection within that asset class) basket
2) Have to have the cashflow to sustain your leverage (never ignore cashflow if you don't want to go broke .. not even hypothetically)

 

This is fatal. No one ever went broke from having too much debt, they went broke from failing to manage cash flow on that debt.

- Andrew

 

Points 1 and 4 dont take risk into account. If you better address those points and adjust your strategy accordingly, you will do much better long term. Could mean the difference of possibly hundreds of thousands and years sooner to achieve your goals.

 

You need to be crystal clear on what your objective is. These conflicting aims is a reciepe for divesting money. How do you get a capital return, which is achieved by cashflow by ignoring cashflow ? What is the point of capital gain without income, so you can live on social security ? Why do you want to avoid areas( ( regional) that are lower risk, giving the best CG, and revenue growth, compounding away ? Regional have been giving 10% capita growth and more than that in revenue growth. You need to understand the basics, borrowing more and higher LVRs, generally reduces capital return .

 

Lewisham & Marrickville cafes?