Am I missing something here?

[pete_w]

There's a property thats an old house converted to 3 blocks of flats.

Current rent is $43,420/p.a.

Offer is $975,000

You borrow 80% @ 7.37% = $780,000 x 7.37% = $57,486 pa
You fund the 20% deposit and 5% costs from a LOC also @ 7.37 = $243,750 x 7.37% =~ $17,964 p.a.

Your net payments are $75,450 - $43,420 = $32,030 p.a. which is ~$616/week.

Is it just me, or is that crazy?

Am I missing something, or is it a large punt on future CG? The property is in Sydney, so potential CG's are a way off yet imo.

 

[alexlee]

There's a property thats an old house converted to 3 blocks of flats.

Current rent is $43,420/p.a.

Offer is $975,000

You borrow 80% @ 7.37% = $780,000 x 7.37% = $57,486 pa
You fund the 20% deposit and 5% costs from a LOC also @ 7.37 = $243,750 x 7.37% =~ $17,964 p.a.

Your net payments are $75,450 - $43,420 = $32,030 p.a. which is ~$616/week.

Is it just me, or is that crazy?

Am I missing something, or is it a large punt on future CG? The property is in Sydney, so potential CG's are a way off yet imo.

Sounds about right. 4.45% rent, 100% LVR @ 7.37%. So you're down about 3% or approx $30k to start with. Add in all the expenses (another 1-2%) and add back depreciation and you're probably down another $10k. After tax breaks you're probably losing $25k CASH.

At the peak crazies in Sydney bought for 3% yields. They're probably losing at least that sort of %age. It IS crazy. Only works if you get high capital gains, and kills your serviceability. I'd much rather buy something with a higher yield and buy more of those.
Alex

 

[WinstonWolfe]

get the rent up 30% and sell to someone who doesn't factor in a return on their 20% equity, and you have a neutrally geared property.

 

[The Y-man]

is it a large punt on future CG? .....

$32k pa on a $975k property is 3.2% pa or so - do you think that is a stretch for that part of Sydney over say a 5-10 year period? Take tax into consideraiton and it may only need 2.6%pa..... Do you feel it is still a "large punt"?

Cheers,

The Y-man

 

[pete_w]

Even at 2.6% p.a. its still about $500/week loss. Whoever bought it is obviously ok with that (it actually passed in at $975k). It was in the inner west of sydney, which has proved to be reasonably robust against the downturn, values are down, but not by much. This is the actual property: click

Long term I'm sure it will be fine, but you're still bleeding cash over the short/medium term. Opportunity cost? Or, if you sit back and look at the options, you have $200k/$1mil to play with and can afford to lose $500/week, would some other assest class provide better return?

 

[The Y-man]

... its still about $500/week loss. .....

Remember that you are basing it on effectively 100% loan.

The figures seem ok. Personally, (in Melbourne mind you!) I'd split it over 2 or three properties, rather than plough everything into one.

Remember, if the property actually performed at 6% growth (reasonable?), you'd be making $25k odd per year (someone check my numbers! )

Also remember that if the outgoing drops your tax rate from one bracket to the one below, it can have substantial impact.

Cheers,

The Y-man

 

[The Y-man]

Long term I'm sure it will be fine, but you're still bleeding cash over the short/medium term. Opportunity cost?

I guess I am looking at this from the eyes of someone whose net outgoings on the property protfolio (the bleed) exceeds 50% of the combined gross wages of my wife and I (i.e. 1 person's whole pre-tax pay goes to paying the shortfall). So I guess this is "normal" for me.

....you have $200k/$1mil to play with and can afford to lose $500/week, would some other assest class provide better return?

I personally would consider a smaller property (with similar bleed rates) in a good growth suburb, and invest the balance into managed funds to provide some diversificaiton.

Cheers,

The Y-man

 

[NedKelly]

Don't forget to factor in all the other items that everyone forgets:-

Insurance
Accountants fees
Void periods
Maintenance & Repairs
Pest Control
Council Tax
Land Tax
Letting Agents fees if not doing it yourself.

Don't forget that when you come to sell you will have real estate agents fees, marketing & advertising costs, etc. which will reduce your capital gain.

 

[Oscar]

That's pretty normal for me too.

My last property purchase was April 2002, 2 bedder unit on Clovelly beach

Purchase price - $551,000
rent today - $470 per week

Annual cash shortfall after costs ~ $23,600

After tax roughly lose about ~ $10,000 pa.

Value of property today would be about 600K. So I haven't made or lost anything in 5 years on this one. In short, a dog of an investment. But I'm I'm happy to hold it for the next 20 years or so. I've made good CG on the others in the area bought in 1999 to 2001, this one will be a late bloomer but will bloom nonetheless.

Now, if I had invested that money in 2002 in managed funds.......

 

[Dazz]

Long term I'm sure it will be fine

I'm not sure about that Pete. There are big alarm bells going off for me - wouldn't touch this one with a barge pole.

This property has a large fundamental flaw.....and that is it relies on tenants who fundamentally will never pay enough in rent to keep the property's head above water. It's gonna drown economically, and forever be a millstone around some poor hapless investor's neck. These are the exact type of properties I see in fellow investor's portfolio's when they come to me and say they can't afford to buy any more.

God knows the tenants around the country are whinging and bleating their sox off in this latest round of rental hikes, dragged kicking and screaming from gross yields of 3% up to a massive 3.5%.....they wouldn't know the true cost of living in a place commensurate with their 'modern lifestyle expectations' if it jumped up and bit them on the bum.

Using the 975K figure, which the Vendor hasn't accepted - so it's higher than that, you're up for say 76 in interest, 3 for CR & WR, a couple for insurance and maintenance, god knows what LT is in NSW (can be big if you structure it wrong) and then all of the PM fees and the like.

This property, on a tiny block of only 300 odd sqm of dirt (land component for growth is very small) would need to rent out for over $ 1,650 per week just to go nowhere on the cashflow side. That's $ 330 per room per week. You can get an entire house for that. Residential renters simply won't pay that out of their after tax income. They would expect a palace for that rent.....and remember, you as the Landlord aren't making a dime at this rate.

Doesn't fly....wouldn't touch it with a barge pole.

 

[alexlee]

Long term, as long as you can make up the cashflow, the property probably will turn out ok. The question is whether you can find something better. It's like saying buying at the top of the market might still be ok as long as you hold it until the next boom, but you'd be much better off if you hadn't bought at the top.

In this case, I think you'd be better off buying MORE property with a higher yield.
Alex

 

[pete_w]

thats actually quite a big block for the area, most are around 220sqm. balmain gets you 125sqm heh. i'd guesstimate the land value of it to be about $600k

i guess how big a "punt" it is depends on your size. if its 10% of your portfolio i guess it would be ok, but if its 100% hmmmm ....

 

[Bushy]

If you only look at a property with a rental only perspective, the factors you would need would be the same for all properties ie rent return, growth etc. Some properties have an X factor which is very hard to value unless it suits your purpose.

A few examples might be, It's zoning, Land value if subdivided or developed and the value of the property to an adjoining owner. I have noticed that sometimes the initial high prices asked are mainly directed at these buyers. If they don't turn up then the price drops to something more normal.

If you can get a property that fits into a few catagories you are probably on a definite winner. We have purchased before with a 3.7% gross rent return but the land component was 92% of purchase price. (it's one of our best performers)

Regards Bushy