The topic gets talked about a fair bit and I see support for either side.
The biggest argument is something like: a 2M property increase 10% means 200K increase in value, but a 10% increase to 500K property is only 50K.
However, I think it is interesting to think from a slightly different angle, that is: what are the costs associated with each.
Angle 1: stamp duty.
If you buy a 2M property, the cost of stamp duty can get very high. Whereas if you use the same borrowing power to buy 4 x 500K properties, for each of 500K property the stamp duty is calculated from $0, so combined 4 x stamp duty for the 500K properties is a lot less than the stamp duty cost of a gigantic purcahse.
Angle 2: land tax
Same as above. If you buy a 2M property, you pay a pretty big land tax, but if you buy 4 x 500K properties and buy in different states, then you save a signficiant amount of land tax each year. It can even be 0 depending on where you buy them (eg: land tax starts from 270K in VIC, 600k in QLD, etc…)
Angle 3: When you sell.
Let’s make an assumption that by the time you sell, your property doubled in value. This means 2M property gets sold at 4M, while each of the 500K property gets sold at 1M.
For the 2M property that gets sold at 4M, this means a Capital Gain of 2M, and even with 50% CGT discount, it means CGT to be paid based on 1M value within the financial year.
For 4 x 500K property that gets sold at 1M each, this means you can choose to sell only 1 within a financial year, and pay CGT based on 500K (or 250K facotr in 50% CGT discount). Which means you get charged 250K/500K CGT when you sell property 1 during year 1….. and you still get to hold onto 3 properties (which further generates rental income and has a chance to appreciate in value until you need to sell the next one), and then you sell property 2 during another year, and only get charged 250K/500K CGT for selling property 2 during that year…. and you still et to hold onto 2 properties (which can still generat rental income and has a further chance to appreciate in value and you need to sell once again)…… overall you pay less CGT, your properties has longer time period to appreciate in value and you get more rental income over time.
Of course, my post is not intended to convince people to “start abandoning multile million dollar properties and start buying cheap properties”, but rather to provide a different angle so investors can take those into consideration when making decisions.
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This topic was modified 3 years ago by
Steven.
Hi Steven,
A good thoughtful post – well done. I agree with everything, and readers can add another point that comes into play too – the fact that if a tenant left, with a $2M property, you have lost 100% of your income (likely with a mortgage still to pay). But with 4 x $500k IPs, losing a tenant means a 25% drop in your income instead of 100% drop.
Then again any change in circumstances ( with you, a local council, or one particular area ) might impact the ability to hold that property. (e.g. a local catastrophe might send a suburb’s desirability into a tailspin). If that suburb holds your “one and only” IP, much pain for you. But if you’re holding 4 IPs (likely in several suburbs) your path would hopefully be less rocky.
Despite my recent post that quoted Warren Buffett (“Diversification is protection against ignorance. It makes very little sense for those who know what they’re doing.”), I agree with you that it makes sense to have diversification in some cases. Your post provides a catalyst for discussion around this complex subject.
It would be great to hear from others on this (especially from the opposing side).
Regards,
Benny
Hi Steven,
Let’s look at each in turn:
Stamp Duty
You are right in that purchasing multiple properties takes advantage of the ‘stamp duty free’ threshold for each property, and this could add up to quite a lot of savings depending on your total investment capital.
Applying your example in Victoria to calculate stamp duty, 4 x $250,000 properties = $10,070 x 5 = $50,350 vs 1 x $2m = $142,500.
However, we need to be careful not to let the tax tail wag the investment dog. If the $2.5m property was to generate a higher profit, sooner and/or with less risk and aggravation, it may be better.
Land Tax
Grouping means all properties owned by a common entity are combined for land tax purposes. However as land tax is a State tax, not a Federal Tax, investors will get a tax free threshold in each jurisdiction.
Applying your logic, and assuming each $250k property is bought in a different jurisdiction, there will be considerable savings compared to buying one property for $2.5m.
However, again, don’t let tax drive your investment. It is one of many considerations. For instance, owning one property in four states will increase your management and aggravation footprint, and your accounting costs if they are all owned in separate entities.
CGT
I’m not quite sure your example works here, because in one scenario you are selling your whole portfolio, and in the other only a quarter. The example really needs to compare selling everything in the same year, in which case the CGT impact would be the same.
However, you do make a valid point that owning 4 properties allows you to sell piecemeal as opposed to ‘all in or all out’.
My Experience
I’ve owned lots of cheap properties in various jurisdictions, but found the management aggravating. Today I own a commercial property in Tassie, and two in Queensland (in separate entities), plus a large investment in my US Fund (no stamp duty on purchase in the US, but a small amount on sale). Being commercial property, the land tax is passed on to the tenant, or reflected via an inflated gross rent. In my case, a CGT discount isn’t very attractive vs the company tax rate given I am already on the highest tax rate, and trusts pay high stamp duty and land tax rates.
Good discussion though, and thanks for your contribution.
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Of course, my post is not intended to convince people to “start abandoning multile million dollar properties and start buying cheap properties”, but rather to provide a different angle so investors can take those into consideration when making decisions.
Thanks for the thoughtful post Steven. It’s a commonly talked about thing, and I agree that it’s not a once size fits all type situation.
Having said that, with my portfolio, for me, I sleep a lot better at knight when one property has issues (for example, I’m having to do some major repairs on one at the moment) or is untenanted than what I would if I had all my eggs in the one basket. And for me, I also like the extra flexibility of being able to hedge my bets in multiple markets and minimize holding costs etc. But you’re right, it can also come with more hassles, so I guess people need to give it careful consideration and make a decision that works for them :)
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