Am I being short sighted? Houses vs Units and Equity vs Cashflow

[MsAli]

I've now been looking for my second IP for quite sometime now. Perhaps I have had some stringent criteria. Me and my sis always buy in doubles so whenever we are in the market we are out there to get one each. My sis bought her second property in December and I've been on the hunt. I've pretty much spent every weekend since late last year in the Mount Druitt region, having looked at multiple homes, put an offer on quite a few...lost an auction by a wee bit.

My strategy (like many others) is to buy below market and have a rental yield of 7%+. We've done it before and intend to repeat it. Often I believe it's about being able to find the "right seller".

Of late our focus shifted from just units/villas/townhouses to purchasing a house instead - at least till they are affordable with good rental yields (7%+ for resi). One deal has been on a verge of happening with the vendor asking $220k and me being stuck to $215k as the property needs at least 15k-20k work and is in an owner occupier area. Worst house on a relatively private street.

I know a lot of people have purchased DOH properties for below $200k...which definitely look good (and a few don't even need that much work). My concern about those is that how can one do for example 10 B&P on those on auction, not knowing which one you may be able to get (if any). My feeling is most people who buy DOH houses don't do B&P. I could be wrong but that is the impression that I get.

I feel either I need to increase what I am willing to offer (less equity) OR be open to units - which offer better bargaining power (equity + potential for cashflow). YET, it is a unit at the end of the day. I'm only looking in metro and not yet willing to go regional either.

So what is OKAY? Houses vs Units/townhouses/villas? Or is it more important to look at cashflow regardless of the type of dwelling....as long as there is equity to move forward as well - knowing/trusting that western Sydney region is moving in a favourable direction and equity will show up - if not now in a years time.

Have considered looking in QLD as well. Just don't want to "waste more time" as I know I can do/afford a lot more deals which I'm currently struggling with due to some "mindset" issue. I need to break this risk averse thinking pattern.

Thoughts/comments appreciated.

Thanks.

 

[DaveM]

You know my thoughts already after our PM marathons

Yes cashflow is one consideration but future value needs to be a significant part of it if you are doing the buy/reno/reval/redraw game.

There is an oppportunity cost to tying up funds in a low CG property. In a lot of regards its better to be negative $40 a week on a place increasing by $20kpa than positive $20 a week on a place in a rotten suburb increasing by nothing per annum.

There is a lot of investor punters for houses for your strategy, and the local agents (and through them, the vendors) know that.

 

[MsAli]

Agree Dave . Perhaps I do either need to come up to market value for houses...I'd rather have reasonable CG and I don't mind some negative cashflow e.g. $40 pw. I have formed good rapport with some of the agents in the area...Hopefully something will come up soon. I even put an offer of $225k (walk away price) on a brick home in Emerton yesterday - agent is owner who is getting divorced. But he says he has an offer of $236k cash. That doesn't really leave much equity for me...He advertised it as cash flow positive (of course! He bought it for sub 200k!). It cuts me as there was a clad sale by dept of housing the next street for $196k!

 

[MsAli]

Would you though consider a 3 BR unit in South St Marys instead with no equity BUT yield close to 7% (purchased for $240k, rent of $340 pw) with outlook to it being positively geared as soon as rent hits the $380 pw mark (at current IR)? Knowing that South St Marys is a popular area.

 

[DaveM]

3br unit for $380pw? Thats near new townhouse/full house and land rental.

 

[MsAli]

3br unit for $380pw? Thats near new townhouse/full house and land rental.

No I'm talking 2 years down the track. Prolly not pragmatic to speculate what the rents will be in 2 years time. But working back to what will make the cashflow neutral for a 3BR 10 year old unit in St Marys south.

 

[JWR]

Since you already have one in West Syd I would move to QLD or somewhere else - for diversification - unless you can find a real bargain.

 

[matto_]

I have spent a number of years building a portfolio of CG props. They have done well. Growing at on average 10-12% pa over the last ten years. This has assisted in building my portfolio.

I am now in a different life situation (read baby and one wage) so am on the lookout for cashflow and willing to sacrifice some growth.

Two things I was thinking of.

1 on our first prop, it felt like we overpaid by 5%. Paid asking price, but had thought could get for lower. Over time this prop has delivered 400k of equity, so the ~5k to begin with didn't really matter.

2 not sure about Mt druitt but melb market doesn't feel time sensitive, hence a buyer has the luxury of waiting round for a bargain. Not sure how long this will last

 

[travelbug]

It is VERY difficult to get a bargain in Mt Druitt these days with Nathan and a few other groups hitting the area hard.
I've been to a few auctions of late and the price people are paying for properties that need renovating is crazy.

There were maybe one a night went at a good price. Everyone is getting in on the reno caper. The last 2 years the bad ones got passed in and sat there so you could negotiate a good price. Not now. Units are going out fast as well. There has been CG in the area in the last 2 years also. People keep saying there is no CG in Mt Druitt but that's rubbish.

I wouldn't buy something with no equity built in. That's paying full price and hoping for CG. Not my strategy. Mine have built in equity and slightly CF- at worst from the start.

I doubt that rents will go from $340 to $380 in 2 years. Rents have been increasing rapidly the last 2 years. It can't continue on that steep incline.

 

[virgo]

Cashflow

Hiya

If it were me, i would up my budget by a bit and buy in Parramatta surrounds...more capital upgrowth potential plus yields are not too bad either

Re mount druitt.....Sometimes cheap does not equal good...

You need equity growth to grow your portfolio........

Also noticed you've lost a deal over 5K..think about it...do you think you can make 5K back in one year????

all the best

 

[MsAli]

Thanks for the responses. Virgo, I'm not sure how the yields in parra surrounds sit with me seem low...I like mount Druitt. I have a villa there and it's just such a good purchase it's hard to find those. I bought it (through a BA) at an old unit price less than 2 years ago.

Travelbug, what do you mean by paying full price? If a property is a wreck and needs money then obviously you are paying 'full price' given the condition. I take when you say below full price / market you mean it needs work but you do see similar much nicer properties selling for higher?

 

[MsAli]

If I pay $220k for the property needing around $15k-$18k overhaul (plus external paint down the track) with a rent of around $340 pw I will have a monthly outlay of $108. Also the street has had sales for $275k plus. So if the re-val comes down to $260k, I'd be able to get 19k (outlay of $38k). Rental yield of around 7.42% (and 6.67% after outlay expenses). The rooms have mould (probably due to the tenant keeping 2 big beds in the master bedroom and not leaving the windows open. I know I can offer the $220k and ask for a delayed settlement. It has been on the market for a WHILE. The vendor is losing money already but saying that's what they owe the bank. Not my issue.

 

[devank]

mount Druitt. I have a villa there

For this reason alone I would look somewhere else! Queensland with a help of BA is what I would suggest.

 

[vaughan]

I know a lot of people have purchased DOH properties for below $200k...which definitely look good (and a few don't even need that much work).

The sub-$200k houses are either under an owner-occuper caveat for 7 years, or have major problems like fire damage. Both are out of scope for the average investor.

Ditto for a dual-oc. I've done some numbers for a gf and they didn't exactly bowl me over. Profitability was predicated on keeping the building costs low and prospects for future cg are not improved by a gf, so I decided not to go that way.

 

[Rixter]

So what is OKAY? Houses vs Units/townhouses/villas?

I preferr to purchase Townhouses & Villas (with a 30% or greater land component thereby eliminating multi story units or high rise apartment), for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant

2/ lower purchase or entry level into a Higher capital growth suburb area

3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.

4/ greater tax advantages & effectiveness thus maximises cashflow.

5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area and people like the looks so move in creating demand.

I have found this works well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

I hope this provides some food for thought.

 

[MsAli]

The sub-$200k houses are either under an owner-occuper caveat for 7 years, or have major problems like fire damage. Both are out of scope for the average investor.

Really? A lot of the ex DOH can be in a decent condition needing around 10-15k works. At least that's how the photos come across. Also, the ones I'm talking about were on auction to public and did not have an OO clause.

I hope this provides some food for thought.

Thanks Rick it does. Though the other side of the coin is....buy land while it's "affordable".

I have found villas/townhouse purchases to be a bit more competitive - at least in Western Sydney/

 

[Rixter]

Thanks Rick it does. Though the other side of the coin is....buy land while it's "affordable".

All depends on you chosen investment strategy. Sure buy land if you have a view to develop.

You see, contrary to popular believe you see thrown around the media and elsewhere, it is not the land that determines growth. Its the level of demand for the commodity being marketed that does.

Land, Villas, Townhouses, Duplexes, Houses, Apartments etc - All these are purely different types of commodity.

Its the supply & demand ratio for these commodity that determines growth.

I hope this provides further food for thought.

 

[MsAli]

Rick, thanks for the input. As for developing. I don't know if I will develop but I'm keeping my options open

 

[JWR]

You'd be surprised what you can achieve in the future MsAli. I didn't think I would develop for 10 years after I started - but I am thinking of doing it in the near future (after just one year of investing) because the numbers work and a have a good enough support team.

So if you can buy a potential development site don't dismiss it because you won't develop. You may even be able to sell with the DA Approval on it if you are not comfortable DIY.

 

[MsAli]

So if you can buy a potential development site don't dismiss it because you won't develop. You may even be able to sell with the DA Approval on it if you are not comfortable DIY.

Yeh exactly. I won't say No to any opportunities - be that development.