Hi guys,
I've been reading Steve's books and getting motivated about investing in property, and would like to get my head around a few things:
Is it better to invest in higher-valued or lower-valued properties, if you had the same money to invest?
I understand there are a lot of factors involved, but what I am trying to find out is if I had $1,000,000, would it be better to buy many lower-priced properties, or a few higher-priced properties (with the deals being theoretically roughly the same in terms of potential capital gains and net rental income)?
I realise that to minimise the risk of untenanted properties, it would be best to invest at or below the median house price for that particular area, but how would you choose between two $500,000 properties in an area with a median house price of $500,000, compared to four $250,000 properties in an area with a median house price of $250,000 (all other variables and potential gains / income being equal)?
Any help getting my head around this would be much appreciated
Regards,
Peter
It depends what your goals are. One person will say 2 $500K properties, another (like me) will say buy more cheaper properties.
Some people like expensive negatively geared properties as they believe they'll get better capital growth.
Others like cheaper properties as the yields are generally higher making holding multiple properties much easier.
I also like cheaper properties because I want to retire soon (better cashflow).
Most investors I know are after cashflow for the same reason. If you don't need the cashflow and believe the properties will give you higher CG while paying the negative cashflow each week, go for that.
There's no right or wrong as everyone has different objectives. Some people also don't want to deal with multiple properties or properties they wouldn't live in themselves.
Lucky everyone doesn't think the same.
Hi Schplak,
Quote:how would you choose between two $500,000 properties in an area with a median house price of $500,000, compared to four $250,000 properties in an area with a median house price of $250,000 (all other variables and potential gains / income being equal)?Purely to "help you get your head around it", if all other variables are equal, then having four properties helps you out when a tenant vacates – you have lost just 25% of your rent until another tenant is found instead of 50%. With 75% still coming in, hopefully your mortgages will still get paid without too much damage. Conversely, with half your rent gone (if a higher value tenant leaves), covering the mortgages could be a bit of a stretch for a few weeks. Having four properties could also help if you want "diversification" (not one of my hot buttons, but it can be a safer ploy for some).
At the lower end, anyone can afford to rent them, so you are less likely to have an empty place for very long. Of course, some things won't be halved with a lower value property – e.g. conveyancing costs on purchase, rates, insurance, accountant fees at EOFY, maintenance, etc.
But then, rents of a cheapie are likely to be more than half of the more expensive property – just as well eh?
I'm sure there is more – but that should start a few thoughts going. In the end, personal choice, abilities, goals, etc will dictate your path,
Benny
I'm with Catalyst on the cheaper sides of things. If the market turns how much more do you think a 150k house can fall compared to a 500k house. Theres not a lot of room to go backwards and best case it stays stagnant and you still have your cashflow. As other posters have stated it depends on your strategy whether cashflow or capital growth and your end goal.
Tony Fleming | Triumphant Property Group
http://www.triumphantpropertygroup.com.au
Email MeNSW Buyer's Agent specialising in Western Sydney-Blue Mountains-Orange-Albury
Is it better to invest in higher-valued or lower-valued properties, if you had the same money to invest?
for me these are both the same- reason being the value is the same- price is different- just to elaborate if you buy a 250k worth of property at 260k then that was not cheap- you overpaid and therefore this was an expensive property. at the same time if you bought a 500k property at 490k then that is cheap. hope that makes sense. so if you had lots of money to invest it would not make a difference if you buy a property that is priced at 250k ( not valued) property or 500k priced property. however for my investment i want to buy a property below its actual value .
It is all about risk mitigation but personally for a first time client looking to build a portfolio we would probably suggest they start with something < 350K rather than a
property for 500K+.
Buying a cheaper property helps with land tax strategy planning and also when interest rates rise (and they will do in this cycle) you can look to increase the rent $5 – $10 / week on a lower priced property and have less objection from the tenant. On a higher priced property the rental increase will need to be a lot higher to cover the increase in interest repayments.
You can't live on capital growth but you can live on rental return.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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