The trade off to upsizing

People think that buying a 2nd or 3rd property is easier than your first. It's not. A lot of people face the dilemma of what to do with thier first property.

When you are a first home buyer, the strategy is usually about borrowing to your maximum, and getting that first foot "onto the property ladder". When you are buying an investment property, the strategy is all about the numbers and the return on your investment. When you are downsizing, the strategy is focused on being debt free and comfortable.

But what on earth is the strategy when you are looking to buy your second or third primary residence?

• Is it about being in one specific location? Perhaps close to schools or family.
• Is it about building wealth? Perhaps it requires a larger mortgage.
• Is it driven by the demand for more space? Perhaps a growing family or a new relationship.
• Is it time to move because you'd like a new project?

Maybe it is all of these together! It often is.

Here's the dilemma:

• Do I sell property A and use all the money I have to buy one new home, let's call it property B? OR
• Do I keep property A, turn it into an investment and buy property C (that is not quite as good as property B)

There is no one size fits all answer to this question. Many things factor into this, including:

• Where and what type of property is property A; how will it perform as an investment property
• How does keeping property A affect your borrowing power to buy another property
• What is the trade off between properties B and C? Is it location, quality of the property, size
• What is your comfort level with debt
• What is your risk appetite
• What is important to you in the short and long term

The outcome

The financial outcome of Option 1 and Option 2 can vary massively over the long term. The challenge for many buyers though, is they do not have the information at hand to be making an informed decision about whether they would prefer Option 1 or Option 2.

A big part of this is understanding what the differences between Property B and C would look like, and what are they trading off in the short term, for long term financial gain.

Buyer Tom

Tom was telling me this week that he would be selling Property A at a loss*, and this in itself was a pill he didn't want to swallow. Tom bought an apartment in Sydney 7 years ago, it was meant to have doubled in value right? Unfortunately not. After talking through his scenario, running the numbers, and mapping it out, Property A is not a great investment option to keep. Tom is now in the process of looking to sell Property A to allow for the purchase of a new home.

This is largely because an apartment in a high density suburb is never going to outperform a small house on a block of land in the Inner West.

When the numbers stare at you on the page, then it is much easier to step aside the pride in selling your home at a loss.

*loss is not just about the purchase price, but the price he paid + stamp duty + strata levies + interest on his mortgage + real estate agent sales fees.

Knowing what you are trading off is a better outcome than just guessing

These are significant decisions, and while the pathway for first home buyers, investors, and downsizers seems to be clear cut, this one is quite complex.

If you find yourself in a similar situation, I'd be more than happy to talk you through the considerations that you may find helpful to make an informed decision.