Property Portfolio: 10x$300k versus 4x$750k

hi all,

ive started reading alot more on PC again as of late, and really enjoy the Investor Stories & Showcase sub-forum. It sure does bring alot of inspiration from alot of you, and the depth you can accomplish when you put your mind to something, and go all-in!

One commonality with majority of these guys/alot here on PC/SS, is I noticed that volume is of the focus in terms of acquiring properties.

I guess the point of this thread is to see why many of you focus on buying cheaper valued properties, opposed to buying much higher valued properties further apart from each other?

The thread title was more of a hypothetical to have an open discussion on the pros and cons of doing either. either option would still leave the owner with a $3m portfolio..


discuss

 

A few thoughts to get started, very high level and obviously won't apply to all locations or property:

$300k Pros:
Higher yield
Buy sooner (missed opportunity cost if spend longer saving a larger deposit)
Spread location risk (price falls) more easily i.e. more diversified
Easier to spread over various states to avoid land taxes
Lower income needed to get started
Smaller cost impact with a defaulting tenant, etc

$750k Pros:
Blue chip areas, higher growth
Fewer tenants, fewer problems
Simpler to manage at tax time
Reduced maintenance cost in aggregate (1x hot water system for exp property per 2-3x for cheap)

 

Provided the yield ends up almost the same I would go for the more expensive properties. Less to manage, less maintenance, possibly in better areas with less problem tenants. Probably higher land component too. Remember the land appreciates and the building depreciates.

 

From a PM perspective - the 750k property will have a smaller tenant pool as there are less tenants who can afford that, however they'll generally be better quality. However, they'll usually have higher expectations too.

Ie I'd probably have someone in our expensive properties complain about xyz problem but in a cheap property they'd be more likely to not even mention it because they know thats what the quality of properties is like in that price range.

But just saying 300k or 750k doesn't mean much unless you talk about city as well for context. EG a 300k property in Adelaide and a 750k property in Melbourne are probably identical. Or, if you're comparing a 300k property in Adelaide with a 750k property in Adelaide, then the above thoughts come into play.

From an investor perspective - I'd rather have less better quality properties than more lower quality ones. I've learnt this the hard way. This doesn't have to be a price range question though - there are good and bad quality properties in all price ranges.

 

Better to focus on the median price or just under for the city, area and suburb than buying a 300k or 750k property.

For many young investors starting out in the current environment they may quickly run out of borrowing capacity and only get to IP 2 or 3.

At 750k each that's a lot of money tied into only 3 investments. Until the portfolio reaches a decent size the possibility of tenant default, no growth etc etc would have a greater affect on cashflow and available equity.

 

Additional benefit of the cheaper range: better ability to minimise CG tax by selling over multiple financial years

 

I like 450-650k

• A big advantage of the cheaper ones is that later on you can sell them one per year and reduce your CGT bill a bit. Also you can choose to sell one smaller one and keep the other one rather than be forced to sell your one bigger one when you would otherwise prefer to only sell a smaller amount.
Edit: ^^ Just saw someone mention this point as I typed it up.

• Are there really going to be a lot of people demanding $3milllion properties when the 750k ones have gone through 2 cycles? Although by that time inflation will mean 3mil is equivalent to $1.5mil today in buying power, so this is a very small consideration.

• Under about 450k, you often end up quite far out from the CBD and it is less desirable to live there (lower demand) and there is a lot more land (20-30km out has 3x as much land as 10-20km out). Though these less in-demand areas become more in-demand as they become closer to the CBD relative to all the properties available as cities spread out. How far out you go and how long it takes to be more in-demand depends on the population growth and time frame and gentrification of the area, so given the choice, I like 450k+

• Though lower price point often has higher yield.
If your cash flow is a little tight, then a higher yield property is going to be important.
Look at the current lending environment (which is not going to change any time soon and probably going to get worse) - If you get 3mil in debt and properties are yielding 4% and interest rates are 4.5% IO or 4.2% P&I (payments @ 6% including P), then you are going to have to make up 0.5-2% (15-60k p.a.) from your own salary. And if rates rise 1% more, you are looking at a serous amount of money to pay for that (45-90k per year). If you have any problems re-financing to a new 30 yr loan after 5 years IO, your repayments will force you to sell. If the market drops and you lose your job, this would be a catastrophe - you sell some of them at a loss (bigger loss when considering buying and selling costs). Lower priced properties often have a higher yield and can play a part in risk management in that way. Although I'm sure this is just one consideration as there are also cheaper properties with very average yields, although still generally higher than more expensive properties.


As a rule, I tend to prefer the lowest price properties that still are close enough in to be in relatively good demand to maximise growth, and for me these seem to start around 450-500k.
If I was like sash or melbournian who knows entire cities back to front and sideways, and how to choose properties like a pro, I am sure they can stray far from this and do very well and find higher quality properties with higher yield and further below market value better locations within the suburbs themselves etc, but for someone who does not have that capability, this is what I like when looking at just price point.

 

One problem with cheaper properties that hasn't been mentioned is that the holding costs don't scale. Maintenance, insurance, rates don't vary that much based on value. Whilst cheaper properties tend to have higher rents as a percentage of the purchase price, when all the holding costs are considered, a more expensive property may have a better net yield.

This won't always be the case, but it's worth doing additional due diligence.

 

One thing I have noticed (even though I favour more expensive properties), is that the rental growth on cheapies from a % perspective is much better. Just because you rent a place out for $1000 a week doesn't mean a > $20 increase is palatable to tenants. Tenants don't give a rats if a $30 increase on $1000 a week is just 3%. It's like "*******s, $30, we're moving!!!"

 

One more factor - expensive property usually means closer to CBD. The closer property to CBD, the greater growth.

 

I would focus less on the price structure of the portfolio and more on the overall value/return each deal brings. You could have an IP for 400k and another one for 900k. Is the 900k deal too large an asset for a portfolio? Well depends on its overall value and return and also importantly your financial position.

Just my take.

 

Also need to look at the risk of competition. One bedroom apartments in Brunswick go for about $300k at the moment and have a reasonable rental yield. The problem is they haven't had any growth for over 7 years because there's so many other apartments being built in the area. This also affects rental yields.

 

Much rather have less properties to deal with as long as they all have good yield and good position. Have found over time that less with higher values means less maintenance issues and costs.

 

Excellent replies all.

I guess this thread was sparked as mentioned by me reading the investor showcase sub-forum, and found that all the threads showed PI's that had a volume of properties, and yes they all invested in at least two states, but the average property value was circa $350k bracket.

I do really enjoy the pro/cons noted on both sides of the equation, and myself personally do have just three properties in Sydney totalling $2.4m. I guess I am looking to diversify and buy some cheaper ranged properties in Syd/Melb down the track on the pro's noted, as well as limited borrowing capacity.

Having said that, all the pro's noted on buying into cheaper valued properties etc, assuming the asset class works at the current place in time, wouldnt blue chip equities be more of a better avenue for this strategy?

I mean,

-the higher rents = higher yield could be obtained from the blue chips
-with equities, you do have the ability to sell a parcel of your choice opposed to the entire stock holding, much like choosing to purchase multiple smaller value properties, and only sell one per year as an example
-can buy equities sooner due to minimal costs mainly

 

Less is more.

Really depends on what stage you're at though.
We haven't bought for years, but next one will be over 10 mil.
Can't be bothered mucking around with cheap stuff.

 

Look at fundamentals of supply and demand. I do wonder if the demand for renting a $3m property is there (presume if you can afford the rent on a $3m property you could probably afford to buy a decent place anyway - unless perhaps you have been posted interstate for 2 years). So think about the pool of tenants and what is driving demand.

 

Looking at future planning, I think it's more of an affordability issue now. Much easier for most people to buy $300k properties than it is $750k, especially now with the tightening of lending criteria.

If you're talking about all-cash investments, I wouldn't be putting cash into property in any case.

 

Could be a number of reasons, such as deposit required.
When starting some investors wont have the deposit required and have no choice.

Which option would provide a better outcome will have nothing whatsoever to do with the entry level, but more about the market conditions/different States.

Lets look at this scenario, starting with lower entry level, similar properties/similar demographics, however different market conditions

Investor 1 buying cheap properties in Adelaide (Elizabeth), around $250-300K in 2013-2017

Investor 2 buying cheap properties in Mt Druitt, $250-300K in 2013-2017

Investor 1 - property today Adelaide (Elizabeth) is still worth around $250K-300K
Investor 2 - property in Mt Druitt in 2013 (250-300K), today is now worth close to $550-600K

So investor 2 has doubled their money in a short time frame because they purchased in strong market conditions, a boom cycle.

I could go on with other examples, but my point is the higher entry level may make the properties harder to hold, however it wont matter if you buy lower entry/higher entry as long as you are buying in strong markets

How do you find these strong markets......would you believe we have had at least 3/4 booming markets since 2013 and some still going



MTR

 

What do you think is the price point to not suffer on growth in today's market?