Too often I hear people say 'I want to build a portfolio of 10, 20 and even 50 properties' without any reasoning or strategy behind their decision. I've always believed that investing in property should be about quality over quantity! Did you know that you can actually achieve better results with less properties?
Understanding Your Objective
First and foremost, it's important to understand what your long-term goals are when deciding to invest in property. Are you looking for positive cash flow to supplement your income? This may give you the opportunity to reduce your hours of work or perhaps you're looking to start a family. Or do you need funds to buy your dream home or maybe even a nice car or boat? Whatever your goals, there'll always be a preferred strategy to help you with this.
Now that you have a clearer picture of your end objective, it's time to determine how you're actually going to achieve this..
Positive cash flow properties are important for your portfolio especially to help with serviceability, so that you can continue to borrow from the banks - this is more so important if you're a low-medium income earner. Whilst higher income earners may easily be able to afford multiple negatively geared properties whilst having no trouble continuing to borrow money from the banks.
So How Can Less = More?
Now to the exciting part! The reason I believe less can equal more is actually quite simple and can provide you with the opportunity to create wealth quicker - I'll outline this below:
1 Property Scenario
Purchase Price: $1,000,000
Rent Return: $700 per week (3.6% gross yield)
Annual Growth: 8% per annum
Loan Repayments: $3,766 per month (90% LVR at 2.94% Principal & Interest)
Based on the above scenario, the monthly rental income is $3,033 less the loan repayments of $3,766 = -$733 per month. Over 12 months, this comes to negative cash flow of $8,796 per annum. Now you might be thinking, why would I want to lose almost $9,000 a year - right?
Well let's take a look at the capital growth over a 10 year period now.
At an average annual growth rate of 8% (common for high growth markets), this compounds to capital growth of $1,158,925. So when you consider losing almost $9,000 per year ($90,000 over 10 years) but have gained over $1.1M in value on your property, it's easy to see how this strategy works well for wealth creation. Imagine having only 2 or 3 of these properties - that's $2M to $3M in wealth creation over a short 10 year period.
5 Property Scenario
Purchase Price: $200,000 x 5 = $1,000,000
Rent Return: $240 x 5 = $1,200 per week (6.2% gross yield)
Annual Growth: 4% per annum
Loan Repayments: $3,766 per month (90% LVR at 2.94% Principal & Interest)
Based on the above scenario, the monthly rental income is $5,200 less the loan repayments of $3,766 = +$1,434 per month. Over 12 months, this comes to positive cash flow of $17,208 per annum. Now this sounds great, right?
Well let's take a look at the capital growth over a 10 year period now.
At an average annual growth rate of 4% (common for regional markets), this compounds to capital growth of $480,000. With this scenario, you'll gain around $17,000 per year cash flow ($170,000 over 10 years) plus capital growth of $480,000 which totals $650,000 - that's $508,000 less in value over a 10 years period and you have 5 properties compared to only 1 in the above scenario - what!
As with any investment strategy, there'll always be pros and cons so it's important to understand your financial position (speak with your mortgage broker) and to clearly outline your goals.
What are some pros and cons?
If you own one property, then you'll most likely encounter less maintenance costs compared to owning five properties as everything has a life span such as appliances, fixtures and fittings, gutters etc. There's also less risk with tenants not paying rent, as you're only relying on one tenant/income to pay on time rather multiple incomes.
There are risks involved too. Owning one property means you've got exposure to a single market only, so if the market flattens or even declines, you'll be left sitting and waiting for the market to reverse. This can hinder you moving forward and buying more properties if you're relying on equity.
Having one income also poses a risk though - if the property is vacant, then you don't have any income coming in and will need to service the loan from your own income. Whereas if you have five properties, then even if one or even two properties are vacant, you should still have enough passive income coming in to service the loans on the vacant properties.
The other pro of having more properties is diversification - exposing yourself to multiple markets (this could be different states/regions) means that if one market slows down, then some of the other markets may still be rising and those properties can counterbalance the capital growth loss of those other properties.
Where Do I Start?
Ready Set Buy are a team of experienced buyer’s agents, who can guide and advise you on all stages of your property investment journey to lead you to success - click here to get in touch for a complimentary discovery call.
Once we’ve determined your short-term and long-term goals, we strategically help you build a property portfolio to assist you to reach your destination.
We don’t just stop at settlement! We continually assist our clients to ensure each purchase compliments their portfolio, re-assessing the strategy along the way. This is how so many of our clients have been able to purchase multiple properties over the years.
We also have a strong network of other professionals to help you along the way, including mortgage brokers, accountants etc.
I hope all of this info has been helpful and wish you all the best on your property journey. Please don't hesitate to get in touch if you have any questions.
Disclosure: The information contained in this blog is my personal opinion only and is not to be taken as financial advice. Please speak with your accountant or any other licensed professional for specific advice based on your own personal circumstances.
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