A very narrow gap between gross rental yields and mortgage interest rates is a buy signal for investors.
How to invest $2 to $3m wisely in property
If you had the means to finance two-to-three million dollars’ worth of residential property investment, where would you put it?
That sort of money opens most doors and you would have your pick of some dazzling properties, ranging from penthouse suites in luxury apartment complexes to double-fronted, exquisitely-renovated period houses on quarter acre blocks in the leafier streets of our inner suburbs. You would banish any notion of compromising on the location, the position and the amount of accommodation.
Moreover, at this rarefied altitude the whole process is much more serene for buyers. They’ve escaped the hyper-competitive turbulence that is first time buyers, upgraders, downgraders and the vast majority of investors dog-fighting to secure good quality property in the sub-$1.5 million market.
Because the competition falls away at this level, you tend to get more bang for your buck once you can spend $1.5 million and certainly at $2m and $3m. You secure proportionally more land, more accommodation and can access the best streets. Renters of high quality property also benefit from this phenomena. Whereas a typical sub-$1 million investment grade property might yield 4% in a capital city, its $2m+ cousin yields less than 3%. There just isn’t that many people who would prefer to pay $5,000 a month in rent rather than towards paying off a home. That’s great news for the renter who is willing to spend $5,000 a month as they consequently have super-sized purchasing power.
But it is precisely these market characteristics that means cashed-up investors should tread carefully. When investing you want the laws of supply and demand skewed vertiginously in your favour: strong, persistent demand meets scarce supply. That’s often not the case with multi-million dollar properties, both in terms of buying and renting. So whilst you may get tremendous value when you buy a millionaire’s pad, it is likely the person you subsequently sell it to will get tremendous value as well. Too often there is not the competitive pressure to drive the strong capital growth that must be the objective of property investment. Moreover, due to the smaller pool of potential buyers, a prestige property sales campaign can take many months to complete.
The overall sleepiness of the prestige property sector belies the headlines we see occasionally regarding Sydney harbour side or Toorak mansions doubling in value and selling for eye-watering amounts. From time to time manias for trophy property transpire and there can be a frenzy as ASX-listed CEOs vie to secure the best address. But this is another level again and, by the way, you tend not to hear as much about the sharp correction in prices when the stock market takes a tumble.
Consequently, an investor with $2 to 3 million may be better advised to do one of two things. One, consider buying an established block of apartments in an inner suburb. With the value of the block a function of demand for the individual units, you’ll be back in the intensity of the mainstream sector where demand persistently outstrips supply, delivering strong capital growth. But as the owner of your block you’ll have far more control than one unit holder in a body corporate. You won’t have to negotiate with others regarding maintaining and upgrading the asset, which can be very liberating and encourages optimising the block to maximise returns.
Alternatively, divvy up your multi-million dollar budget into smaller parcels and embark on building a perfect portfolio. Look to buy a diverse range of investment-grade properties in terms of architectural styles, a variety of inner suburban locations and across apartments and houses.
Many of us aspire to the peace and tranquillity of ascending to ionosphere-located property. That’s lovely for a home. But if you want to make money from property investment, it’s best to dive down and embrace the madding crowd below.