When establishing a real estate portfolio, often newbie investors get confused with whether they should buy one expensive property or multiple cheaper properties. Personally, having started from a low capital base, we liked the cheaper properties, with high return (in order of 7%-9% rental yield). Although the market was never timed, fortunately Sydney boom helped provide spectacular capital growth as an added bonus.
With Sydney not being the place to buy right now, there are always other markets in Australia where you can start your investment journey. Now, nobody has a crystal ball as to where the market would be in the future, however as per the standard expectations, the two scenarios of 1) buying 2 x $400k properties versus 2) 1 x $700k property may offer you an insight into the path you should take to build a real estate portfolio.
P.S. There is no universally perfect property. The “perfect” property for you must tick the boxes on your strategy. We intend to write about strategy in our upcoming blogs.
Scenario 1: 2 x $400k
Pros:
- Lower entry price
- Ability to diversify in two different areas / states (minimise land tax)
- Possibility for a better rental yield
- Possibility for Neutral / Positive cashflow
- Depending on the state, the stamp duty for 2 x 400k properties is lower than the stamp duty for 1 x 700k property
- Vacancy for one property means part of the mortgage is still covered
- Sell one, hold the other property (spread your tax liability across financial years if selling both)
- Help with loan servicing and hence assist you on scaling up your portfolio with further purchases (assuming a high rental yield though).
Cons:
- Lower quality demographics
- Lower potential for capital growth (Note: In Sydney the boom started from the cheapie areas and due to the affordability the cheaper areas outperformed most of Sydney)
- 2 x council rates / 2 x water rates
- 2 x solicitor fees / 2 x Building & Pest inspections
Scenario 2: 1 x $700k
Pros:
- Better demographics
- Better potential for capital growth (higher demand from owner occupiers)
- Possibility to buy a development site – that you can get a Development Approval (DA) & Sell, DA & Build/Sell, DA & Build & Hold
- 1 x council rates / 1 x water rates
- 1 x solicitor fees / 1 x Building & Pest inspection
Cons:
- Higher buy in cost
- 1 x rental – so when vacancy happens, you pay mortgage on the whole amount of 700k
- Negative cashflow / holding costs
- Depending on the state stamp duty for 1 x 700k property is more than the stamp duty for 2 x 400k properties
- Potentially in the land tax territory with just one purchase
- Impact on loan servicing & hence future purchasing due to the cashflow position
- When you sell, you sell ONE; incur tax on one property alone in the same financial year
Please seek professional financial, taxation and legal advice before making significant financial decisions.
Happy IP shopping!
Property Twins
To Get Started: Schedule A Chat with the Property Twins Team Join Our Exclusive Facebook Community of 6,000+ Property Investors: Property Addicts Australia Join our Exclusive Search & Select The Right Property in 90 Days 5-Day challenge
Note: Please ensure you always seek specific specific credit, tax, financial, legal or investment advice. Property Twins' Blogs are not a substitute for personal and specific, taxation, financial, legal or investment advice
Good post. I think, in the investment journey, there might be a time for both Scenario, depending on where you are in the acquisition phase. Eventually, I would say it would be good to have 350k IP as well as 700k IP, just for diversification purpose (even if these properties are already in different suburbs or states).
The main risk for the higher entry price IP remains vacancy management if you don’t have a buffer big enough to sustain loan while there is no rent coming in…
Agreed. Both have a time and place. Depending on the risk profile, I believe the stronger the foundation the more risk you can take on.