Buy 1 or 2 IPs if you had the funds

[bennos]

I've just come back from a mortgage broker, he calculated that I can borrow up to 700K comfortably for my financial situation.

Not that this will be my last point of research/searching... but I just wanted to know the opinions of fellow investment-interested people.

- If I bought 1 IP (more expensive) then I will only have to manage/pay for fees of 1 IP.

- If I bought 2 IPs (less expensive), I will spread my risk a little more but increase my worries/fees two folds.

What about capital growth, rental return and any other considerations I've missed?

Any suggestions/advice/comments welcomed. Thanks in advance for your replies.

p.s. This is my first go at investing... planning to buy more as equity builds.

By buying a more expensive IP, the prop will need to attract people in the higher income bracket because the rent will be higher so I am limiting myself to a smaller portion of the rental market (outside the median price range). So, I should buy 2 less expensive ones to stay in the median price range and have a larger portion of potential renters, potentially limiting vacancy rate.

 

[softmonkey]

also don't forget the 700k IP will cost more than the 2 x 350k IPs to hold onto because rent doesn't scale linearly with prop value.

this rent difference imho will be greater than the fee difference

i would go for the 2x350s unless the 700k is the only way to get into a great area you know will do really well

 

[steveadl]

It depends on what type of investor you are and what sort of properties you're after eg. inner city, development potential, apartment/house etc.

If it were me, I'd buy 2 IP's and spread the risk somewhat, as well as perhaps being able to take advantage of counter cyclical markets by buying in 2 different cities/markets. So while one may sit still for a year or two, the other may rise and vice versa, not limiting your ability to continue buying.

I don't think worrying about PM fees should be that high up in your considerations to be honest. Since you want to buy more IP's down the track, hence more PM fees, either way you'll be paying more at some point. Also, whilst only 1 property would decrease your PM costs, what happens if that 1 ip lies vacant for 3 weeks?

 

[bennos]

Absolutely right. Spread the risk and don't be too overly concerned about the fees... afterall these are tax deductible.

I was leaning towards 2 IPs initially but thought I'd better search around a bit in case I was missing something (very new to investing).

Cyclical markets. I was reading a little on this last night. How do you (or anyone else) get information on the current cycle? I've spoken to a couple of investors recently that say that Darwin is nearing the peak of its capital growth. QLD seems to be the place to invest.

BTW, I am looking at residential houses/townhouses/apartments in the range of new to only a few years old.

 

[BayView]

I agree with Softmonkey there;
the higher the property goes up in value, the worse the rent return seems to be.
For example; we are renting our PPoR while we are over here - it's value is around $650k, and the rent return is $320 p/w. I have another property that we purchased for $105k, rents for $220 p/w and is worth $200k after 3 years of ownership. I would rather swap the PPoR for 5 of those.
Also, as you mentioned yourself, the risk of vacancy is higher with only one property.
The holding cost etc. are simply a percentage of the overall rent, so the more properties you have, the more dollars you pay, but the more rent you receive; it's all academic; you just keep adding zeros.
In my opinion, 3 x $200k properties may be even better than 2 x $350, but of course, we are probably not talking about CBD or near it.
It also depends on what you are seeking; can you carry a neg cashflow on a $700k property, or 2 x $350k properties?
If you are seeking to buy and hold, this might be a crippling position unless you are a high income earner with plenty of surplus income to service the shortfall of cashflow.
If you are looking for a quick turnover, a subdivision and sell or something like that, then you may be justified in carrying a neg cashflow until the deal is done if you can carry it.
With 3 cheaper properties, your chances of getting the rental yield closer to the outgoings are better; you may even create a pos cashflow, and if selected in the right area, you may get as good as, or maybe better cap gains than the more expensive property.

 

[steveadl]

Absolutely right. Spread the risk and don't be too overly concerned about the fees... afterall these are tax deductible.

I was leaning towards 2 IPs initially but thought I'd better search around a bit in case I was missing something (very new to investing).

Cyclical markets. I was reading a little on this last night. How do you (or anyone else) get information on the current cycle? I've spoken to a couple of investors recently that say that Darwin is nearing the peak of its capital growth. QLD seems to be the place to invest.

BTW, I am looking at residential houses/townhouses/apartments in the range of new to only a few years old.

Markets are quite offen in different cycles, it a matter of researching and finding where you believe there is value (don't read this as trying to buy under market, buying average price is fine too). I also would'nt get too hooked up on trying to pick the next boom, although you do have the benefit of SS which allows you to hear what people from around the country think is going on in their area.

Take a look at the "Where to buy" thread for people's theories on which areas are going to do well soon.

 

[bennos]

... we purchased for $105k, rents for $220 p/w and is worth $200k after 3 years of ownership...

Wow... that's like approx 40% p.a increase over the 3 years. How did you find this little nugget?!

 

[lizzie]

Wow... that's like approx 40% p.a increase over the 3 years. How did you find this little nugget?!

everything said so far is correct - i personally would go two properties as well. what the majority of the renting public wants to rent is often vastly different than what "we" would choose to live in. i would only remotely consider living in one of my 10 rentals - and only if desparate - but i have barely had a day vacant over the last 9 years. none of them are slums, but none are even remotely flash either.

40% ain't that grand if you pick the market and the property correctly. our last ppor went from $395k to $740k (87%) in the space of just over 5 years (2001-2006), with us doing very little but some landscaping, new carpet and a splash of paint here and there.

who says property doesn't increases in value and that demand doesn't push up prices?

but the rent on the $740k joint would've only been around $400/wk - so i wouldn't buy it, at that price, as a rental as the large negative component would kill me. but, if it bought it as a $395k joint and rented it at $400/wk, i'd be very happy to watch the cg.

 

[gooram]

Also, management fees are a percentage of rent, so your management fees will be proportionate to the amount of rent you are getting regardless of how many properties you have.

Interesting question though, I would lean toward buying one good quality property, but again you have to be fairly certain of good growth to offset the significant losses you will make in the early years.

Spending that amount on a single IP may allow you to get into a higher growth asset, e.g. a development block or inner city as opposed to two units for example which may have better yield but less growth potential. Spreading your risk is also a good argument for getting two, hedge your bets a little and go for an IP in sydney and one in melbourne for e.g.

 

[bennos]

... development block ...

I haven't even considered this option. Don't you need a lot of moola for this type of investing?

 

[snowy]

Similar situation

Hi Benno,

We have similar situations. We had a Property Portfolio created about 3 months ago by owe MB for $700 also. We have purchased IP1 close to home and bought a Morgatee Sale ( new home ) and instantly created appr $50 in equity due to the developer unfortunatley going under.
We are just purchasing IP2 in Caboolture as I would like to create extra equity for future purchases noting QLD is creating good long term equity, stability, in a high rental demand area, great infastructure etc etc.
May I suggest you purchase the monthly Australian Property Investor Magazine ( next due out 31Aug07 ) at $8.95 from the newsagent is a great read and full of investor tips for us newbys haha

May I also suggest you creat a "Financial Goals" plan. My husband has created a great spreadsheet with our goals, aspirations, passive income upon retirement etc etc Thru this we created a spreadsheet which I have next to my computer on the fridge, everywhere which maps out our ( hopeful ) plan of attack of purchasing six IPs in the next couple of years ( we have high hopes and dreams ).

Just my thoughts, good luck with your future purchases and have fun.

Regards,
LIsa

 

[lizzie]

Spending that amount on a single IP may allow you to get into a higher growth asset, e.g. a development block

very good point - didn't think of that view but rather buy and holds. if you bought a development block and built them (perhaps a duplex) you'd end up with your two brand new properties at wholesale prices instead of retail.

and then it snowballs.

 

[willy008]

Thanks bennos for asking the question as i have been thinking the same
thing but still looking into it till i read this post

 

[addbe]

well, seems like that almost everyone choose to buy 2.

i say put all the eggs in one basket and take good care of it. that means i will only buy a good one with my maximun capability.


i live in melbourne. for the last 6 months, land prices in balwyn, middle park, kew has doubled. accordingly, suburbs with median price around 350K range moved some where by 15%~40% in the eastern suburbs.


i bought a few properties around 350K last year and they went up 30% on average by now. however, if i buy into balwyn, middle park, still borrow to the same limit, i would make a lot more. 700K house last yr in balwyn can easily go for 1.1M by now.


i believe a real property investor is aiming for capital appreciation rather than cash flow. so i suggest you to buy a good one and hold on to it. then you will have a pool of equity for the next step.

 

[alexlee]

i think 2~3 property is best for you. the more exposure you have the better result you will gain. just remember to buy cheap.

well, seems like that almost everyone choose to buy 2.

i say put all the eggs in one basket and take good care of it. that means i will only buy a good one with my maximun capability.

i believe a real property investor is aiming for capital appreciation rather than cash flow. so i suggest you to buy a good one and hold on to it. then you will have a pool of equity for the next step.

Addbe, did you just totally contradict yourself?
Alex

 

[bennos]

Was reading Margaret Lomas "The truth about positive cash flow property". There was a part in it where she talks about having 600K and whether to buy one or more properties.

She recommends to buy cheaper and multiple properties... in her example of 600K - buy at around the 150K price range, saying that there are more renters in that price bracket. Also for the reason that lower priced properties are more liquid (probably not the right term) if you need to suddenly and urgently sell. She would buy more to spread the risk and in different cities to capture the rise/boom/peak of the property cyclical market.

Not that she is saying to do this blindly, of course it is only if you can find cashflow positive properties in that price range.

All valid and logical reasons to me. Anyone agree/dsagree?

 

[addbe]

Addbe, did you just totally contradict yourself?
Alex

hi Alex,

well, looks like i am contradicting myself. the reason behind it is because i have done both.

i live in a big house in a good suburb, the capital-growth on that this one is very good. so i know the benefit of getting a piece of prime real-estate.

i have other houses as well. they all geographically spread over. i think they will capture the hot and non-hot spot in different areas, which is good in the long term.

the avaliable $ was mentioned in the first case. i don't know how much $ will be spent on each IP and i don't know the borrowing capacity. in order to play safe and play well, it is good to buy 2~3 IPs under that circumstance.


but the second case was different. when serviceability is strong, a 700K loan (if provided with another 20% cash deposit would be better) can make a difference. for instance, a 900K house in balwyn north (balwyn high school zone) or a townhouse in malvern will enjoy the high growth and "bulletproof" down the track. it is very essential for starters. under this booming melbourne market, top suburbs nearly doubled the growth % of the average suburbs.


it is all about numbers. doen't matter which way you choose. some prefer +cash flow and some prefer -ve gearing. it is different in every circumstance, and it's personal. i personally don't have any +CF IP, but i know a few people chose + CF IPs even they have better CF than i do. but anyway, there is no bad choice.

 

[Welcome]

40% ain't that grand if you pick the market and the property correctly. our last ppor went from $395k to $740k (87%) in the space of just over 5 years (2001-2006), with us doing very little but some landscaping, new carpet and a splash of paint here and there.

Your example is actually less CG.

$395k > $740k in 5 years is about 13.5%pa.a (not counting upgrades)
$105k > $200k in 3 years is about 24%p.a.

I would give my left nut for a couple of properties that did 40% pa

 

[addbe]

Your example is actually less CG.

$395k > $740k in 5 years is about 13.5%pa.a (not counting upgrades)
$105k > $200k in 3 years is about 24%p.a.

I would give my left nut for a couple of properties that did 40% pa

it will be fantastic if you can find IPs with 40% growth per year, every year.

 

[redwing]

Your example is actually less CG.

$395k > $740k in 5 years is about 13.5%pa.a (not counting upgrades)
$105k > $200k in 3 years is about 24%p.a.

I would give my left nut for a couple of properties that did 40% pa

I get 17.46% p/a for an increase from $395k to $740k over 5 years?

Maths is a weak point fore me though..and on that; how do you work out the CG

Just trying to work out CG on an IP over the last seven years

For the above I used

(740-395) / 395 * 100 = 87.34%

Is that Calculation correct?

Tried it on one of our IP's (held for 7 years)

(260-87) / 87 * 100 = 198% or 28% p/a ?

Is that Calculation correct?