Buying a block of units

[DanielG]

Ive been looking at doing a purchase of blocks of units, and was wondering if someone who has done this can advise me.

For example, I found a building with 4 / 2 bedroom units in Cammaray and began doing some numbers. As I see it, this is how it turned out (broken into per/month),

PURCHASE

Cost $1,500,000.00
Deposit $150,000.00

Loan $1,350,000.00
Monthly Repayment @ 7.5% $8,437.50

CashFlow

Rent $9,040.00
Water $200.00
Council $143.33
Management $52.73
Insurance $250.00
Estimated Repairs & Maintenance $416.67

Estimated P& L $7,977.27


Total Cost Per Month -$460.23


According to this calculation, it isnt a good investment. I just wanted to ask whether I am on the right track when calculating this for a good investment or if I am missing something altogether?

Thanks

 

[Simon]

Cashflow alone doesn't dictate whether something is a good investment or not.

What do you think the capital growth might be like? Usually we get more net worth via capital growth rather than rental income.

ie a property might double in ten years whilst you might have made $50K in rent over that time. (ignore the maths - get the idea).

Is there a way to increase the rent? Are the units tired and distressed? As a tenant leaves you could have the unit repainted and the bathrooms and kitchen tarted up (up to you how much you spend) this then might allow you to raise the rent markedly plus improvements might be deductible in one way or another.

Maybe the current rents are under market rate? When tenants stay for a long time their rents might have stagnated. Check what the agents think you could get if a tenant was sourced today.

Perhaps the negative gearing might cost you for the first few years. But in time your rents might be doubled and it is easier to own. I have a student house that was getting $60 per room when I bought it 7 years ago. With time, tenant selection and a minor makeover (about $4000) my rents are now $110 to $150 per room. Loan is still the same so my profit margin is markedly better.

Sometimes people make money by strata titling the units and selling some or all of them off individually. This can entail quite some cost or may not even be feasible. But often it is a great idea.

Or maybe it really is a crap investment and you should avoid it.

Cheers,

 

[Propertunity]

DanielG,

All you have shown is that the investment is -ve cash flow. That does not make it good or bad.

What is the CG?

Actually it is good rental yield at 7.23%. But if you borrow all the money at 7.5% interest of course with rates, insurances etc it is going to be negative. Positionally, you might be going backwards at $6K per year cash flow-wise BUT you would be moving forward at say $150K per year capital growth-wise (assuming 10% CG on $1.5M)

BTW, I don't think you're going to get a 90% LVR loan on a block of units. You might, but I seriously doubt it.

 

[jaycee]

Cashflow alone doesn't dictate whether something is a good investment or not.

What do you think the capital growth might be like? Usually we get more net worth via capital growth rather than rental income.

ie a property might double in ten years whilst you might have made $50K in rent over that time. (ignore the maths - get the idea).

Is there a way to increase the rent? Are the units tired and distressed? As a tenant leaves you could have the unit repainted and the bathrooms and kitchen tarted up (up to you how much you spend) this then might allow you to raise the rent markedly plus improvements might be deductible in one way or another.

Maybe the current rents are under market rate? When tenants stay for a long time their rents might have stagnated. Check what the agents think you could get if a tenant was sourced today.

Perhaps the negative gearing might cost you for the first few years. But in time your rents might be doubled and it is easier to own. I have a student house that was getting $60 per room when I bought it 7 years ago. With time, tenant selection and a minor makeover (about $4000) my rents are now $110 to $150 per room. Loan is still the same so my profit margin is markedly better.

Sometimes people make money by strata titling the units and selling some or all of them off individually. This can entail quite some cost or may not even be feasible. But often it is a great idea.

Or maybe it really is a crap investment and you should avoid it.

Cheers,

What Simon said. by my calculations, it's 5.45% negative, so that could (?) be made up in rent increases over time (not that long a time (?) I guess (?)

Were you initially looking for income / growth / combination of both when this opoptunity popped up ?

 

[geoffw]

Adding to Simon's ideas. I've increased the cashflow in a block of units I owned by furnishing them (basic, about $2k) each and letting them out as furnished. That worked in the location well, and there are many locations it wouldn't work. But it may be worth investigating.

Those were 1br units. Search for "flock of bats" in the forum.

 

[JIT]

Ive been looking at doing a purchase of blocks of units, and was wondering if someone who has done this can advise me.

For example, I found a building with 4 / 2 bedroom units in Cammaray and began doing some numbers. As I see it, this is how it turned out (broken into per/month),

PURCHASE

Cost $1,500,000.00
Deposit $150,000.00

Loan $1,350,000.00
Monthly Repayment @ 7.5% $8,437.50

CashFlow

Rent $9,040.00
Water $200.00
Council $143.33
Management $52.73
Insurance $250.00
Estimated Repairs & Maintenance $416.67

Estimated P& L $7,977.27


Total Cost Per Month -$460.23


According to this calculation, it isnt a good investment. I just wanted to ask whether I am on the right track when calculating this for a good investment or if I am missing something altogether?

Thanks

I can't see stamp duty costs in there?

And you're assuming you can get 90% LVR on something like this, whereas you may find that you can only get it at 70% LVR and possibly also only at commercial interest rates.

 

[Leghorn]

Your calculations also assume the propperty stays fully leased and there is now allowance for any repairs and maintenance. you are going to be buying new stoves and hot water systems at some stage.

 

[DanielG]

Thanks guys but I am looking mainly at cashflow here, CG is a factor but secondary in this case.

I guess the key here is to look for someone who is desperately selling and offer a lowball bid.

The numbers need to work, but I guess I was asking, since its a block of units, do I need to start thinking about strata management and other things that I would not have thought about?

 

[Simon]

The numbers need to work, but I guess I was asking, since its a block of units, do I need to start thinking about strata management and other things that I would not have thought about?

Not if you own them all.

 

[Propertunity]

Thanks guys but I am looking mainly at cashflow here, CG is a factor but secondary in this case.

If this is the case Dan, then:
#1. Looking for property is probably the wrong vehicle if you have to gear it at 90%
#2. Looking for property in Cammeray is probably the wrong spot to be doing it - because all you're going to get this close to the Sydney CBD IS CG!

Hoping for a desperate vendor of a block of flats with a rental yield over 7% that is only 2.0km from the famous Harbour Bridge is ............well .....optimistic in the extreme

 

[DanielG]

If this is the case Dan, then:
#1. Looking for property is probably the wrong vehicle if you have to gear it at 90%
#2. Looking for property in Cammeray is probably the wrong spot to be doing it - because all you're going to get this close to the Sydney CBD IS CG!

Hoping for a desperate vendor of a block of flats with a rental yield over 7% that is only 2.0km from the famous Harbour Bridge is ............well .....optimistic in the extreme

LOL...good point. Well I'll just keep trying and researching and maybe something will come out of it.

 

[Rolf Latham]

Hiya

If the property u describe exists, and you can get a 20 % deposit plus costs together, it looks like a nice cashflow and CG proposition.

The strata idea usually has been tried by x people b4 you and usually wont fly for any number of reasons some being gic mandated that the property must provide low cost accom as it ahs done for xyz years

tarolf

 

[Ajax]

Hi DanielG,

I think Cammeray is a good location for capital growth and rental demand.

You wrote:-

"Council $143.33
Management $52.73
Insurance $250.00
Estimated Repairs & Maintenance $416.67"

which I see is monthly, or $10,352 per annum.

I have just compared that to a 6 unit 3 story block of 2 bedroom units in Auburn-1970's building (each unit worth about $250k). For simpliciity sake just multiply my figures by 2/3 (as your block only has 4 units). Your figures appear to be reasonable.

The body corporate manager paid the following expenses last year on the Auburn block. I think the body corporate manager is slugging the owners here. The individual unit owners each paid their own council rates whereas you are up for the entire council rates (which you have at $416/month or about $5000/annum):-

Cleaning $191
Electricity $181
Gardening and lawns $1545
Insurance premiums $2766
Insurance claims excess $500
Management fees $2,634* If you self manage this item won't exist
Telephone, facsimile and emails $94.60*
Disbursements $613*
Water usage $1483
Taxation/GST fees $$202
Statutory certificates $99
Repairs and maintenance $848
Miscellaneous $456
Total $11,815

 

[Philip Thomas]

Get Clear On What You Want

It looks like to me you need to get really clear about your goals & what you want.

If you’re looking for cashflow yet looking at residential property close to CBD Sydney, then there seems to be discord here.

Usually for high rental yields you need to look outside the capital cities, to the regional areas. Or you look at adding value to property. or you look at commercial property.

However, some regional areas have also experienced high capital growth as well.

I did a property segment the other day on Perth’s 6PR Radio with Ted Bull looking at Capital City vrs Regional investments. Over the past 14 years Bunbury’s median house price had increased by 280% (or 10% per year), Bunbury by a whopping 384% & Karratha by 400%.

Once again, I recommend getting clear on what you want and also spend time understanding why. Then you will find it much easier finding the right property for you and your needs.

Philip

 

[geoffw]

Over the past 14 years Bunbury’s median house price had increased by 280% (or 10% per year)

I just want to nitpick on the maths here.

10% pa for 10 years compounding would actually be a 380% increase. 280% increase is around 7.7% pa compounding.

 

[Ajax]

I think Daniel is getting good rent (if he can get $520/week for each unit). Capital growth will be the strong point on the lower north shore and usually not rental yield.

For sake of comparison, the unit block I mentioned in Auburn (with 6 units each worth about $250k) so comparable purchase price to Cammeray could get up about $17500/week gross rent or $8864/month (about 6.1% gross rental yield).

In other words the gross rental yield for Cammeray if you can get over 7.2% per annum is exceptional.

Australian property monitors figures for 12 months to end 31 July 2010 have Cammeray median unit price $580k, median rent $490/week and gross rental yield at 4.4%

Australian property monitors have Auburn units gross rental yields at 6.2%.

 

[willair]

I am missing something altogether?

Thanks

There is another angle to look into,as your total costs factor maybe just a bit slim,but as i have a rough idea of this property,maybe a simple phone call to the local council and ask the question if the property can be redeveloped in something different layout from what in on the block,..

A Lady i know just buys old run down timber 3-6 straight line flats on corner blocks,but has a 6-18 months turnaround plan from the start the last one went from 4 timber flats to a 3 level walkup,there is still serious after tax dollars in that game,i had a look yesterday on the next
one she intends too develop in Moorooka inner southside Brisbane the DA'S signs went up yesterday,4 timber-brick i bedrooms single carports
corner block,I will not run the numbers on this but it will be a 3 level walkup within 9 months..

 

[Philip Thomas]

I just want to nitpick on the maths here.

10% pa for 10 years compounding would actually be a 380% increase. 280% increase is around 7.7% pa compounding.

Geoffw,

Well spotted. Thanks.

Philip

 

[Y33]

At the moment sitting very comfortably with what we have but toying with a similar idea of picking up 3 in a block of 4 to own all.

Basic figures only.

Cost roughly around 1.2m. Return around 4.5K per month.

Has definite potential for future expansion or development.

Trying to decide on best way to submit an offer to other owners.

Annoying part is could have picked up the whole lot for under 250K a few years back but passed on it. You live and learn.

Decided early last yr we had enough properties and no need to buy more but something keeps nagging me to just grab these and then call it quits.

 

[csc2]

These are the threads i like on S/S....terrific! right up my alley but I cant add to it currently, everything i was thinking has been covered nicely.

Great thread, precise and easy to understand...

Thanks all!