Dud investment need some advice.

[devo76]

Hi all.

Well as some would know i have started the development of my last purchase and it should see excellent returns so very happy with that end.

Now problem being my first IP purchase. While i purchased in 07 at a reduced price from 04 values. I believe it is worth less again and im not sure what to do.

property

2 bed double garage fully renovated 50 yo home in central regional city location ( shoalhaven)
$295,000 purchase
$300,000 Loan fixed

rent $265 pw
About $90 pw out of pocket after tax pw including all expenses.

Good points
Low maintenance due to the $100,000 plus reno
Good depreciation for a 50 YO house
Central cbd location in high demand for rental. 200 meters to cbd
chance of commercial rezoning in the future that could double rents.

Bad points
2 bedroom ,2 bedroom,2 bedroom
No cheap add value potential due to big dollar reno in 05.
Significantly negative geared

While i fully understand that property is a long term investment i still feel i should do something with this one. I have a few options.

1# Sell and purchase another property
This is a viable option but the total transaction costs would run around $30,000 plus i would be looking at a sale price of $280,000 at best.

2# Add granny flat.
Space would be tight for parking but once again an option. should achieve around $250 for main house and $170 for granny flat.
Cost to build around $70,000 i would think. could run higher if keeping with original house theme/quality.

3# Add two bedrooms and bathroom.
This is my first option as this was the original owners plan and had designed house with this in mind. $40,000 to build and rent should improve from $265 up to $345.

4# Hold on and sell when i can cut my losses in future

5# Make PPOR as it is a really nice house that i would love to live in.We plan to sell our current PPOR in coming years due to a number of reasons.

So in a nut shell i am not happy to leave it as is for the long term. Making it a 4 bedroom or 2 bedroom with granny flat would change things allowing it to achieve better returns and capital gain long term but a 2 bedder just aint cutting the mustard for me.

Anyone have any thoughts ???

 

[skater]

If you would like to live in this house, could you not do that and rent out your current PPOR?

 

[devo76]

If you would like to live in this house, could you not do that and rent out your current PPOR?

Current PPOR is next to 1 of 6 potential corridors for a town bypass. Although this would be 10 15 20 years away. Once talk on the streets increases values may be affected.So my plan is to sell our current PPOR within 2 to 3 years.

I understand that improving the IP with the above options does not increae cashflow significantly. Its more about turning it into an asset with acceptable neg cashflow with good capital gain potential. turning a 2 bed into 4 bed or granny flat would do this i believe. I cant see a 2 bedder being worth $600,000 in years to come no matter how nice although a 4 bedder etc would in my eyes.

 

[skater]

I cant see a 2 bedder being worth $600,000 in years to come no matter how nice although a 4 bedder etc would in my eyes.

Two bedders get a reasonable return out here, however four bedders get a premium. I like my four bedders. Better yet, four bedders with flat.

 

[Perp]

What was your plan when you bought the property?

Is it constantly tenanted? Are the tenants problematic?

Can you afford the negative cashflow? (I'd be delighted to be only $5K out of pocket each year!)

Other than being disappointed with performance to date, why would you sell?

 

[Pa1nter]

I'm sure we all have had a dud investment some time or another,some wouldn't like to admit it.
The only difference between a dud investment and a good investment is "TIME"
I have one that I put $440,00 into and only receive $310 weekly rent.
So I know how you are feeling
Do I sell ?? improve?? or accept??
I have just decided to accept.

If you can improve without using up your equity,why not.
Better do something than nothing:
I like the idea of a granny flat,I have used that a few times myself over the years,it has been very successful.
This way you can have two rentals in one
The budget of $70K for a granny flat is probably attainable?

The 3-4 bedder is probably not so creamy,however,better than a 2 bedder.

Selling now would probably not be such a good idea

 

[RumpledElf]

I have a dud 'investment'. My old house. Pays for itself and then some, but will never be a big earner and will always be a very cheap house that is impossible to sell, unless a mine opens up right next door or rural living 2 hours out of a capital becomes fashionable. It would be way cheaper for someone to buy it than rent it (especially with the FHOG), but I couldn't sell it in 6 months but got a tenant in 6 weeks

It is a big 3br house on 1850sqm that I owe about $25k on, currently rented for $110pw - over 20% gross yield or about 8% on the current value. Sounds good until you realise that any maintainence or tenant issues could wipe out the bulk of any rent for the year. And of course insurance and rates are much the same anywhere, and the bank fees per month are fixed, so for a place this cheap the fixed expenses are a proportionally much larger amount than they would be on a more expensive place.

I figure it is just Too Hard to get rid of it so I might as well hang onto it indefinitely so at least some people who earn less than I do and can't save have a very nice, cheap house to live in, and I get some spending money out of the deal.

 

[Pa1nter]

25K owing with $110 rental income,why would you get rid of it?
Brings me back to the game of monopoly,"Mayfair" always seems to win???

 

[RumpledElf]

I've spent close to $40k on the place, cash. It is REALLY nice for the area, waaaaaaaay better than median and then some. Its not like it was bought for $25k and then immediately rented out. I've had it since 2003 and sans renovations, in that time an identical house has increased from $25k to around $50-60k, but unfortunately purchasers aren't willing to pay $75k for a $60k house with $40k of renovations done to it - they'd prefer the $60k hovel down the road that has different neighbours. $75k after buying, holding and selling costs, is a capital loss. Compare to my current house, which has appreciated from $65k to $180+50k in 18 months with a lot less than $40k spent on it.

At the time I had it for sale I needed around $10k for a subdivision too, and selling it seemed like the only way to get that money. Needless to say it didn't sell, I got the cash from other sources, and if I ever need money in the future I won't be able to get anything out of *that* house. You're lucky to find a bank to lend more than 60% on the postcode. Also bear in mind you'll never find tenants for the place that aren't on welfare - my current ones are on pensions.

Still think is is a brilliant return? I'll sell it to you for $75k Just don't use a PM, they take 20% of the rent.

 

[terrence]

I have a dud 'investment'. My old house. Pays for itself and then some, but will never be a big earner and will always be a very cheap house that is impossible to sell, unless a mine opens up right next door or rural living 2 hours out of a capital becomes fashionable. It would be way cheaper for someone to buy it than rent it (especially with the FHOG), but I couldn't sell it in 6 months but got a tenant in 6 weeks

It is a big 3br house on 1850sqm that I owe about $25k on, currently rented for $110pw - over 20% gross yield or about 8% on the current value. Sounds good until you realise that any maintainence or tenant issues could wipe out the bulk of any rent for the year. And of course insurance and rates are much the same anywhere, and the bank fees per month are fixed, so for a place this cheap the fixed expenses are a proportionally much larger amount than they would be on a more expensive place.

I figure it is just Too Hard to get rid of it so I might as well hang onto it indefinitely so at least some people who earn less than I do and can't save have a very nice, cheap house to live in, and I get some spending money out of the deal.

Telling a completely irrelevant story about one of your houses is not likely going to help the original poster (just to let you know).

devo76: Let us know of the particular street, town and we may be able to give you better insight. If the central town is Nowra, and it is a central house in this certain town, maybe I could give you a little advice on your personal predicament.

 

[RumpledElf]

Telling a completely irrelevant story about one of your houses is not likely going to help the original poster (just to let you know).

Maybe not, but in comparison it makes his look *good*

 

[Pa1nter]

Also bear in mind you'll never find tenants for the place that aren't on welfare - my current ones are on pensions.
Still think is is a brilliant return? I'll sell it to you for $75k Just don't use a PM, they take 20% of the rent.

Pensioners are the best tenants,
Mostly they don't whinge and they pay the rent in advance.
Maybe you could sell it to them?
Just set and forget

 

[Pa1nter]

Maybe not, but in comparison it makes his look *good*

Makes a person feel better when someone else is worse off,
Human nature,I learn t that as a lifeline counselor,
Grass is always greener on the other side

 

[devo76]

Thanks all for the replies.

What was your plan when you bought the property?

Is it constantly tenanted? Are the tenants problematic?

Can you afford the negative cashflow? (I'd be delighted to be only $5K out of pocket each year!)

Other than being disappointed with performance to date, why would you sell?

Originally bought before i knew better and before i used this forum.Cashflow is not an issue. Would just like to know im bleeding cash for an end result.I have never been without a tennant and i havent had any major issues apart from a late payer.I dont really want to sell as the costs etc would come in close to a extension/reno. Rather add value than sell i think.

I'm sure we all have had a dud investment some time or another,some wouldn't like to admit it.
The only difference between a dud investment and a good investment is "TIME"
I have one that I put $440,00 into and only receive $310 weekly rent.
So I know how you are feeling
Do I sell ?? improve?? or accept??
I have just decided to accept.

If you can improve without using up your equity,why not.
Better do something than nothing:
I like the idea of a granny flat,I have used that a few times myself over the years,it has been very successful.
This way you can have two rentals in one
The budget of $70K for a granny flat is probably attainable?

The 3-4 bedder is probably not so creamy,however,better than a 2 bedder.

Selling now would probably not be such a good idea

granny flat would improve cashflow and value the best but may be a struggle on the 550 sqm block. Still possible but. The existing house is weatherboard with original timber floorboards.exposed beams. really nice so the flat or extension would have to follow this theme to gain max value and rent.

Telling a completely irrelevant story about one of your houses is not likely going to help the original poster (just to let you know).

devo76: Let us know of the particular street, town and we may be able to give you better insight. If the central town is Nowra, and it is a central house in this certain town, maybe I could give you a little advice on your personal predicament.

yes in Nowra. On kinghorne street about 2oo meters south of the CBD.Its the southern entry road to the town. The northern entry road has commercial zoning and similar properties on that road rent for around $600 PW. there is talk of rezoning but nothing concrete.

Pensioners are the best tenants,
Mostly they don't whinge and they pay the rent in advance.
Maybe you could sell it to them?
Just set and forget

yeah your right. my property around the corner has a disability pensioner in it. rent paid straight into bank account and keeps the place perfect. a real keeper.

 

[terrence]

I know the area well. In my opinion, not much is going to happen in the area a lot has changed but not much has actually moved/grown. Harvey Norman/ Forty Winks/ All the big retailers you see in the city have moved to South Nowra where land is cheap and it's only a 5 minute drive out of town.

In my opinion it is a nice place to live, as long as you aren't with in a 30 minute drive of the CBD of Nowra. Not so much a great place to invest.

 

[jingo]

Hi all.

Well as some would know i have started the development of my last purchase and it should see excellent returns so very happy with that end.

Now problem being my first IP purchase. While i purchased in 07 at a reduced price from 04 values. I believe it is worth less again and im not sure what to do.

property

2 bed double garage fully renovated 50 yo home in central regional city location ( shoalhaven)
$295,000 purchase
$300,000 Loan fixed

rent $265 pw
About $90 pw out of pocket after tax pw including all expenses.
?

Hi Devo,

I don't know the area at all so my observations may not be very helpful.

What is the long term growth rate for the area your property is in? Has property appreciated by at least 7% p/a over the past 30 yrs or so??

If so, I'd be inclined to hang on to it for a while longer. Two years is not a long enough period of time to accurately evaluate the performance of a property. I wouldn't do anything to it either - except pay down the loan to a level whereby the property was neutral. This would give you time to re-evaluate the purchase and then go on to purchase again.

It's tempting to tinker with one's portfolio. Always thinking that you can do better elsewhere. I think about selling out of the areas I have my IP's in and buying into more desirable locations. (The grass is greener on the otherside syndrome). The maths tell me that it is not a profitable idea and there is no guarantee that I will do better elsewhere!

Regards Jason.

 

[devo76]

I know the area well. In my opinion, not much is going to happen in the area a lot has changed but not much has actually moved/grown. Harvey Norman/ Forty Winks/ All the big retailers you see in the city have moved to South Nowra where land is cheap and it's only a 5 minute drive out of town.

In my opinion it is a nice place to live, as long as you aren't with in a 30 minute drive of the CBD of Nowra. Not so much a great place to invest.

Your right in some areas and a little off in others. I have lived in Nowra for a total of 30 years.

your right the big retailers are moving out of town but this is not an exodus.South Nowra is a industrial center that the majority of your bigger outfits are moving there. 6 or so years ago it was dead. Now there is growth everywhere with industrial land prices to match.

the CBD is actually the better place to invest. Not the outskirts ( seaside is a different kettle of fish). the center is landlocked.
river to the north
South nowra development to the south
Cliffs parks to the west
Flood marsh land to the east.
My property window is west of the highway and north of albatross road( services the base)
riverfront is to be developed. Link road 92 will connect Canberra to nowra via braidwood.Soon to be dual lane all the way to nowra from Kiama( preferred route stage). Plus the aviation technology park is expanding with big defence contracts going there.There are others but im sleepy.

there are problems also like high unemployment although the large number of semi retirees distort this figure.So good and bad points but you could do a lot worse. Location is not actually my concern. more worried about making the most of what i have.

 

[BV]

devo

I'd make it a PPOR and rent the other property out.
Wouldn't such a move improve your cash flow?

 

[devo76]

Hi Devo,

I don't know the area at all so my observations may not be very helpful.

What is the long term growth rate for the area your property is in? Has property appreciated by at least 7% p/a over the past 30 yrs or so??

If so, I'd be inclined to hang on to it for a while longer. Two years is not a long enough period of time to accurately evaluate the performance of a property. I wouldn't do anything to it either - except pay down the loan to a level whereby the property was neutral. This would give you time to re-evaluate the purchase and then go on to purchase again.

It's tempting to tinker with one's portfolio. Always thinking that you can do better elsewhere. I think about selling out of the areas I have my IP's in and buying into more desirable locations. (The grass is greener on the otherside syndrome). The maths tell me that it is not a profitable idea and there is no guarantee that I will do better elsewhere!

Regards Jason.

Hey jason.
I would have to have a look but the 10 growth was 10% pa although that has dropped a bit since the market here dropped off around 05.Average rent returns around 5% with the odd 7% plus thrown in.
Historically Nowra has moved a year or so after Sydney but generally prices stay flat to slight growth during cycles with a big catch up during boom times.

Selling would be my last option and im not really considering it. When you factor in the reduced sale price from purchase price and buy sell cost to find another property. I believe that money is better spent improving this property or just sitting on it as is. Long term CBD property will pay. It has in other cycles and will again. Just trying to fine tune the portfolio i guess.

 

[devo76]

devo

I'd make it a PPOR and rent the other property out.
Wouldn't such a move improve your cash flow?

This is an option because we will sell our current PPOR in the next few years no matter what. And we like the idea of CBD living. 5 minute walks to pubs.clubs cafes and resteraunts really appeals to me ATM. Plus i am able to extend the 2 bedder at my own pace using building skills i have almost forgotten
Cashflow is not that much of a concern as we spend less that 20% of our income across all of our properties and i am still a few properties off hitting a financial lending wall.
So i guess i have two preferred options.

1# add two rooms/bathroom or granny flat to increase value and yield making it more of a keeper

2# Move in and sell PPOR as planned in 2013/2014 and enjoy town living for a few years while having a go at extending/renovating myself.

selling or doing nothing are not my preferred options.