Every few months, there’s a story online about an investor in their 30’s that has amassed a property portfolio of 12 properties…and how you can do it too.
Firstly, we shouldn’t be impressed by the number of properties that someone owns, as it doesn’t tell us anything about their wealth (equity). Boasting about the number of properties you own is like a business boasting about the number of employees it has. It’s often an ego trip.
Secondly, there’s nothing impressive about borrowing huge amounts of money i.e., more than what is sensible – that is a recipe for disaster.
The definition of successful investing is achieving the highest return for the lowest risk. There aren’t any shortcuts. Building wealth takes time. A perfect example of this is that Warren Buffett accumulated more than 96% of his wealth after his 60th birthday.
How do people buy 10+ properties?
It might sound impressive that an investor has amassed a larger portfolio of 10+ properties in a short time, but you can’t do that without taking risks. They probably have a lot of borrowings and dealing with 10+ properties would be time consuming (e.g., administration, maintenance requests, and so on).
There’s only two ways that someone can buy so many properties in a short space of time. Either they have a business that is generating a large amount of profit and cash flow, or they have a unethical mortgage broker or lender that has helped them borrow more than a sensible amount. Obviously, the former explanation is legitimate. But the latter is a recipe for disaster. Mortgages are wonderful servants but terrible masters. Borrow carefully. Building wealth is a marathon, not a sprint.
Property was more affordable 40 years ago
In 1980, the median house price was only $200,000 in Melbourne and $315,000 in Sydney in today’s dollars. For example, 40 years ago, a single-fronted, investment-grade, Victorian cottage in a nice street in Prahran (blue-chip suburb in Melbourne) would have cost you about $300,000 in today’s dollars. The same property today would cost circa $1.5 million.
Of course, borrowing capacities and incomes were a lot lower back then (as I discussed in January). However, arguably an investor didn’t have to be as picky as they need to be today because they could buy 2 or 3 (or more) properties in blue-chip suburbs. However, today, most people are hard pressed to be able to afford one investment property, let alone multiple.
These inner-city, blue-chip locations were a lot cheaper because our capital cities were so quite immature. There wasn’t as much congestion, so living close to the city wasn’t as desirable as it is today (and will be in the future). Properties located in blue-chip suburbs didn’t cost much more than ones located in the outer suburbs. A house in Prahran (an investment-grade suburb in Melbourne) cost the same as a house in Bentleigh (an outer suburb – 20km from CBD) in the early 1980’s. Obviously, the supply-demand pressures have changed a lot over the past 4 decades. The house in Prahran now costs $1-2 million more than the house in Bentleigh.
Buying ‘any’ property might work initially
The problem with articles glorifying an investor with a property portfolio consisting of 10+ properties is that in most situations, they have been investing for less than for 10 years. Therefore, it is likely that if they sold everything, paid selling costs, mortgages and CGT, they wouldn’t walk away with much cash – certainly not enough to retire. And the net income that the portfolio produces isn’t enough to retire on.
I’m not seeking to denigrate anyone that has worked hard to build wealth – quite the contrary. All I’m saying that taking high risks (i.e., high borrowings) to invest in average quality assets might work in the short-term, if you get lucky with market timing, but it isn’t the best way to build long term wealth.
It’s about the longest return, not the highest return
The chart below demonstrates that you really need to hold a property for 3 or more decades to benefit from the power of compounding capital growth. If a $1 million property grows at an average rate of 7% p.a., it will appreciate by almost $1 million in the first decade. However, in the third decade it will appreciate by $3.7 million. That is the power of compounding capital growth.
Percentage growth rates are important to consider when comparing investment options, but you fund retirement in dollars, not percentages. If your one investment property is appreciating at an average rate of $370,000 per year, its likely you will enjoy a very comfortable retirement, as you’ll have a very valuable asset to sell one day.
That means you must invest in a property that has the fundamentals to drive growth over multi-decade periods. Secondary locations can experience short term bursts of growth but in the long-run, growth will revert to the mean.
Fundamentally, a location that benefits from a greater imbalance between demand and supply will produce a higher capital growth rate in the long run. That is why blue-chip suburbs will grow at a higher rate than locations that don’t have the same perpetual imbalance of supply and demand. I discussed this previously here.
That means quality is a lot more important than quantity
The more expensive that property becomes, the more important it is for investors to only invest in the highest quality asset that their budget allows. Investors that bought property in the 1980’s didn’t have to be too worried about quality. Investment-grade property was relatively cheap. But today, investors must be more diligent. Quality is absolutely critical – they must invest in property that will be the most sought-after for at least the next 3+ decades.
Webinar on 26 April: I am co-hosting a webinar at lunchtime on 26 April where I will discuss what investment returns the property market may deliver over the next 10+ years. If you are interested in property investing, you should register now. Spaces are limited to only 500 people. Click here to register.
