Big'ns or little'ns

[Barracuda]

Gudday,

I'm only new to the forums but have already learned alot whilst lurking. Keep it up.

We don't have any IP's yet. It's been a few years (5) since we bought our PPOR - so am having to restart the research mode again. Being Sydney based, I'm likely to wish to invest in Sydney or it's surrounds as we're more familiar with the town. My feel is that I would prefer to pick a suburb / area in Sydney to research well, rather than try to cover the whole city.

My question is a general one, but was hoping that there might be some general thoughts on the issue that might then help me target my research to particular areas of Sydney.

Given that we can likely borrow a fair amount and sustain quite high carry costs year on year is it generally better on a CG basis to look for 2-3 properties worth around 4-500K (meaning the little'ns in the outer suburbs) or 1 more expensive property (say a big'n at 900-1500K) closer to the CBD or water?

I understand that the rent of 1 bigger house is likely to be less than 2-3 houses in the outer suburbs - but gut feel says that the higher carriage costs might be rewarded with higher (and more stable) capital growth and quicker equity gains for re-invetsment.

My preference for research is to stay with houses only, with more than 700m2 of land.

I do intend to get the residex reports etc but am champing at the bit to get a feel for this.

Cheers and looking forward to being a regular contributor once I have something to add!

 

[asdf]

Unless you target a niche market, homes on the north side will not bring the rent in to let you continue on the IP journey. But I'm sure theres demand for well done up homes on the north shore for executives. I would love to own a few houses scattered over Syd but the yield is just so poor. And cap growth is going to be very minimal over the next couple of years as well. Either wait for rents to rise or buy a problem property to add value. Remember though to not over capitalise, when markets were booming, you would spend $1 to make $2-$3 but now with high reno costs, you'd be lucky to get your money back. Eg. Friend just bought an inner city f/standing semi for $563K. Last traded 2002 for $450K. Vendors added 2nd storey for $150K. Plus stamp duty, interest carry costs, doesn't take a genious to work out that vendors are WAY behind.

I'd research the executive rentals route but also bear in mind there a lot of cashed up baby boomers who are not selling their homes but merely renting them out to travel/ live in their holiday homes so you'll be competing against those guys too.

And don't forget land tax. $1M worth of dirt will be $11.5K and if you purchase through trusts, will be a few thousand more. All OK if you have deep pockets but you could quickly find yourself working for your investments rather than the other way round and no cap growth to compensate for it.

 

[aef]

I would generally spread the risk over two to three smaller properties myself for a number of reasons.

More properties give you better probability of achieving CG. If two go up and 1 stays flat, you are still ahead. With one property you are stuck with whatever performance it achieves (which is OK if it booms.)

There is also the vacancy factor, if one is vacant you have 33% vacancy (if you own three) but 100% vacancy if you own one.

The only 'but' to the above is if your plan is to buy one bigger deal now with the intention of adding more to it in the not to distant future.

I would also be looking to keep carrying costs at a minimum as this will impact on the CG you make, especially since we are supposedly heading into a time when CG are a lot harder to come by.

Good Luck
A

 

[MarkB]

If the yield is so crap in Sydney, then why buy an IP there at all? (be it a mansion at Point Piper, or a slum at Punchbowl)

But if you are going to buy in Sydney, you want CG, and you can afford (to hold), it then why not aim for the best piece of dirt you can get?

Pre 1788 all the land in the area was worth the same (all but worthless), but now there are some parts of sydney worth tens of thousands of dollars (and more) per square metre.

As yourself why.

Then ask yourself if the historical reasons that made that property so valuable today are likely to be any different in the foreseeable future.

As always, caveat emptor.

Mark

 

[Jacque]

Hi Barracuda
I'm with Aef here, in that spreading your risk around, even in different areas, will at least provide you with some peace of mind should unforseen events change the capital growth expectations of the properties.
Are you a renovator? If so, then I would see now as an opportune time to search out the unloved properties and spruce them up cosmetically for both immediate equity and rental gain. There is plenty of stock on the market and owners are now more negotiable than they were even a year ago, to the changes and vagaries of the current market.
You are wise to select properties with higher land content- most of the houses in my area, for example, (Baulkham Hills) are older homes on bigger blocks (750sqm+) and well sought after by families. The higher the land content, the better your chances of capital growth in the long term. As the old saying goes, it's all about the land appreciating, not the building.
Yes, rents are still down, as the last boom saw a proliferation of investors into the market, which forced landlords to compete aggressively to get tenants. However, things are improving, as investors are now not as active and eventually demand will (almost) match supply.
If you believe recent media reports then our vacancy rates for Sydney are improving, with shortages expected within a year in many areas.
See here: http://www.domain.com.au/Public/Article.aspx?id=1132016828510&index=NationalIndex

Anyway, good luck with your search and I admire your enthusiasm
I know how you feel- it's very exciting when searching for property!!!
Try Residex, as well as RPData and Home Price Guide reports. They can all provide you with recent sales information as well as individual property reports. Have fun

 

[goddessk]

I agree with some of the other posts here. Better to diversify than to put all your eggs in one basket. Well, that's my opinion anyway. aef said it best. If one of them is not rented then at least you have two others with rent coming in.

And don't just think about Sydney because it's what you know. That's a trap a lot of people end up falling into. I know people that have bought a house in the same street as them in Sydney and although it is happily rented and they can keep an eye on it, the suburb has not grown for years. However, in saying that, it's their strategy and it may suit them. Everyone is different.

There is lots of information out there...on the net, talking to agents, talking to buyers agents, searching through this Forum, in API mag and other mags. I am just starting on my IP journey and I just bought in regional NSW, am actively looking in Perth and then will go to Qld. Why? There is great growth still in these suburbs.

But my first recommendation is to come up with your investment strategy and your goals. Without this you won't really have a plan of what you want to do. Are you looking for properties that are -vely geared for tax purposes and are high in growth? Are you in it for the long haul or want to make short term growth? Do you want +vely geared and therefore they pay for themselves, allowing you to purchase more? If that's the case, growth may suffer unless you hang onto them long term. All of these considerations will determine what you want to spend, how many you will need to achieve the results you are after and where you spend.

This may sound basic but in my mind this is the most crucial piece. It will then determine what research you do...and you do need to do the research. I have learnt that. But don't research forever. Read everything you can get your hands on, understand the basics in taxation so you know what it's going to cost/make you, get everyone's opinion (through books, forums, friends etc) and then make your own decisions based on your gut feel and what is right for you.

I set my goals, researched my heart out and then finally bought my first IP 6 months later. Do I know if I have made the right choice? Heck no! But I won't learn unless I get in there and give it a go. You learn from mistakes as well as successes. Ask lots of questions, particularly on this forum and everyone here is extremely knowledgable and will help with advice.

Good luck!

 

[Simon]

Well just to take the devils advocate stance - why diversify? Diwersify as some call it. Diversification is the safe path to a mediocre result.

Why not research really really well and find one "Sure thing" and put it all into it. I am not advocating putting it all on red. Rather buying one valuable piece of property that fulfills all of your criteria for wealth creation?

Food for thought? Or heresy?

You be the judge.

 

[aef]

Simon,

I can see your point of view however by diversifying I am attempting to limit my downside by spreading the possibility of vacancy accross a number of tenancies, as well as spreading the risk that any one individual IP will not perform.

My investment goals are as much about limiting the downside, hence protecting my hard earned capital, as they are about ensuring long term capital gains. However I may change my tune once I have sufficient capital!

At this late hour on Xmas eve I (BTW I am avoiding Darryl Somers on Carols by Candlelight) I cannot see how to protect my capital any other way.

Regards
A

 

[Simon]

Aef,

I was just trying to stimulate discussion. I will not be following the course I suggested myself - mainly because I am a buy and hold guy and will never have that big wad of cash for one property.

I am not even suggesting that any avenue is right or wrong.

I am sure that whatever you do is right for you and only you have access to all the info needed to make your choices. I am the last one to judge.

Cheers,

 

[aef]

No worries Simon,

Agree that discussion on this would be a good thing, Overall I am a buy and hold and would welcome supported alternate points of view.

I have gained a lot of insight and improved my knowledge from the posts where an alternate (to my) point of view has been posted.

Thanks again, hope your not working too hard over the Xmas/New Year break.

Regards
A

 

[Barracuda]

Thanks for the discussion

Thanks for the discussion - it's given me some food for thought.

I expect to be buy & hold for longer term growth - I have a career that pays the bills and don't want a new one full time in property trading / dealing.

Still early days in the researching and learning and and following Goddessk's commonsense recommendations for a solid plan first. I think that I'll get a couple of general reports from Residex (yield and CG reports) as a primer for the suburbs and regions as well as read all I can over the next couple of months whilst we sort out structure and the plan. Then we'll see what's out there that fits the bill....

Cheers,