One Property with low LVR or Multiple properties with higher LVR

Hi Fellow Investors,

I have stumbled across this forum in recent weeks and have been reading some great pieces.

Now my situation has likely come up before around one or multiple properties so please forgive me.

A bit about me: I currently have zero debt. I own zero property at this stage, have a reasonably sized share portfolio and am sitting on approx $500k cash which i was looking to take the plunge into property.

My question is, would it be more advantageous to purchase 1 property approx 700-800k with approx 200-300k mortgage or two / three properties with larger mortgages.

In scenario one, would be quite cash flow positive which I do not mind (I would like all properties to be cash flow positive so not trying to max out my borrowing cap. This could lead to smashing the mortgage down easily over a few years and perhaps cross collateralise it into another property and so on.

In scenario two, I would need to pay two lots of stamp duty straight up and worry about two tenants and maintenance costs as a first time property investor. However, could be entering the market with two properties when in 5 years perhaps the same money I cannot get anything near the properties I am looking at. In addition, would have two mortgages being paid down at the same time. That being said, if both properties were untenanted at the same time I could be in some hot water.

Ideally, looking for some advice in these scenarios or any other ideas that some of you great investors have come across in your time for entering the market for the first time.

Looking forward to some responses,

Cheers,

Outtodry

 

The more you leverage, the more you are subject to growth or loss as a % of your investment/deposit/equity.

So it just depends how much you back your investments or how much you like to roll the dice.

It can be quite extreme difference. 50% LVR is a 2x multiplier of growth/loss, while 20% LVR is 5x and 95% LVR a 20x.

Personally I back my own ability to pick investments so leverage as high as I can afford.

 

Depends how you think the properties will perform, and your buffer.

 

A broker could address the capacity to do either and how it impacts servicing etc. It will arm you with more knowledge to support a choice. The cashflows from each property will also be factors in servicing. As may access to IO loans.

Matters to help risk manage:

• Each property cashflows
• LL insurance
• IO v P&I loans
• Dates and durations of each lease (eg they dont start same date and have 6 months)
• Location and tenancy quality

Its also possible one high value better location may enhance returns and growth v 2 x cheaper and crappier areas.

 

With interest rates so low, why not use other peoples monies to build you own wealth? As other said leverage as high as you can handle. The trick is to pick properties with good potential growth in whatever shapes or forms. Good luck...

 

Leverage is the key to property investment. Use the banks money to make you MORE money

 

And keep as much of your money as possible in an offset account, dont give it to the bank.

 

It is irrelevant how many IPs, RE is a wealth creation exercise for me. So it is about growing my asset base first as big as possible and then deciding on how to get there and then letting time do its thing!
Would you prefer $700K or $1.4M now growing in value in RE say by 7% here in SYD? Say you provided 25% (20% deposit and 5% costs for purchase), with 80% LVR? On $700K 20% deposit is $140K, loan is $560K. Assuming 7% growth means $700K RE is now worth $749K, whereas $1.4M is now worth $1,498,000, regardless how much you borrowed. Just by looking high level you need to understand the numbers and what you wish to achieve from RE.
Your ROI is greater with leverage when prices increase and lower if they decrease but it is only when it is realised can you then measure the gain or loss.

You don't seem to understand and have not answered the two most important questions.

1. Why are you investing into RE, what do you want to achieve? It should be specific answer say to have $60K or $100K gross in rents, etc.... So please try to answer that first before any investment decisions. Then you work backwards how much should be invested and so on....
2 What investment strategy will you adopt? Will you buy in 3 states, say BRIS, SYD, MEL? What will you buy, townhouses, H&L packages on outskirts, units, older properties with renovation potential, older house with larger blocks for future developments, in middle or inner ring or outer suburbs. So many ways to invest into RE.
Once you know what you wish to achieve from RE then you can proceed. Say you wish to achieve $60K gross rent so you may look at RE investments generating say 4% gross 3% net rent. If we then look a figures say at 4% you would need around $1.6M unencumbered in RE. So it makes sense to buy as many as possible first to grow your asset base with leverage. It does not mean you need to buy all at once, it will be process where you buy one, then learn the process if it's for you, then you may buy another and so on....
But the idea would be to borrow as much as possible, and even if you just buy one at first, then the excess cash you can keep in offsets for the next IP and so on. You need to be clear what is comfortable for you to sleep at night, you need your accountant to run the figures for you to see what may be most suitable for you financially too, you may need to figure out what entity structures to buy too.
So it depends, what do you want to achieve? Read some books first and then please answer those two questions before proceeding.
Many years ago I was like you I thought I needed to buy few IPs and pay them off ASAP, no regrets though as now I have a very large portfolio, but looking in retrospect my portfolio would be double that now, if I only understood that RE is about growing asset base with leverage to multiply the returns over time, over the years.
Hopefully this helps? So many people buy RE and don't know why? It should not be how many IPs you own but as explained what do you wish to achieve in $ terms.

 

This is great information. Any book suggestions which explain this sort of thing, setting a SMART objective/goal and the different strategies one can employ?

 

I have read over 100 books and not one book will recommend this plus having early mentors guide helped but search some books recommended prior in this forum.
Some which illustrate whether to own one as opposed to two properties and how great it makes a difference comes to mind (some aspects may be old but still valid to illustrate a point):

I also found MY books of use, simple concepts to understand:


I suggest you read and learn first 3 months or so just acquire the knowledge and hopefully that helps?
Anyone can buy a property and I suppose hence why 90% in Australia own only one or two as I think it's the key that they do not know the answers to these two questions I mentioned above, IMHO.

 

Thank you. Lots of work ahead....

 

Precisely why most folks don't sow. Or reap.

 

I would suggest that you do some reading on the subject, but realise that if you get too analytical you could be subject to analysis paralysis.

You have $500k in cash. Use it wisely! Whether you buy one property or five, don't sink the whole lot into a deposit. Use the minimum, but make sure that you have a loan that has an offset account attached to it. Put left over cash into the offset account. This means that you maintain access to the cash, while effectively not paying interest on the loan for the portion that is in the offset.

My preference is multiple lower value properties, over one expensive property. My reason for this is that if times are bad (use Corona as an example) and tenants are having trouble paying, a property that is lower in price for rent will have more people able to pay it. For example, you've bought a beautiful innercity property, and the market rent for it is $2k per week. When times are tough, you may have to reduce rents, whereas if you buy four with a market rent of $500pw, more people can afford to pay for it.

As well as this, if you want to sell one expensive property that has doubled in value, then you will get hit with a very large CGT bill. With, say, four lower value properties you may only need to sell one of them, or if you DO want to sell all of them, you can split the sales up into more than one financial year & minimise your CGT liability.

Make sure you take out Landlord Insurance. It's a low cost for peace of mind and will protect you from potential issues.

Good luck.

Get a good property manager.

In all my years of investing, I have never had issues with having multiple vacancies at the same time. Most properties can be re-let soon after the previous tenancy ends. Long vacancies are rare unless you've bought somewhere with high vacancy rates, the property is not well maintained and/or has some significant issues or your rent is too high.

Never cross collateralise loans.

Get a good broker. I'd suggest trying someone who contributes to this forum. These guys know what they are doing, as they deal with investors all the time, and know how to structure loans for those of us who have many properties, where the average broker will predominantly deal with people who only have one or two properties. While there's nothing wrong with that, start off with someone who can take you past that stage, should you wish to do so.

 

Thank you for the extensive response. I am still digesting everything you mentioned but one thing caught my eye. Why do you suggest not cross collateralising?

 

Property markets across oz are booming, throw a dart and leverage, grow wealth

 

The brokers can explain more eloquently than I can, but basically, if you have a few properties crossed, and you sell one of them, the banks can take the whole proceeds to pay down some, or all of the remining loan. You don't want that. You want flexibility to do what you want with your proceeds. It can impact in other ways as well, but just know that crossing loans is in the BANKS best interest, not YOURS.

 

Leverage is generally the best way to get value out of real estate investing.
If you don't use leveraging, share investing will generally give you a better return.