One House or Two Cheaper Properties?

Hi,

I would like to hear what members think the pros and cons are of buying either one investment house for around $350,000 or instead buying two cheaper investment properties for around $175,000 each etc? Maybe one house and one unit or 2 houses.

I don't want to go into all the financial details but rather seek general feedback on buying two rather than one and I have a good broker helping me but I would just like to see what ideas and feedback I can get from members as well.

One thing is that I guess I would have to pay a solicitor nearly double the normal price and there is things like Real estate agents letting fees, building & pest inspections etc. Then there is strata fees and issues etc for a unit if I go with one or two units.

As it will be my first IP or IP's then I would like to make the most of out of this first loan and get properties that are as cash flow positive as possible. I actually see 2 cheaper properties as having better rental returns if just looking at rent without considering all the expenses when comparing on homes for 350k in the areas I have looked at. On the negative I would be looking at renting it out to people with less income so there could be more chance of tenant issues.

I would prefer to not buy them close together but maybe in neighboring suburbs or even in two different cities.

I also would prefer to buy properties where I could renovate a little as well and a home is better for me as it means I don't have to worry about strata plus I can improve the gardens since I have considerable landscaping experience from the past.

But I have seen some great deals where I could pick up two properties for a total of $350k and one of them is even renovated and ready to bring in good rent so it's a tricky one.

thanks in advance.
 
Some of the advanatages of 2 cheaper properties:

1. geographic spread (different suburbs, different cities etc)
2. lower complete vacancy probability (i.e. lower chance of both properties being vacant simultaneously)
3. higher liquidity (generally cheaper = easier to sell as wider segment of population can afford)
4. lower volatility in economic dowturns (tenants can down scale in bad times from more expensive properties to a cheaper one)

Cheers,

The Y-man
 
Hi monsoon

You have a nice problem to deal with!

Keep in mind that most expenses to do with property are percentage based

There are a few costs which are not, such as the garbage collection fees charged on your rates notice by the local council, and some establishment costs such as two conveyancing fees, two valuations, two settlement fees etc, but helping to neutralise that are lower Stamp Duty costs eg one $350,000 property would have NSW SD of $11,240, each $175,000 property would have NSW SD of $4,615, so a saving of $2,010 in stamp duty just for starters

Your mortgage insurance would be a lower cost as the value of the risk would be less

Your property manager would charge either one week's rent or a percentage of the annual rent as a letting fee, and a percentage for management fees.

If you have one $350,000 property, at 5% gross yield that would be rent of $17,500 per annum. Two $175,000 properties at 5% gross yield would be rent of $17,500 per annum, so the actual property management fees would be about the same.

So yes, there would be two stoves to maintain or two hotwater services to replace, but the liklihood of having both properties vacant at the same time is not high, so your rent income is likely to be more reliable

There is more flexibility with having two properties. One major disadvantage with property investing is that you can't just sell off the bathroom. Should you ever need to sell, you could put both properties on the market and sell the first one to get a buyer.

In my experience, the bottom of the market gets caught in the updraught when the market rises. If $175,000 is rock bottom entry now, it can't fall much.

You would always have a tenant and the expectations of the tenant would be less than the expectations of the tenant in the $350,000 house.

So you would be able to eg get another couple of years life out of the carpet, have a basic garden rather than a fancy one etc

The new tenant in our exec rental had a significant list of 'fix it's' when they first moved in, including that the curtains smelt - whereas in the lower value properties people have only asked for things to be fixed when broken.

I think you have answered your own question, as you have seen two 'great deals' which would fit your criteria.

From where I sit, two for the price of one sounds like a very good deal indeed

Cheers
Kristine
 
Thanks Y-Man & Kristine, your feedback has been very valuable and I'm probably going to go with the two cheaper properties as I can see there are quite a few advantages with this way.
 
I do have something I would like to understand a bit more about regarding unit sizes. I see Propertunity has written the following:

Anything under 50m2 is very difficult to get finance for AND if you can, the LVR will be restricted to something like 60%. This restriction also makes it difficult to resell or do equity draw downs from. I'd advise againt it and also whatever you buy - get a carspace.
quoted from this thread

Some of the units I had in mind were smaller than this so I guess I would have to keep them over 50m2 otherwise it could cause problems with finance etc.
 
I do have something I would like to understand a bit more about regarding unit sizes. I see Propertunity has written the following:
quoted from this thread

Some of the units I had in mind were smaller than this so I guess I would have to keep them over 50m2 otherwise it could cause problems with finance etc.

Yes. Even if you get finance, then in the event that you need to sell at some point down the track, you will have a limited supply of buyers who can access finance to buy your unit as well. Even if you do not sell, then it may be difficult for you to refinance / drawn down equity for more purchases.
 
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thanks for your quick reply Propertunity. I will have to probably go with one home or two cheaper houses unless I can find a larger unit in my price range.
 
I would recommend the two properties rather than one. We have used this strategy & for us at this point in time it minimisises our risk & assists in our ability to sleep at night!

Sure, we could afford to purchase a higher valued property but if that property were vacant for an extended period of time it would cause us financial hardship. By buying cheaper properties, it minimises the chances of both properties being vacant at the same time. It is likely in the future that our financial situation will change & this may change our strategy.


Good luck in your decision!

Above Average
 
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