The Australian real estate market poses an exciting yet challenging dilemma for investors: Should you pour resources into a single high-value property or diversify by investing in two lower-priced ones? This critical decision can shape the trajectory of your portfolio, with each path offering unique benefits and risks. Let’s unpack the potential of these strategies to help you make an informed choice.
One Expensive Property: The Trade-Offs
1. Exhausting Borrowing Capacity
Purchasing a single expensive property often requires a substantial loan, which can quickly exhaust your borrowing capacity in one transaction. This limits your ability to acquire additional properties and reduces flexibility for future investments. For instance, in Sydney, where the median house price stands at $1.47 million, securing a property in a prime suburb could leave you with little to no room for further borrowing.
2. Low Rental Yields
High-end properties typically offer rental yields in the range of less than 2.5%, significantly lower than those of more affordable properties. This translates into less immediate cash flow, making it challenging for investors relying on rental income to cover mortgage payments and other expenses. For example, a $1.5 million property might generate an annual rent of $45,000, barely covering costs like loan repayments, maintenance, and property management fees.
3. Equity Position and Serviceability Issues
Expensive properties can lock up your equity due to serviceability constraints. This occurs when your income is insufficient to meet the lending requirements for future investments. As a result, you may find yourself unable to leverage your existing property’s equity to expand your portfolio.
4. Higher Risk
Investing in a single high-value property concentrates your risk. If the property’s value stagnates or declines, your overall portfolio’s performance suffers significantly. Additionally, high-end properties can take longer to sell in a down market, further exposing you to financial strain during economic downturns.
5. Less Diversification
By putting all your resources into one property, you miss out on the benefits of diversification. Diversifying your investments across different locations and property types helps mitigate risks associated with local market downturns or tenant defaults.
6. Challenging to Sell in a Down Market
Luxury or high-end properties are harder to sell during market slumps. With fewer buyers in this segment, you may need to lower your asking price, potentially incurring losses.
Two Cheaper Properties: The Advantages
1. Diversification
Investing in two cheaper properties allows you to diversify across different suburbs or even cities. This reduces your reliance on a single market’s performance and spreads your risk. For instance, an investor might purchase one property in Brisbane, where the median price is $720,000, and another in Adelaide, where the median price is $650,000. This strategy leverages growth opportunities in multiple regions.
2. Dual Rental Incomes
Owning two properties means earning two rental incomes, which collectively provide a more stable cash flow. Even if one property is temporarily vacant, the income from the other can help cover expenses. For example, properties in regional markets like Ballarat and Toowoomba offer yields of 5% to 6%, significantly enhancing your income stream.
3. Increased Equity and Easier Access
Cheaper properties tend to appreciate steadily in value, allowing you to build equity faster. This equity can be accessed more easily for future investments, as smaller loans are less likely to strain your serviceability.
4. Fewer Serviceability Issues
Two smaller loans are generally easier to service than one large loan. This improves your financial flexibility and reduces the likelihood of being rejected for additional loans. Furthermore, lenders often view a diversified portfolio more favorably.
5. Tenant Affordability
Cheaper properties attract a broader pool of tenants who can comfortably afford the rent. This reduces the risk of prolonged vacancies and ensures consistent rental income. Suburbs like Elizabeth in Adelaide and Logan in Brisbane have affordable rental markets, with high demand from tenants seeking cost-effective housing.
6. Positive or Neutral Cash Flow
Cheaper properties are more likely to be positively geared or break even, especially in high-yield regions. Positive cash flow means the rental income exceeds expenses, providing immediate financial benefits. For instance, a $400,000 property yielding 6% would generate $24,000 annually, often covering mortgage payments and other costs.
Closing The Deal
When deciding between one expensive property and two cheaper ones, several key factors come into play. Opting for a high-value property may offer prestige and potential for long-term growth, but it also carries significant risks and financial constraints. Alternatively, choosing two more affordable properties offers diversification, dual rental incomes, and greater equity-building opportunities, all while reducing risks and improving financial flexibility. Investors can leverage this strategy to maximize returns and ensure a stable, resilient portfolio.
Well explained Bharat, buying multiple properties instead of one opens up more capital growth opportunities and lesser the market fluctuations risks.