Now that APRA has reduced their assessment rate with most banks following suit, a lot of people have reached out to me with renewed borrowing power and a common question – is it better to have a small number of “quality” properties vs a larger “quantity” of properties in the long run? Well unfortunately, the answer is – “it depends” For me as an example, my personal goal was always passive income – so I went down the quantity route (without sacrificing too much on quality mind you), and that has now led me to pay off a significant chunk of my portfolio allowing it to do it’s passive cashflow thing. There are other benefits too;
1. Much less risk by having lower loan amounts spread across multiple assets
2. Safety in numbers – if 1 property is failing, I have several more to help out the portfolio as a whole
3. Much higher cashflow (more on that later)
When I strip away all the fat, a market property in well located fundamental area historically will increase in value over time. The question is how much time? Well the answer to that is (despite the ongoing predictions by hundreds of “experts” in this country), nobody knows! The real question is, when it does happen – how much “net value” of property are you holding?
• If you own 1 x $500k house and it increases by 10% then you make $50k
• If you own 10 x $500k houses and it increases by 10% then you make $500k
Sounds simple right? Well not quite.
To get to 10 houses, and to be able to hold on to them until capital growth happens is the key. Buying the first 1 is easy – even the first 5. But once you accumulate more debt, the banks will start to look at you very differently – or with a lot more risk. And if you bought property with poor cashflow, your holding costs will creep higher and higher – and that’s assuming all your tenants are paying rent and you have 0 maintenance issues (believe me – this is NEVER the case) We now know properties don’t actually double every 10 years. But let’s say it did. A lot can happen in 10 years to all of us. Things that are out of our control. The worst place to be is in a situation where you are forced to sell property in a bad market. It could be right before the upswing. This is why having decent cashflow is so important during the accumulation phase of your journey.
I remember before the Sydney boom, between 2003 – 2010, most of Sydney did nothing. 7 years is a long time between drinks and if you bought some heavily negative geared properties, it’s a long time to keep your head above water. Imagine if you were financially forced to sell in 2010? (I’m sure some were)
But what is quality anyway? Is it blue chip suburbs? Or the best street in an ordinary suburb? Maybe it’s the property itself and the specs surrounding it or what you can do to it? Its been well established that “ugly duckling” suburbs can often increase significantly more than blue chip suburbs (percentage wise).
In the end a balance of both quantity and quality will ensure you’re exposing yourself to as much gains as possible, whilst minimising risk. One of the main keys is to buy off market properties that are below market value, which often leverages you instantly with equity.
