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To Diversify or Not

Discussion in 'General Property Chat' started by Muddy, 25th Feb, 2016.

  1. Muddy

    Muddy New Member

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    Hi all,

    Last year we settled on our seventh IP, which makes four of them in areas around Brisbane with the other three in Western Sydney & one in Boulder WA. I was thinking of going back to good old Queensland for one more before sitting back and waiting for the dust to settle, however I am a little concerned that 5/8 of my portfolio will be tied to the one market. At what point should you diversify into other markets to spread the risk & even out your portfolio?

    Cheers
    Muddy
     
  2. Leo2413

    Leo2413 Well-Known Member Premium Member

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    HI @Muddy,

    I agree that diversification is important and from a cycles standpoint it just makes common sense. You are exposed to 3 states already and I wouldn't worry about buying another one in Brisbane if it makes sense cycle and number wise.

    Don't forget, you can also diversify in areas of Brisbane as well. If you have them on the south side, then you can go north. If you have them in X price bracket, then you can try a different price range. As long as the deal makes sense and DD is done carefully.

    Ultimately, I believe its best to buy where it makes sense from cycle and DD standpoints, as well as the overall deal looking good. Be it Brisbane, Perth or wherever.
     
    Last edited: 25th Feb, 2016
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  3. jpcashflow

    jpcashflow Well-Known Member Business Member

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    Hi Muddy,
    I think its a good idea to spread the risk but having assests in just property is a risk it self.

    You have three properties in Western Sydney? It might be a good idea to reap the awards and sell?
     
  4. Inov8ive

    Inov8ive Well-Known Member

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    Do you have 7 IP's or 8? Did i miss something?
     
  5. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Your call really.
    Nobody else has the same situation as you do.
     
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  6. keithj

    keithj Moderator Staff Member

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    What risks are you most afraid of ? And would diversifying help to mitigate them ?
    Or are you trying to smooth out returns by diversifying ?

    Are you afraid of city/state based risk ? Do you think there an almost perfect (long term) correlation between housing markets in each of the states ? And also between different price points within each state ? What's your exit strategy - will you want to sell them off slowly (or at all) ?

    Or are you afraid of systemic risk ? eg All housing drops by 50% :rolleyes:.

    Or recession - rental income drops ?

    Would diversifying into shares, art, old cars, gold, commercial prop, Hong Kong apartments be better than diversifying amongst different streets of the same asset class in the same country ?

    Don't diversify just because some people say 'its a good thing'. Work out why you think you want to diversify first..... only then can you decide how to implement it.
     
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  7. Leo2413

    Leo2413 Well-Known Member Premium Member

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  8. MTR

    MTR Well-Known Member Premium Member

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    Nothing wrong with diversification, however makes no sense to me unless you are diversifying and timing the market in the particular State. Otherwise its buying blindly and taking on risk just my opinion from experience.

    For example...you most certainly would not be buying in WA now, or from mid 2014 as its a falling market, however 3 years ago 2013 metro, you would have cleaned up.

    We have seen at least 3 markets rising in Australia over the last 3-4 years, there were opportunities to make money just sitting on your hands. Get the timing wrong and you lose money

    MTR:)
     
    Last edited: 26th Feb, 2016
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  9. Lisa Parker- Buyers Agent

    Lisa Parker- Buyers Agent Well-Known Member Business Member

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    Have you had your capacity for future purchases assessed lately?
    If you have capacity for another 1 Property only your decision might change compared to if you have the capacity for another 5 purchases.

    That is the first step I would look at, followed by land tax considerations. Then I would be looking at strategy and long term goals and which state offers the opportunities to move you forward toward your goals faster.
     
  10. HUGH72

    HUGH72 Well-Known Member

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    Hi Muddy
    It sounds like you are diversified already across 3 states. I've tried to do something similar and have properties in Qld, NSW and SA.
    I think it's a personal decision but I like diversification because:
    If I get it wrong in one city or the local economy turns and is weak then only part of my investments are exposed. Hopefully in another state which is only loosely related something is growing providing further deposits and rental growth.

    It's easier to avoid land tax.

    Initially I was only heavily invested in Qld which worked well from 96-08 but then many places went nowhere for many years. I started buying elsewhere at this point and was pleased I did.
    I can understand the benefits of being a ' conviction investor' and going hard in a location with good timing but won't do this to the extent of being dependant on any one market to achieve cg.
    I would never buy 5 places in the same suburb either but that's just my SANF.
     
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  11. MTR

    MTR Well-Known Member Premium Member

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    If the market is rising and there is evidence of this then going hard can provide a massive opportunity for CG.
    This is my favourite, but always sell down prior to peak, perhaps 50%, then you have a win/win.

    I see this as less risk because you are reducing debt while you are also timing the market.
     
  12. HUGH72

    HUGH72 Well-Known Member

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    Yes, that can work nicely but it requires knowledge, skill, perfect timing and a little luck. Get it wrong and you can get burnt.

    Boom markets don't come around very often and overall with low inflation and wages growth I think we are in for a extended quiet period. Some locations excepted.

    We look at this differently, you like to buy and sell while I like to accumulate. I like to pay down a little debt via income vs pay down debt from profits.
    Transactions costs deter me from this approach and I try not to hold anything that drains cashflow. I like to do this by purchasing decent yielding places and paying down debt. Or I accumulate funds in offsets of other more expensive places so they aren't a burden.

    I can see the benefits of going hard in a suburb but I don't think I could ever do it.
     
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  13. MTR

    MTR Well-Known Member Premium Member

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    Actually we had boom cycles in Australia from 2012 in 3 markets that I can identify, and have been posted on the forum, that is pretty significant, imagine if you jumped in all these markets what could be achieved.

    Sydney 2012- 2015 peaking
    Melb 2013 and still going in certain pocket
    Perth - 2013- 2014 (mid)

    You got it wrong, I don't buy and sell everything.
    I also hold property, I sell developments if I see that markets are changing/turning ie Perth. Melb?.... because I would rather be cashed up for the next cycle. Yes, I pay tax, but I am treating it as a business therefore I pay 30%.

    I am not stating that I have the perfect model... hardly, I am simply giving options that may help investors get to the end goal in 10 years rather than 20 years. '

    Nothing wrong with your strategy, its not a competition, all to their own

    I also don't believe its rocket science to time the market, its very obvious when markets are rising, the main thing is not to ignore the signs and you only need to get into rising markets at the early stage, significant growth is generally closer to the peak.
     
    Last edited: 26th Feb, 2016
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  14. HUGH72

    HUGH72 Well-Known Member

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    Sometimes typing away on the phone is a blunt instrument.

    I'm not critical of your strategy at all its just not the way I'm heading. I'm annoyed that I was asleep at the wheel when Sydney boomed for sure.
    I've timed buys well before but I have also been too late to the party on occasion, for example Bn in 08. Everyone thought the good times would continue, I remember RPdata predicting something like another 18% growth over the next couple of years yet the result in some suburbs was something like minus10-15%. Was this obvious? With hindsight yes it was.

    Plenty of ways to make money using perfectly viable strategies that I don't intend to try.
    That's what is great about real estate.

    Back to the OP, I think it sounds like you are nicely diversified already but as has been pointed out I would think of what is important to you in terms of risk management.
     
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  15. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Long bloody sleep mate :p

    oooonly kidding :0)
     
  16. HUGH72

    HUGH72 Well-Known Member

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    Lesson learnt..
     
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  17. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Your a quick learner.. some things have taken me a looong time to finally learn...:oops:
     
  18. Chilliblue

    Chilliblue Well-Known Member

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    Why not diversify outside of property?
     
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  19. MTR

    MTR Well-Known Member Premium Member

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    Agree, but if you are doing well, by this have a track record of making consistent profits with property and perhaps crapola at shares then I think stick to what works and just get better at it.

    If you can do both well then great
     
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  20. Muddy

    Muddy New Member

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    Apologies for the late reply, can't do this while at work. My mistake with the original post, I have two properties in western Sydney, not three. Thanks everyone for the chat, I was thinking of going for one more taking the total to 8 and then taking a break for a while. I did, as suggested take advantage of some gains in the Sydney market and used those to buy the last two Brisbane properties (Brassall & Eagleby).

    I have just enough equity in my PPOR to get another and then I am tapped.

    I have thought of investing in unlisted property trusts, but don't know enough and would have to borrow to do it.

    As far as exit strategy goes, accumulate and hold for the next 10yrs & then re-assess.

    Cheers
    Muddy
     
    Last edited: 26th Feb, 2016
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