Monday, 20 April 2015

Why haven't I bought a second investment property?

When I first thought about buying an investment property I imagined that it would be the start of a property portfolio that would grow incrementally over time.  However almost 5 years after buying my first investment property I still only have one property.  Why haven't I bought more and why am I not some sort of young property baron?

My decision not to buy more properties was by design...

I actively decided not to buy more investment properties.  I could have done it several times and I definitely had the finances to do it.  My decision to stick to one investment property (for the moment) was by design and not through laziness or lack of opportunity.

I want to own a diversified portfolio of assets

My desire has never been to be a property baron.  Whilst I do want to be financially secure / well off and to reach my $90 million target I don't think that this needs to be within one investment class.  I want to own property, shares, bonds and alternative investments.

Owning an investment property puts a whole heap of your assets in one bucket.  Even if you can use a small deposit and use your cash to buy shares your actual exposure to the property market is still incredibly high.

If you want to own a physical property the fact is that you will be overweight that asset class for a very long period of time until everything else can actually catch up.  One of the reasons I haven't bought another investment property is that I was building up my other portfolio of assets during the last 5 years.

Your own home is an investment in the property market

When I was young I was very taken by Rich Dad Poor Dad.  I thought provided me with incredibly revelations that I had been completely missing before.  Once I did a bit more research and actually educated myself a bit more I realised that the book actually provided very little other than an idea of "you too can be rich".  

One of the core ideas that Robert Kiyosaki pushes in that book is that your home is not an asset because it takes money out of your pocket each month.  On face value this seems to be a true statement.  How many of us actually make money from our homes?  However the more I thought about the less I believed in this statement.

Your home is an asset.  You can spend too much for an asset, you can over-invest in an asset and you can over-capitalise an asset.  And most importantly not all assets put money in your pocket each month.  If you invest in physical assets (such as gold or oil or silver) they will typically take money out of your pocket each month due to storage costs and they certainly don't give you any cash until you actually sell the asset.  This is the same for your house.  Also owning your own home helps you avoid a cost - i.e. rent.

In fact your home is often one of the most tax advantageous investments you can own (in Australia).  You don't have to pay capital gains tax on your home and it is exempt from almost all forms of asset tests.

I don't own my own home (one that I live in) yet but it is definitely on the horizon. When I buy this home it will be an additional exposure that I have to the property market...and I will need to balance my other investment classes before I even think about buying property #3.

I can own additional property exposure through listed property funds and companies

I have written about buying listed property funds and companies before.  The major benefit of them is that you can buy them in small parcels and get exposure to sectors of the property market that I wouldn't normally be exposed to.  The major disadvantage of these types of investments is that you have much less control, the ability to leverage this investment is less and you have to pay fees on top of the natural costs.

I actually have a fair bit of exposure to the property market through listed funds although I have been reducing this lately.

The market doesn't look attractive to me at the moment

I'm a bit believer in value investing.  That is - putting my money to work where I believe there are fundamental traits which will make the investment more valuable in the future (even if these take a little while to realise).  At the moment I can't justify buying another property and increasing my exposure to the market.

If there was a crash or an amazing buying opportunity came my way I would not hesitate to go for it...but this does not seem likely in the current market and in the near term.

Over time I will probably buy more properties...but not right now

I don't have a problem with property investments in general.  In fact I think they are some of the easiest to understand and to own however like all investments you want to understand why your investing in something and have a thesis about how and when it will make you money.

Over time I will probably buy more properties and continue to hold onto them however this is not the right time for me.

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  1. Very interesting post and it definitely boils down to what you're looking to achieve I suppose..

    I'm looking to achieve an income level and while shares can and will produce income, the thing I like about property is the leverage it allows.. Having said that and I'm learning first hand now this leverage also comes with high exit and entry costs and it's a highly iliquid asset..

    What are your thoughts and knowledge on using a margin loan to invest in shares? Too risky for your liking are there any books out there that are good for understanding how the strategy of using equity to invest in shares and then use a margin loan..

    Cheers and I'll be looking to grow my asset base once I've built a bit of equity too! :)

    1. I agree - the stability of individual properties and the fact that they are illiquid and therefore not prone to the same kind of booms and busts that shares are (or not as often anyway) means that you are allowed to gear them up much more freely than shares.

      As a long term investor I really dislike margin loans for one simple reason. I don't expect the market to bear out my investment thesis straight away. In fact if the market goes against me then this is another opportunity to buy if the investment thesis still holds. If you have the potential for a margin call this affects how you look at investments.

      I much prefer using the debt from my investment property which is incredibly low covenant to play in the share market. It is actually one of the biggest things that having an investment property has offered in fact.

  2. Thanks for the reply and insight 90M, am currently developing up an investment strategy and goals for myself with a view to then developing a course to potentially help others as well as a bit of a career transition..

    If you're interested would be great to get your insight!

    Hope you had a fantastic weekend :)

    1. Hey Jef! Would love to hear what you're thinking about. Shoot me an email and we can go from there!

  3. Great post 90M. I tend to agree with everything you mentioned above except 1 thing ...

    I wonder if REITs should really be considered as a substitute to Residential (direct) Property?

    I know they are both property, but when you consider their historical patterns of returns, it becomes more mirky.

    REITs are highly correlated to the stock market, whilst residential property have a negative correlation to the stock market.

    In the interest of diversification and asset allocation, I wonder if it makes sense to consider 2 forms from property: REITs and Direct / Residential Property

    What do you think?

    I also came across a new space of fractional property, it's like buying 1 brick of a house and you get the rental income, etc

    1. Hi Jeremy,

      Thank heaps for the comment.

      I know what you mean about the correlations that REITs tend to have with the stock market. I wouldn't agree with your point about direct property and the stock market having a negative correlation. I think it's still positive however far less strong than the REIT correlation.

      In my view REIT valuations are impacted by the stock market which is why you get REITs trading at a premium to NAV however I think this offers opportunities if you are willing to search for REITs which are trading at a discount to NAV. Yes you have to sense check the NAV that they use but it offers you the ability to invest directly in property at a discount to the current value of that property.

      I don't think they are perfect substitutes (especially given there are very few funds that actually invest in residential property) but I don't think they are uncorrelated.

      Fractional property looks interesting - I'll definitely look into that!