Quality Vs Quantity In Building A Property Portfolio

Simon Loo is a very successful property buyer’s agent and director of property buyer’s agency, House Finder. He has a wealth of knowledge in the property market from working in the industry for many, many years and is generous enough to share some knowledge on where to invest successfully in the real estate market.

Join us as we discuss the topic of quality vs quantity when it comes to properties in your portfolio. We delve into why a good balance of both is important and we hear some reasons why, why looking at the best quality suburbs to invest in can sometimes be a mistake, how to start your own perceptions of locations can blind you from making the best real estate investing, and much much more!

We start off with Loo sharing his opinion on quantity versus quality. 

I don't think there is any right or wrong. You know, I think it's depending on different situations and depending on different goals as well. As investors, we all have our own individual goals that we want to try and achieve. And the other thing I wanted to stress is, you know, just because I buy a lot of quantity type properties, it doesn't mean that you have to forego quality either. So I think it's definitely a good thing to have a balance. And I'll kind of explain a little bit why. I'll break it down into three simple points, I guess you can say why I think quantity is equally as important as quality. The first reason is there's much less risk having lower loan amounts spread across multiple assets.

You know, so if you had let's say, a maximum borrowing power over the life of your investment journey of $5 million. If you had two or three super, super-nice blue-chip houses within that $5 million loan limit, then you're just exposing yourself to three houses at the end of the day during that whole ownership period. Exposing yourself to extremely low rental yields, you're exposing yourself to three tenants only. You're exposing yourself, you know, to three kitchens, three physical houses that each will have its own maintenance issues over time. And look, I think, you know, we discussed this in a previous podcast, but the reality of owning investment properties is that you're just maintaining headaches and issues that come up during the ownership period. So what do I mean when I say headaches? I'm talking about maintenance.

I'm talking about busted hot water tanks. I'm talking about broken stoves. I'm talking about, you know, tenants. I'm talking about vacancies, I'm talking about bad tenants. You know, tenants who fall behind in rent. Now if you have a $5 million loan amount or loan limits or $5 million property portfolio and within that loan amount, you've only got three properties. If one of those properties go through a vacancy or go through a maintenance issue or an insurance claim, then it's going to hurt you extremely severely in your back pocket from a passive income perspective because you've only got two properties that are, you know, doing what they are supposed to be doing. And look, I mean, heaven forbid if you had two properties that are going through some kind of, you know, a situation where it's not producing rent or producing income, you're going to be in an even bigger hole.

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Now we all talk about, you know, buying a property for capital growth, which is great. We all have the aim of these properties going up in value. But a lot of people forget that between the time of you buying the property and capital growth happening, it can be several years and it often is several years, you know, up to ten years or even more. So it's always about, you know, during that ten year period, how are you sort of maintaining ownership consistently of these properties and, you know, ensuring that you're not even in a position where you're forced to sell. Because when you're forced to sell it, and if it's a bad market, then it's obviously not a very good thing for any investor.

We delve into how having a balance of quality and quantity in your property portfolio can help avert risk.

I think balance is the key. I'm not suggesting that people go out and buy twenty $100,000 units or whatever out in the world. But I think there's gotta be a balance. I mean, you know, in any capital city for example in Australia, you know, you've got your extremely wealthy, nice blue-chip areas and then you've got your extremely sort of lower socioeconomic areas. I think somewhere in the middle is always a good balance for what I would consider as an investment grade type property. You know, those are the kinds of areas in a property where to invest the majority of people in households can afford to buy to rent. Those are the kinds of properties that have the biggest potential to gentrify over time and become more sort of quote-unquote upper class. And those are the kinds of properties that are always in demand from a rental perspective, from a buying and selling perspective.

From a risk management perspective, I feel like these kinds of properties are probably a safer bet. Bringing me, I guess to my second point, which is having safety in numbers. So you know, if you have a portfolio of just three very expensive properties, you know like I said, and if two of them are struggling, then you've only got one property producing income, you're going to be having a hard time for at least that short amount of period. But if let's say you don't have twenty properties, let's say you've got ten properties, you know, which is quite realistic for a long term investor. If your goal is let's say passive income and you've been investing for ten, twenty years to accumulate ten, you know, sort of middle ring suburb type properties.

If one of them is struggling with a vacancy, if two of them or even three or four of them are struggling, you've still got a whole bunch of properties doing what it's supposed to be doing from a cash flow perspective, you know, from a tenancy perspective. So your head is still above water, so you can still wait it out if that makes sense. You know, because the goal, as I said before, is obviously for these properties to go up in value eventually, but you need to be able to sit it out. You need to be able to wait it out for that to happen. And look, I mean, having ten or so properties in more sort of affordable areas also brings in higher rental yields, which means that you just have more cash flow over time.

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Having a quantity of quality properties in your portfolio is a way to safeguard yourself if something unexpected might occur in your life. 

The third point is that if you have more cash flow, you're just in a much less risky position. Because most of us investors, we're not super high income earners earning millions of dollars a year and you know, in our day jobs, if we're earning let's say combined income of $150,000, you know, having one or two properties negatively geared may already be eating into your weekly expenses, your monthly expenses. But having that cash flow, just backing you up along the way just ensures that whatever situation you might be in, it's less likely that you'll have to dip into your own back pocket to maintain properties if they are going through a bit of a bad patch or are struggling a little bit from time to time. So I really do feel like in short, those kinds of three points are the reason why I feel like having quality properties in quality areas where all the fundamentals stack up but not ensuring that the loan amounts tied against each asset is quite low.

Ensuring that you're spreading your capital across multiple assets. And also, you know, if you were in a position, let's say for example, you had a bad personal issue come up and you have to liquidate some of your properties. You have to sell down some of your portfolio, you've got more options. If you've got ten properties, you know, if you wanted to sell, let's say half that portfolio, you're still left with another half that’s hopefully producing enough passive income to see you out of that particular bad patch or whatever situation you're dealing with.

The location that you buy into is very important but that does not always mean looking to buy in the best quality suburbs. 

Sydney is a very unique market. Like you could have thrown a dart on a map in 2009, you know, anywhere in Sydney and you would've made, you know, 100% growth in the subsequent sort of five to eight years. Even in the super lower socioeconomic areas, you know, places like Mount Druitt and in those kinds of places have experienced extreme amounts of growth in most cases, even more, percentage-wise than a lot of the more sort of blue-chip areas. I think it comes down to like quality I think is one of those things that a lot of people have various opinions on. Using Sydney as an example, I guess the two main areas where a lot of people aspire to own probably are over on the North Shore and in the Eastern Suburbs is always considered to be the more sort of blue-chip and maybe parts of the Inner West as well, you know, more sort of blue-chip areas where people want to end up in terms of where they want to live.

But I think, you know, over time it's really interesting to see how growth happens and where growth happens because I think we've talked about this in a previous podcast about affordability, you know, for a $2 million house, which is generally what an average house would cost, you know, in what you would consider a blue chip area in Sydney. For that to double in value to $4 million, you starting to get into a realm where it's extremely unaffordable for the majority of the population whereas if you're starting out with a property that's maybe worth $800,000, you know, it's still in a decent suburb, not in a very low socioeconomic area, albeit maybe in sort of borderline working class/middle class areas. And for that property to be worth $1.6 million in five years or ten years time.

That's what I would consider socially a more realistic outcome, you know, based on meeting income standards, you know, based on affordability. So a lot of people talk about capital growth and obviously quality is tied in a lot with the capital growth potential. But I think at the end of the day it's, I mean, nobody has a crystal ball. So the question really is kind of, like I said initially, it's all just about having a balance, ensuring that you've got cash flow, ensuring that you're spreading that risk across multiple loans, multiple properties are important. But also buying in areas where the growth potential, not only from an infrastructure and government spending and location to shop, schools and transport but also from an affordability perspective is also quite important. And I think is one of those things that become a little bit missed when people do their research because I think naturally people, in the property at least, always aspire to buy in the best quality suburb that they can afford which sometimes from an investing perspective is a mistake.

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I agree with you on that because you know, I take a look at my own example. I remember back then going and looking at particular suburbs that I was very interested in back more than a decade ago around the Ryde area kind of thing. And I had learned from speaking to a few experts and also a few coaches in property investment that they said, look, you should try and find properties that are around those suburbs that are not already priced up quite so highly. So I said, all right, well I’m going to have a look at Ermington. Emington is pretty much one of the suburbs sort of on the outer rings of the Ryde area. And it was still reasonably priced and I could have picked up a place down there for about 360,000-$370,000 that was pretty much on the water. But it just needed a little bit of work.

You know, renovation might've cost about $20,000 to do. Now that particular property, I know when I looked back there, which is a missed opportunity, was worth over $1 million. And that's because I guess those suburbs have picked up because the affordability back then, and I think back then when we were looking at Ryde, it was still at least about 500,000 to $600,000 to be able to purchase a house in the right area. So there was at least a $200,000 difference in terms of pricing based on just basically in the next suburb. And that would've been a five minute drive around the corner. And I think from an investor's point of view, if you can find suburbs like that that are more or less up and coming, you know, over the long term they will be a lot better to buy in. Same thing as you said, Mount Druitt, it's pretty much very close to Penrith and Penrith is also a very, very well known CBD hub. If it wasn't that close to that, then it wouldn't be worth so much. But because of that, it's had such a huge amount of growth and I think that's the reason why it's attracted so many people who can afford to buy those properties in and around those areas. So it is very important to look at it from that point of view because that's where potentially quality does come into play.

And bad quality areas. Like, you know, the example that you gave there is important because quality has a perception, you know, and bad quality areas once perceived as bad quality can change very, very rapidly.

Loo shares with us some of the suburbs that have grown in quality over time and what buying into these areas can do for your portfolio. 

Even like, you know, suburbs now that are considered quite expensive like, you know, parts of the Ryde area, you know, leading onto areas like Carlingford and Telopea and like more around areas like around Parramatta, you know, you've got areas like Toongabbie and those kinds of pockets where previously, you know, it would have been considered quite rundown, quite lower socioeconomic. Now it would be considered, you know, very standard, average family, middle-class type areas. So perception changes over time and it is usually down to affordability. At the end of the day, you know, everyone obviously aspires to be in the best suburb possible, but it comes to a point where they simply can't afford it. I'm talking about the mass population and they immediately gentrify the next best thing, you know, and it just kind of creeps out to the point where, you know, you've got areas that used to be looked down upon, suddenly become very expensive areas.

I think actually Balmain is a very, very good example because Balmain years and years and years and years and years ago used to be a very working-class, very blue-collar area. It was considered a very rough area as well. But now in Balmain, I mean, you know, you're two, three-bedroom terrace houses, you're looking at $2 million, you know, on tiny blocks of land as well. So, you know, things change over time. And I think at the end of the day, you know if you strip away all the fat and all the moving parts of ongoing property investment, you know, it really comes down to properties in well-located fundamental areas that will increase over time. But the question is how much time?

property where to invest

So if you own one $500,000 house and it increases by 10%, then you make $50,000 in equity. But if you own ten, $500,000 houses and it increases by 10% then you make $500,000 in equity, but the trick is how do you accumulate ten, $500,000 properties and how do you maintain them over that five or ten year period to realize that capital growth I think is the real question that a lot of long term investors need to ask themselves rather than trying to guess the next hotspot and the next growth area. So that balance between quality versus quantity I think is very important.

When you are investing in property it is vital that you don’t get in your own way and let your emotions dictate your decisions. 

I think at the end of the day some tips and advice for any investors or maybe even new investors out there is to not get too caught up in your own perceptions about what is an acceptable area to buy in or an acceptable suburb. I see this a lot with my own clients, especially very new clients. They want to stay within 10 kilometres of the CBD or 20 kilometres of the CBD because they feel like, you know, 21 kilometres out of the CBD is suddenly just barren wasteland where the properties are full of people on Centrelink and unemployed, you know, that kind of stigma to it. 

But the reality of the fact is, wherever you are, whichever capital city that you live in wherever you are, even in regional areas, you know, you've got nice pockets everywhere. There are definitely areas that you should definitely stay away from, very low socio areas where it's, you know, probably common knowledge that it may not be the best place to live in, but then there are very sort of, you know, average and it's just suburban family-friendly areas that even though you might not want to live in yourself because you may have grown up in a different kind of situation or a lifestyle, but those can make some of the best investment areas. From an affordability perspective, it also ties in very well you know, from a cash flow perspective and buying properties that are not overextending yourself when it comes to getting loans and you're kind of spreading that risk across multiple assets and things like that. Sometimes it's really important not to be blinded by your own perceptions about what's acceptable and what isn't. And once you kind of get past that hurdle, it enables you to just look at it from a very black and white perspective, you know, and just invest in properties that will ultimately achieve your own personal goals.

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