Should I buy a million dollar property investment or a $500,000?!
Many investors believe they must purchase a $1,000,000 property to do well in the market and reap the rewards. But is that really the case?
Investing in property isn’t sexy!
I think property investing sounds a lot sexier if you can purchase a $1,000,000 property opposed to a $500,000 property. Many investors can’t afford a $1,000,000 property from both a servicing and a deposit point of view. That doesn’t mean you can’t purchase a high-quality property that will achieve capital growth as well as providing a strong rental yield.
Below I have broken down the entry costs for both a $500,000 purchase as well as a $1,000,000 purchase. These calculations are based on Queensland, and this will vary state to state due to the various stamp duty calculations and charges. To keep things simple, we haven’t included Lenders Mortgage Insurance (LMI) in the calculations, however this would be applicable with a 10% deposit.
|
$500,000 Purchase |
$1,000,000 purchase | ||
| 10% Deposit | $50,000 | 10% Deposit | $100,000 |
| Stamp Duty | $17,499 | Stamp Duty | $41,449 |
| Legal Costs | $2,000 | Legal Costs | $2,000 |
| Pest and Building | $500 | Pest and Building | $500 |
| Total | $69,999 | Total | $143,949 |
| Difference: $73,950 | |||
You would require an additional $73,950 for the deposit to purchase a $1,000,000 property. The important question to ask is “how long would it take you to save $73,950”? If you could save that amount in 1 year you would need to put away $1,422 a week. If you wanted to save that in 2 years you would need to put away $711 a week.
You need to save $50,000 plus a year!
We have seen markets move up to 40% in the last 12 months, not just on $1,000,000 properties but on $500,000 properties also. The areas we invest in for our clients will continue to grow in value, they can’t continue to grow at 40% each year, however if they grow at 10-15% a year, you most likely can’t save faster than the property growth. You would need to save $50,000 to $75,000 if a $500,000 property grows at 10-15%.
Therefore, it is important to get into the market when you can afford, and not wait to buy the sexy $1,000,000 property (or more expensive property). Get in, purchase at the price point you can afford, take advantage of the capital growth sooner and then you can leverage into a second property once the property has grown in value, and you have the available equity.
What do the rental yields and cashflow look like?
Another important part of the scenario is the rental yield on each of the asset classes. Typically, what we are seeing at the moment is that weekly rents aren’t increasing as fast as property prices. Don’t get me wrong, they are certainly increasing, however the 20% growth in the weekly rent over the last 12 months doesn’t compare to 25%, 30% or even the 40% growth in house prices.
What this means is that the $500,000 purchase will be generating a stronger rental yield for you than that of the $1,000,000 purchase. This means it will have less pressure on your cashflow to hold the property and have less impact on your serviceability. On a $500,000 purchase, the yield could be 4%-5% opposed to a $1,000,000 property with a rental yield of 3%-4%, being optimistic.
One more benefit is that if you purchased two $500,000 properties, opposed to a single $1,000,000 property, this is a way to mitigate your risk. Having two tenants across the $1,000,000 worth of assets and debt. Therefore, if a tenant moves out, you are still receiving rental income on the second property. Alternatively, if you purchase a single $1,000,000 property and the tenant moves out, you have no rental income until you find another tenant.
Your $500,000 purchase will be worth $1,000,000 in the future!
Remember that investing in property isn’t sexy, you don’t get rich overnight and property is a long-term game. You must be patient, trust the process and continue to build your assets and wealth over time. It is crucial to get into the market when you can, as you can take advantage of the growth which you can ultimately leverage against for further purchases. Selecting properties in the right areas will mean that one day in the future that $500,000 purchase will be worth $1,000,000.
Here at Taylored Property Wealth we specialize in helping investor clients purchase positive cashflow properties that are primed for growth. If you would like to know anymore information or you’re looking to purchase your next property and would like to discuss further, please reach out at info@tayloredpropertywealth.com.au.
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