It's the portfolio $$$ that counts not the number of properties

Hi All,

I've read on Somersoft and now on Property Chat, threads about "how many properties do you own?", "how many properties did it take you to hit $1 million?". If you ask me it's a fallacy. Initially in our journey, it swayed us considerably too in terms of "number" of properties we had to have. In @DaveM 's terms it's - "Somersoft bragging rights".

Even met a spruiker who happened to have bought 4 properties in 2 months with a very low income and that looked impressive. I thought WOW at the time, however, in hindsight, they were ALL duds and low quality! Know a few who travelled all across Australia to buy properties (to renovate) in regional areas with little or no prospects for capital growth in 2010-2012 when all of the same was doable in Western Sydney! Why make it fancy? Keep it simple and stupid. Works for @monalisa and I.

Whilst number of property acquisitions can be and are impressive (and trust me it feels great every time another property settles and we get the call from the solicitor to "pick the keys"), I want to bring your (the newbies) attention to quality versus quantity debate. In the initial days, I wanted to increase the property count no matter what. I even put an offer on a property in Townsville to bolster the numbers. This is in early days. The universe was kind and thankfully such deals never happened. We stuck to Sydney and continued buying in the rising market and pleased with the outcome with the portfolio having grown significantly, especially over the last 2 years.

For newbies, I would suggest:

1. Although number of properties give you a ballpark figure to aim for e.g. 10 x $300k properties, look at having a $3,000,000 portfolio in 'x' number of years and then work out how you are going to achieve it. Note: it's all compounding unless you buy in a flat market (that means you need ways to generate equity)
2. Buy quality assets. What's the use of 30 x $100k properties that don't grow at all? And cause a lot of tenant and maintenance headaches (TMNT started an honest thread on this recently)
3. Figure out why you're investing in property altogether? Is it to give yourself/family a better future or is it to say "I own an investment property" even though it may not grow at all?
4. Work out your strategy in terms of what is acceptable with return, location, property type and what isn't. If you don't know what you're looking for then everything looks the same! For instance @monalisa and I like well located properties. We tend to avoid buying properties that are not serviced well by transport and shops and that means a lot of properties don't make the cut to begin with!
5. Choose a broker who is willing to work out a proper structure. Refer to #1 - if you want $1m, $2m, $3m, $4m and so on worth of acquisitions, figure out against your income & expenses if any of this is possible? If not, what are your options? How do you maximise it? The right broker will be willing to spend time with you working out a road map to your goals!

Happy Investing!
MsAli

 

Completely agree with the total value being more important than quantity.

However this doesn't mean cheaper properties are inferior to more expensive ones. If 2 people both aim to travel 2000 metres, one might do this using 20m strides and the other in 100m bounds. It depends on their preference and capabilities. Still the same gained at the end of the day.

Also agree growth is the most important ingredient. Equity is what allows new purchases to be made. Growth doesn't need to be organic though, can also be manufactured.

Yield is less important, but makes hanging on a hell of a lot simpler.

 

Controversial post: "Generally" Yield is more important than capital growth potential when buying in a capital city.

 

That's true. When I read some of these stories I feel so inadequate until you do the sums and realize that the person with double the properties I have has an overall portfolio that's pretty much the same.

 

I'd suggest that capital growth is what makes you wealthy, but yield is what helps you own more assets. What's more important depends on your circumstances. I've noticed that a lot of people with higher incomes tend to be more interested in capital gains.

I've also noticed that whilst properties in the 'blue chip' locations have a lower yield as a percentage of property value (at any given point in time), the rental income tends to increase faster than those in the cheaper areas.

As to the number of properties, unless you're planning to open your own rental agency, less properties of higher value is a lot easier. Holding costs such as management fees, rates, maintenance, insurance all tend to be lower as a percentage of value in higher end properties.

 

Its an evergreen topic, and some folk will always have a strong view in one direction or the other. I am so grateful that at 20yrs old I read Jan Somers books and clearly saw that it is possible to build a portfolio and grow wealth using either method. I am neutral on the topic of cf vs cg and city vs country and cheap vs expensive because I have had low yielding beachside properties that grew (and the cashflow hurt early on) and mining town properties that grew with over 10% yield from day one. Both made money. In the end it always comes down to knowing yourself, getting comfortable (and good) with a chosen strategy that fits your goals and repeating the process.

If one is feeling inadequate from hearing another person's story and the gross numbers then it is possibly more of an emotional question than a financial one.

Is is actually fine to review your strategy in light of new information but remember to celebrate your own decisions, and continue to take action on your own plan.

 

@MsAli

well said

yes, low entry point will get you x numbers of properties, but it is quality assets that counts. (especially, in current APRA conditions)!

 

Price and quality do not always correlate

 

Read the post again.... no mentioned of price vs quality..

Buy low entry point property by all means, but don't get inferior product.

 

I like buying inferior product, its easy to manufacture equity with

 

So, in summary it's neither how many you've got nor the type of returns but what suits your circumstances.

(I like big and expensive but that's just me )

 

In relation to increasing asset base, you can quickly convert existing CG to CF but you can not quickly convert CF to CG.

Food for thought.

 

I don't think there's any one number that paints the picture. So I don't think that the portfolio value in isolation counts either.

 

When people ask Capital Yield or Income, my reply is

 

Go figure!

 

For a long time, I wanted to have higher valued but lower number of properties. I didn't want to deal with two set of tenants if I can get away with just one.

I believe it was @sash who changed my view. If your end game is to reduce IPs at the end, then it is more tax effective to have lower valued IPs.
Compare one 1 mil IP Vs two 500K IPs. Say both double in value when you are ready to downsize.
Scenario 1: 1 mil IP
CG = (2-1) = 1 mil.
50% exemption = 1/2 = 0.5 mil
Taxable per person (in a Mr & Mrs case) = 0.5/2 = 250K
So your taxable income is 250K for that year!

Scenario 2: 2 x 500K IPs
Sell one IP a year.
CG = (1-0.5) = 0.5 mil.
50% exemption = 500/2 = 250K
Taxable per person (in a Mr & Mrs case) = 250/2 = 125 K
So your taxable income is just 125K for that year!

Sell the 2nd IP the year after.

My sweet spot would be just bellow the median for the suburb you are interested in.

 

I completely agree with this. Location Location Location.
The simplest example i can think of is building a house.

If you build a house in Sydney's Outer West it costs the same as building one in Sydney's Inner West or North Shore. Guess which one sells for more?

 

@devank why not subdivide and sell it after in two separate FY.

Zoning rules have changed in the last few years in Sydney, it will probably happen again in 10-15 years.

 

Like this

 

You forgot the land is far greater value, entry level is much higher, regardless of build costs.