Investor Alert: Is it wise to put all your eggs in one basket?
Some investors are lucky enough to afford a fairly substantial investment property. Perhaps it’s a property around the $800,000 mark or even as high as $1 million. Whatever the exact figure, these investors are naturally excited at the prospect of being able to buy something a bit more glamorous than a run of the mill investment property. But the question is, is it better to put all your money towards this one property or spread it out across a number of cheaper properties?
Personally, I am a firm believer in buying multiple cheaper properties instead of one expensive property. The caveat to this however is that the cheaper properties must still be ‘investment grade’ properties, otherwise you negate any advantages in pursuing this strategy. Generally speaking for Perth, you will find most of these types of properties around the median house price of $400,000 - $500,000 (although that’s not to say that they don’t pop up occasionally below and above this mark). So in the earlier scenario, that could mean purchasing two properties instead of just the one.
There are a number of reasons why I support this strategy and most of them relate to risk.
Firstly, there’s less risk from rental vacancies. Should one property become vacant, the weekly income loss would be far less than if the same situation arose with your more expensive – and only - investment property. With multiple properties, you have a safety net in that your other properties will continue to bring in rental income while you find a replacement tenant for the vacant property. There’s no safety net, however, if your million-dollar investment sits vacant.
Secondly, having multiple properties is better from a liquidity point of view. Even if you invest with a buy and hold mentality, sometimes you may be forced to liquidate your assets despite your best laid plans. With multiple properties, you give yourself more options in that you may only need to sell off one or two assets and be able to retain others, keeping your foot in the market. With just one expensive investment property though, you may be forced to liquidate it and go back to the drawing board.
Thirdly, there’s protection if an area or property you choose doesn’t perform as well as expected or is negatively impacted by some activity or event. You will still have other properties in your portfolio that may continue to flourish which will help you in continuing to grow and leverage off your asset base. The economy is one such factor which can affect properties differently depending on their location and their value. In the economic climate of late, in Perth and throughout the nation, lower-to-mid priced properties have been far less affected than those in higher price brackets. If you had bought a single million-dollar investment property in Perth prior to the GFC, you would be in far more financial pain than if you had spread your funds across multiple median-priced properties.
Aside from risk, there are other reasons why multiple cheaper properties can be a better investment decision. At the median price, rental yields are typically quite good and superior to those achieved by higher value properties. With multiple properties, you also afford yourself more freedom to take greater calculated risks that could pay off handsomely, such as buying one property in an up-and-coming area or an area that could be rezoned. With just one substantially-valued investment property, however, you may be more reluctant to take that chance.
Diversification is important to any investor. Most think that diversification means to spread your money across different asset classes such as property and shares, but as you can see the concept equally applies within one asset class such as property. Buying multiple properties in different areas, in a price bracket that continues to attract demand and minimises your risk even in flatter economic times such as now, is wiser than putting all your eggs in one more expensive basket.
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