Why is it better to have 5 cheaper investment properties than one expensive one?
If you had $1 million to invest in property, would you buy a $1 million property, or five properties worth $200,000 each?
Would you even ask yourself that question?
A lot of people don’t, because they have the age old mentality that it’s better to be paying off one single property than having debt on several at once.
But an age old mentality is what stops all but around 1 per cent of Australians from having six or more investment properties. An age old mentality won’t help you build a large portfolio.
Let’s look at some of the factors to consider when choosing one or many investments.
A $1 million property is likely to be a good quality home in a nice part of the world, but where is its upside?
Remember, investment properties shouldn’t be ones that you’d like to live in personally, but ones where the numbers stack up.
How long will it take that single property to double in value? It could be multiple property cycles.
Or it may have had significant growth in recent years and will now be unlikely to jump again for some time.
A $200,000 property, on the other hand, is about as cheap as it gets in any decent market these days so has most of its value growth still ahead of it.
A $200,000 property growing in value to reach $400,000 is a much smaller leap than a $1 million growing to $2 million.
So, if you have 5 of the $200,000 properties, you are likely to double your money and hit that $2 million mark much faster.
Think about which markets have the most tenants to choose from.
Rental returns on higher end properties are usually much lower because there isn’t much demand for those from tenants.
Good luck getting a positive cashflow out of a $1 million house!
The $200,000 properties, on the other hand, are at the affordable end of the market where there is a lot of tenant demand.
That competition will mean that rents are likely to be upwards of $300 a week and therefore positively geared.
Five of those would give you $1500 a week in rental income, which would be a very unlikely return from a single $1 million house.
If there is a market downturn or something else goes wrong and you have the one expensive property, your entire portfolio is then exposed to that risk and you may actually lose a chunk of money if you need to sell.
Alternatively, you can spread five cheaper properties around separate markets and minimize your risk exposure.
If one has to be sold, only 20 per cent of your portfolio is vulnerable and any losses are likely to be minor.
If a $200,000 property fell 20 per cent in value, you could lose $40,000, while the same percentage fall on a $1 million property would see you lose $200,000.
Mind the costs
Buying and selling property comes with a whole lot of added costs, the most significant being stamp duty.
Then there are agent’s fees, legal fees, bank fees and insurance. It’s important that you take this into account when choosing to purchase one or many properties.
For a property worth $200,000, stamp duty will set you back between $2000 and $7000 depending on what state or territory your purchase is in.
A $1 million property purchase would mean forking over between $30,000 and $55,000.
So you need to look at what the rates are in your neck of the woods and do the sums.
Long story short
Having five cheaper properties will enable you to minimize risk exposure, maximize potential for growth, protect yourself from vacancy periods by appealing to a larger tenant base and achieve a positive cashflow, which will mean they should all pay themselves off without you having to throw in too much extra cash.
It’s well worth doing if the stamp duty and other associated costs don’t get in the way.
If you want to grow your own successful property portfolio but you aren’t sure where to get started, sign up for a FREE Discovery Session with one of our team today and start creating your Road Map to Financial Freedom.