Is bigger always better?
I was recently in a conversation with somebody that I had met at an open house we were at previously. I asked the nature of why she was looking at this particular property and it came about that she was looking at it as an investment. Her first investment.
Now this was a freestanding 3 bedroom house in the eastern suburbs of Sydney with 2 car spaces. It was on a huge block & will probably sell for between $2.8m - $3m. The house needed a lot of work, approx. $100k+ worth of renovations needed to be done to bring it back up to scratch to achieve a decent return and increase it's value.
This brings me to beg the question 'is bigger always better'? I personally don't believe so and here's where I will explain why.
It really just comes down to simple mathematics and that's the way that any investment should be looked at, as it is the numbers that are important and should not be based on your emotions to help you decide. An investment should be generating income and increasing in value.
A $3m 3 bedroom home in said location would rent for approx $2,200 - $2600,w. The average of those two being $2,400/w. The repayments for an interest only loan for $2.8m at conservative rates of 4% interest works out to $2,153/w. Now how many people do you know that pay rent at nearly $2,400/w as opposed to those that rent smaller homes or apartments? The demand for these is much stronger and if the property is vacant for long periods of time without a tenant, it's you that has to fork out the entire amount for the repayments on that investment weekly, without any form of income generated from it.
In retrospect, let's look at if she were to instead of buying 1 $2.8m house, she were to purchase 3 smaller property's costing significantly less. I personally prefer to only buy free standing homes for investments as I am now in a position to do so, but this was her very first investment and for the purposes of this exercise I will illustrate the benefits according to the pricing within Sydney at the moment. So lets look at 3 apartments at say $950k each. A $950k apartment is generally a 1 or 2 bedroom property which are fairly easy to let. If we multiply $950k x3 apartments we have a total of $2.85m to purchase. The repayments on that $2.85m at 4% interest is $2,192/w. Each apartment would rent for approx. $750 - $1,000/w, the average of those two figures being $875/w. 3 apartments renting at $875/w = $2,625/w in rental income, which is more than what your repayments are for the loan and more than what would be generated for only 1 property. Is this making sense?
$2,625/w income across 3 properties is a lot better than $2,400/w for 1 in the sense that if you only have the 1 property vacant at nearly $2,400/w loss of income per week, you are still forking out the entire loan repayment amount weekly on that property, but if you have 3 properties at $875/w and even if 1 of those is empty for a short period of time (as smaller 1 - 2 bedroom properties are generally easier to let) you are still generating rental income from the other 2 property's receiving $1,750/w, so your only outlay is the extra $875/w for repayments in a shorter period of time which is much more manageable than having to fork out the full amount of $2,625/w for the 1 empty $3m property.
Even if 2 apartments are empty for a short period of time you still have $875/w extra income coming in from the 3rd investment which will be far easier to let than 1 large home that could possibly be vacant for a considerable amount of time.
So there we have it. Bigger doesn't necessarily always mean better, and can you imagine how good the feeling would be being able to say "I own 3 investment property's" or whatever amount you own as opposed to saying "I have an investment property" for just the one?
I hope this has been helpful and please don't hesitate to contact me directly with any questions you may have. I have been investing and buying for over 20 years now with a considerably large portfolio and would love to help others as I previously have many times over on their journey, whether it be for your dream home or your 1st/10th investment property.
We as Buyers Agents buy property as a full time career. Shouldn't you have someone on your side providing you with the proper guidance on the largest purchase we will ever make of our lives?
Of course you should.
If searching for your new home or investment has dragged on or is becoming frustrating and tiresome, please contact me for a short no-cost consultation. I specialise in the Eastern Suburbs of Sydney and can potentially help alleviate the stress, the wasted time and confusion out of purchasing real estate. If your search has taken any longer than 8 weeks it would be a wise decision to inquire about engaging professional help and discuss any questions you may have.
Simon Tasievski | 0403 625 566
Licenced Buyers Agent, L.R.E.A & Managing Director | Haus Property Buyers