When it comes to investing in the Australian residential property market, one common dilemma arises: Should you opt for the allure of a single $1 million property or diversify with two $500k properties? A number of buyers are currently weighing up this exact dilemma in Perth versus Sydney. Perth has certainly done well over the last year or two which is why there is a current attraction, but what some buyers are not aware of (or choose to ignore) is the 15 years of the reasonably flat period between 2006 and 2022.
Investors are often faced with the challenging decision of whether to invest in one expensive property or opt for multiple affordable ones to reach a cumulative asset value of $1 million. As always, there’s never one answer that will suit everyone, but let’s delve into some of the considerations you should explore.
Diversification is Key
Diversifying your investment portfolio is a fundamental principle of risk management in real estate. By spreading your investment across multiple properties, you can mitigate the impact of market fluctuations in any single location or property type. This not only helps safeguard your investment against localized risks but also provides exposure to different rental demographics and market segments.
With three properties valued at $300,000 each, you have the opportunity to diversify across various suburbs, cities, or even property types, depending on your investment strategy. This diversification can help reduce overall portfolio volatility and enhance long-term stability.
Flexibility and Holding Power
Investing $1 million in a single property locks you into a significant financial commitment that may limit your flexibility in the future. It ties up a substantial portion of your capital in one asset, potentially restricting your ability to adapt to changing market conditions or investment opportunities.
On the other hand, owning three properties allows for greater flexibility and holding power. If one property experiences a downturn or requires significant maintenance, you have the option to rely on rental income from the other properties to cover expenses. This flexibility not only cushions the impact of unforeseen circumstances but also provides liquidity for future investment or diversification.
Reduced Risk Exposure
When considering the risk-reward trade-off, affordability plays a critical role in minimizing downside risk. In the event of a market downturn, the impact of a decline in property value is proportionally lower for affordable properties compared to high-value ones.
For instance, a 30% decline in a $1 million property results in a loss of $300,000, significantly impacting your investment portfolio. In contrast, a similar decline in a $300,000 property would only translate to a $90,000 loss per property, spread across three investments. This reduced risk exposure helps protect your capital and preserves wealth over the long term.
Serviceability and Financial Flexibility
Maintaining affordability is crucial for ensuring financial sustainability and servicing debt obligations. While purchasing one expensive property may stretch your borrowing capacity and increase your debt burden, investing in affordable properties offers greater financial flexibility.
Affordable properties typically have lower mortgage repayments and operating costs, making them more accessible to a wider range of tenants. This not only enhances rental income stability but also improves cash flow management and debt servicing capacity. Additionally, owning multiple affordable properties diversifies your rental income stream, reducing reliance on a single source of revenue.
Wrapping It Up
In the ever-evolving Australian real estate market, the decision to invest in one expensive property versus multiple affordable ones requires careful consideration of various factors, including risk tolerance, financial objectives, and market dynamics.
While the allure of prestige and potential high returns associated with expensive properties may be tempting, diversifying your portfolio through affordable properties offers numerous benefits, including reduced risk exposure, increased flexibility, and enhanced financial sustainability.
By spreading your investment across multiple properties, you can effectively mitigate downside risk, capitalize on diverse market opportunities, and build a resilient and balanced investment portfolio that stands the test of time. For example, our founder, Bharat Patel, used a combination of these strategies to build his massive investment property portfolio over 30+ properties in Australia.
Ultimately, adopting a strategic approach that prioritizes diversification, flexibility, and affordability is key to maximizing returns and achieving long-term success in the Australian real estate market.
