Advice please

[Angel13]

Hi guys my nephew is looking at buying his first investment property. He has looked at a one bedroom unit (off the plan) in new the Element development coming up in Kingston Harbor. It is $430K with water views. He will have 2 years to save extra deposit to avoid mortgage insurance. No doubt the development looks beautiful but as I said to him investing is all about numbers. Did I mention it's in Canberra?

Agent says it will cost him $2500 per month (all expenses - including mortgage) and he should get $1800 pm rent conservatively.

Does this sound like a good investment? $700 shortfall per month seems a bit high to me (apparently depreciation/ deductions have already been taken into account in the above figures).

Not sure what the capital growth would be on this development.

Any advice would be appreciated.

 

[Shahin_Afarin]

The biggest problem with this story is the part where you say 'the agent says.....'. You need to do your own numbers but even with the numbers the agent has provided - it doesn't look overly attractive. I am not familiar with the Canberra market but it is very rare that an off the plan or a 1 bedder (let alone both) are a good IP option.

 

[Rolf Latham]

Agent says it will cost him $2500 per month (all expenses - including mortgage) and he should get $1800 pm rent conservatively.
.

Perhaps the agent should become an psychic.....

With Settlement 2 years out no one really has a clue what the financial markets and availability of funds will be, let alone the cost, and the val on the place thats being sold.

My response to my clients when they come to me with this sort of stuff...........

Sure, go right ahead, here are the things you need to think about.........OTP has some BIG benefits but even BIGGER teeth if the market or the borrower goes bad.

The ONE saving grace is that ACT OTP doesnt seem to have the same bad history real cities : )


ta
rolf

 

[Angel13]

Hi Rolf you mentioned that OTP has benefits. Could you tell me what they are?

I know it will give him time to save extra + the spiel about paying today prices for something that will be potentially worth more in two years (this nobody can guarantee as the market will dictate). He does intend to buy and hold.

And the depreciation benefits due to it being brand new.

I had a quick look and 1B seems to be around this price range. but my hesitation is $700 pm = $8400 pa out of pocket which is a lot don't you think or is that normal?

 

[Rolf Latham]

Hi Rolf you mentioned that OTP has benefits. Could you tell me what they are?

Some benefits that have applied historically

1. get todays price, and settle in 2 years time when the value will be X ( where x can be higher or lower (the lower bit is not a benefit
2. Pay stamp duty on a lower amount than the contract price
3. get a better selection of product than when near completion, because most developments need to sell Y amount of their stock before they can start due to their financier conditions.
4. Often you get input into the colours, fixtures and finishes

ta
rolf

 

[euro73]

OTP can work brilliantly when markets are rising. No doubt its made money for many people, over the years. The upside is that you get to buy at todays price and only put down a small deposit of 10% , but in 18-24 months when its finished, it might be worth quite a bit more . Happy days, right?

Then there's the risk. You are investing in air, something that isnt built yet , and you are required to commit a 10% deposit towards that air. You cant get a building and pest inspection or valuation done because there's nothing there to inspect or value yet. Even an estimated "as if completed" valuation will only really give you comfort that if it were to settle today, it would value at XYZ. It doesnt give you any form of guarantee of what it might be valued at in 18-24 months, when you're trying to get the other 90% funded by a bank. If the market turns and you've committed 10% to something that values badly, what happens if you cant get a loan on completion? Great if you have the cash to cover it- you can save the deal... but what if you dont have the cash to cover it and the bank says no?

Im not trying to scare you. Thats the worst case scenario. More often than not OTP works out well for people...but I would stress that property prices have been very volatile in the last 5 years and increases or even stability of prices is not a sure bet. That's a real risk with OTP.

But as Rolf said, Canberra appears to be very stable, so if you think the sale price is reasonable by todays standards, I'd personally get a confirmation on that by having a valuer out to do an "as if complete" val just to be sure that the asking price is reasonable. If it is, all Canberra needs to do is hold its value between now and when the building is finished and you'll be OK then. A val will only cost you $250-300. Well worth your while.

Having said all of that - if there was an option to invest in something with a shorter delivery time frame, or something near completion, might be worth considering instead. Just reduces the risk.

 

[Angel13]

The way I see it unless he makes huge cap gains it's not the best investment.

I did some research tonight and found a few 2x2x2 units for $20-30K more which are returning higher rents in inner city (walking distance to everything) don't need to travel by car if you worked in the city = lots of savings for potential renters. Also close to the ANU. Plus there are further development plans very close to this area - close off the road and turn it into another yuppy cafe strip. awesome!!!!

Rough figures suggest he'd be out of pocket $31 p.w. Not $180 p.w. And that's not taking into account tax deductions.

 

[Angel]

Remember to factor in what the potential interest rates will be in two years time when guestimating future costs.

 

[euro73]

Or take advantage of a 3,4 or 5 year fixed rate with a small variable portion- to lock in the cash flow numbers over the first few years

 

[westminster]

Remember to factor in what the potential interest rates will be in two years time when guestimating future costs.

And don't forget strata fees when comparing these opportunities

 

[Angel13]

Thanks for all your advice peps. My nephew called last night to say that he is going ahead with the unit and the shortfall is $250 per month not $700 which is sounding better.