{"id":2679,"date":"2022-05-29T09:52:29","date_gmt":"2022-05-29T09:52:29","guid":{"rendered":"https:\/\/royabhishek.in\/urbanbuyer\/an-investment-case-for-putting-all-your-property-eggs-in-one-basket\/"},"modified":"2022-05-29T09:52:29","modified_gmt":"2022-05-29T09:52:29","slug":"an-investment-case-for-putting-all-your-property-eggs-in-one-basket","status":"publish","type":"post","link":"https:\/\/royabhishek.in\/urbanbuyer\/an-investment-case-for-putting-all-your-property-eggs-in-one-basket\/","title":{"rendered":"An investment case for putting all your property eggs in one basket"},"content":{"rendered":"

[ad_1]
\n<\/p>\n

\n

It is generally an accepted investment principle that diversification can reduce your risk and improve investment returns.<\/strong><\/p>\n

The common vernacular is, to spread your eggs amongst various baskets.<\/p>\n

\"GoldenI would agree with this principle, so long as it doesn\u2019t result in deterioration of investment asset quality.<\/p>\n

Sometimes property investors should not diversify.<\/p>\n

That\u2019s because the quality of your investments will determine your future investment returns.<\/p>\n

You cannot expect to invest in average quality assets and expect to generate above-average quality returns.<\/p>\n

If you\u2019re going to invest in property, you are much better off buying one very high-quality property, than two average quality properties.<\/p>\n

To be a successful investor, you must invest in the highest quality property that your budget allows.<\/p>\n

It is also imperative to recognise that the dollar value appreciation of your property is an important metric that indicates whether you will enjoy a comfortable retirement.<\/p>\n

In retirement, we pay for living expenses in dollars, not percentages<\/span><\/h2>\n

The value appreciation of property in dollar terms is an important metric. Whilst we can\u2019t use capital growth to pay for living expenses, unless we sell the property, it still impacts our overall wealth.<\/p>\n

For example, if a retiree had $1,000,000 of super and wanted to spend $100,000 per year, they risk running out of super within 10 years (ignoring future investment earnings for simplicity).<\/p>\n

However, if at the same time, their property portfolio was appreciating by $200,000 per year, they are actually in a relatively strong financial position.<\/p>\n

In 1991, 30 years ago, the median house price appreciated by around $10,000 per year \u2013 which is equivalent to $20,000 in today\u2019s dollars (i.e., after adjusting for inflation).<\/p>\n

Since the average self-funded retiree spends circa $100,000 per year, this property appreciation ($20,000) is equivalent to 2.5 months of living expenses.<\/p>\n

At the moment, the average median house price across Melbourne and Sydney is around $1,000,000.<\/p>\n

Assuming the median property appreciates by approximately 6% per annum (on average, over the long run), that equates to a dollar value rise of $60,000 (i.e., 6% of $1 million).<\/p>\n

That is equivalent to over 7 months of living expenses.<\/p>\n

Annual property price appreciation in real dollar terms over the past 30 years<\/span><\/h2>\n

The chart below illustrates the historic change in median property price between 1991 and 2021, adjusted for inflation, that is, in today\u2019s dollars.<\/p>\n

\"MoneyThe chart also includes a projection of how the median property price might appreciate over the next 30 years, assuming a growth rate of 6.50% p.a. and an inflation rate of 1.50% p.a.<\/p>\n

This chart suggests that the median property value might be appreciating at a rate of over $100,000 per year by around the year 2030-2033 in today\u2019s dollars.<\/p>\n

And by 2045, the median property price may be appreciating by circa $200,000 in today\u2019s dollars \u2013 equivalent to two years of living expenses.<\/p>\n

Putting aside liquidity considerations, this suggests that if you\u2019re at least 15 to 20 years away from retirement, investing in one investment-grade property could be sufficient to assist in funding your retirement.<\/p>\n

\"Screen<\/p>\n

What does this mean for investors?<\/span><\/h2>\n

When it comes to investing in property,\u00a0quality<\/em>\u00a0matters a lot more than\u00a0quantity<\/em>.<\/p>\n

The above chart suggests that owning one investment property (worth $1m or more) might be sufficient.<\/p>\n

Some investors are obsessed with acquiring a multi-property portfolio.<\/p>\n

\"AngelThey express their investment goals in terms of the number of properties, rather than their financial performance.<\/p>\n

Having such a goal does not encourage you to focus on the\u00a0quality<\/em>\u00a0of the underlying assets, merely the number.<\/p>\n

As I wrote about in\u00a0this blog a few weeks ago<\/a>, over the last three to four decades, the Australian property market has benefited from a rising tide.<\/p>\n

Almost anyone that bought a property in the 1970s or 1980s has probably done well, capital-growth wise.<\/p>\n

However, in that blog, I suggest that this rising tide has been stimulated by a handful of unique factors that probably won\u2019t persist over the next three to four decades.<\/p>\n

As such, I suggested investors should develop their investment strategy with the underlying assumption that this rising tide will not continue.<\/p>\n

As such, asset selection (i.e., the quality of the property you invest in) is likely to be a more important factor over the next 30 years, than it was over the last 30 years.<\/p>\n

The chart above suggests that one high-quality, investment-grade property will do a lot of the heavy lifting in 20 to 30 years\u2019 time with respect to funding retirement.<\/p>\n

How do you put all your property eggs in one basket, safely?<\/span><\/h2>\n

The first thing I invite you to do is to examine any preconceived notions in regard to your maximum investment property budget (purchase price).<\/p>\n

Most investors will have a purchase price limit. Sometimes it\u2019s wise to test these comfort levels, as long as it\u2019s financially prudent to do so.<\/p>\n

\n

Increasing your budget may allow you to buy a higher-quality property.<\/p>\n

If you\u2019re going to invest over a million dollars into a property, it makes absolute sense to get professional advice in relation to which property to buy (i.e., use a buyers\u2019 agent).<\/p>\n

\"MaleThe difference between an investment-grade property and a property that has some impaired attributes in terms of investment performance can be significant.<\/p>\n

For example, a 1% p.a. higher growth rate over 20 years will result in over $500,000 more equity in today\u2019s dollars.<\/p>\n

Would you pay $20,000 to make $500,000? I would.<\/p>\n

Honest and professional investment property advice easily pays for itself in the long run.<\/p>\n

If you have more than $2 million to invest, it may be wise to spread your money across two or more properties.<\/p>\n

Geographical diversifying your property portfolio can serve you well on many fronts, which I discuss further below.<\/p>\n

If you are going to put all your property eggs in one basket, then one factor that you\u2019ll need to give a lot of consideration to is any potential capital gains tax liabilities (when you sell the property).<\/p>\n

One of the downsides of property is that it\u2019s a lumpy asset, which means that you need to make a decision to sell all or none of the assets (unlike shares, which you can sell in smaller tranches).<\/p>\n

This means you could crystalize a significant capital gains tax liability in the future, particularly if you buy a high growth asset.<\/p>\n

It would be wise to consider various ownership structures that might help you minimise any future capital gains tax liabilities.<\/p>\n

Of course, there are some risks<\/span><\/h2>\n

There are some risks associated with investing in one property as opposed to multiple properties.<\/p>\n

The first one is that you only have one tenant.<\/p>\n

If your property becomes vacant, you\u2019ll have to rely on your own financial resources to pay all holding costs, including mortgage repayments.<\/p>\n

\"RiskThe second risk of only holding one investment property is that you should expect periods of time where you won\u2019t experience any value appreciation, as highlighted in\u00a0this blog<\/a>.<\/p>\n

Whilst practically, this has no financial implications, as we know we must hold the property for the long-term to enjoy the financial benefits.<\/p>\n

However, it is something to consider from a risk profile perspective, to ensure you are comfortable with this potential outcome.<\/p>\n

Finally, one of the benefits of investing in multiple properties, is that it gives you greater flexibility, particularly in retirement.<\/p>\n

For example, an investor that buys three investment properties when they\u2019re 20 or so years away from retirement, can do so with the intention of potentially selling one property after they\u2019ve retired, to allow them to substantially reduce their debt exposure at that time.<\/p>\n

Whereas if you only hold one property, you don\u2019t have that flexibility.<\/p>\n

Obsess about\u00a0quality<\/em><\/span><\/h2>\n

The purpose of this blog is to make two important points.<\/p>\n

Firstly, an investment-grade house in most capital cities costs a million dollars or more these days.<\/p>\n

This is a lot more than what properties cost 30 years ago.<\/p>\n

\"HouseAs such, whilst the percentage capital growth rate is important to focus on, it is also important to understand the dollar value impact on our financial position.<\/p>\n

Put simply, one investment-grade property will over a much greater impact on our financial position than it did 30 years ago.<\/p>\n

Secondly, if you\u2019re going to obsess about one thing with respect to property investing, it should be about\u00a0quality<\/em>.<\/p>\n

Quality is absolutely critical.<\/p>\n

You are much better to put all your money in the highest quality asset you can afford, than spreading your money across several average quality assets.<\/p>\n

And levelling up in terms of quality is the best way to reduce your investment risk.<\/p>\n

It\u2019s a little bit like buying a pink diamond.<\/p>\n

A pink diamond is rarer than a normal white diamond, and as such, due to immutable laws of supply and demand, will always be more valuable than a white diamond.<\/p>\n

Therefore, you only want to invest in pink diamonds.<\/p>\n

If you want above-average returns, you must invest in an above-average quality property.<\/p>\n

ALSO READ:<\/span> Property investment rules to keep in mind in changing times like these<\/a><\/strong><\/p>\n