Is there a difference between cheap and affordable property
People often confuse affordable properties with cheap ones.
Let’s look at someone with a high income as an example; they’ve got all the latest gadgets and spend their money on $200 bottles of wine when they go out for dinner but for investing purposes don’t have much of a disposable income because it’s being spent.
This is where their selection needs to match so the property will need to be affordable to the lifestyle.
The other factor that would make a property affordable is the amount of capital that is available.
Even if you can afford to hold onto a property with a $500,000 price tag, it may not be affordable if you don’t have a sufficient deposit to buy it.
This means you may have to consider your affordable price range which may result in going down to a $350,000 property to stay in line with your deposit.
So, even though from a cash flow point of view you can afford to hold on to it, it is not an affordable property for you due to lack of capital.
This means you need to be looking at properties from two viewpoints;
The cash flow or the negative cash flow that it brings to the table when you buy it
The initial capital requirement that you would need to actually purchase it.
Both boxes need to be ticked for that property to be classified as affordable for you.
It’s important to understand that cheap does not necessarily mean “cheap and nasty”…cheap refers to the price range in comparison to the rest of the properties in that area.
An example could be a property selling for $450,000 in a traditionally $500,000 market therefore making it a cheap property. In true investing terms that’s what it really means...as opposed to buying a $50,000 property out in the middle of nowhere.
But, that may be an expensive property for that area, since you might be buying a $50,000 property where everything else is selling for $30,000.
You also need to be considering the end before you begin.
This means ensuring that there is a market out there that can afford that property if, or when, you need to sell it.
The problem is that most people look at it from a totally different viewpoint…If it’s got a $1 million price tag then they think it’s unaffordable but, if it’s got a $500,000 or $300,000 price tag then it’s “cheap”.
If you look at the rhetoric that Sydney has become unaffordable to first-time buyers, it’s actually not an affordability problem, but an expectation problem.
They’re expecting to buy into a million-dollar home close to the city straight away but it may not be affordable to them because of the capital or deposit restriction, not necessarily the repayments.
Therefore, what they need to do is go further out first, build their capital base and get into something that they can afford in the capital sense.
At the end of the day, every investment or owner-occupied property must be affordable to your own unique financial situation. If it isn’t, you’ll struggle to hold it for the long-term, which may indicate that it’s not the right property for you or your portfolio.