great deal-long lease..potential troubles??trustworthy?

[rumin]

Hi,
I am in the process of buying a multi-(5~10) bedroom IP,that owner wants to lease back....(and rent out rooms-semi boarding house?)
everything is in writing:
$*00p/w guaranteed (as in it's up to him fill the rooms)*12%
3 year lease agreement (I understand I forgo the opportunity to up rent during this time)
He also pays the utilities.
$10k-bond
The owner seems to have many multi-room places.....Why is he selling,if it's such a great return?He seem to have more places he is remodelling and onselling/keeping and needs the cashflow...
Of course I am looking into all necessary insurances etc and that all things that should be registered are....
My problem is that another REagent I asked for an opinion (not the one I am buying off)has put a few doubts in my mind about the history of this
person...albeit long ago(trouble with BSA,plus even a fire was mentioned)(seemed fine when met)
Tried google search,BSA etc..nothing.
Now this is a great deal...and I kind of feel on one hand that as this person will be living in the prop during lease... there is accountability there .
Does one confront a person with such doubts?
I don't know either owner nor other RE from Adam or Eve....
Could other RE have alterier motive?who knows..?
It is a great deal and buying it will take my business away from 'other agent'(they were looking for reg.multi unit places for me)
What I would like to know is how many of you would err on the side of caution..?
or totally go the other way of Not guilty until proven otherwise (facts etc)
Of course I have plan B stategies if the lease didn't pan out after a while...

it's the BSA trouble/fire rumours (p.s.building inspection was fine)that i would like comments on..please

please give opinions ...pos or neg
Anything else I can do,check or is it the correct thing to do to just ask (in person or via solicitor)...but as you can understand it'll be a long 3 years if I upset them

thanks

 

[arriety]

I would check out if you can get a business type lease rather than standard residential lease as your leasee will be conducting a business on premises. You will have to be careful to have a service agreement in place which specifies what is his responsibility to replace/maintain and what is yours, keeping in mind that as he's running a business there may be certain things he wants to enable him to run his business which you wouldn't normally worry about if you were just renting out to tenants yourself. Say he has sign out the front 'rooms to let' and it falls down. Who fixes it? Maybe the front hallway carpet gets worn out more quickly because so many people coming through. Not very good examples but if you do some hard thinking you may be able to ensure you cover all contingencies. Hope this helps a bit.

 

[skater]

Do you have a plan B for this property? If this tenant leaves (for whatever reason) will it still be a good investment? Is it comparable to other houses in the area, or is the price inflated because of it's potential to earn a higher than normal yield? I'd be looking very carefully at all the alternatives on this one.

 

[rumin]

Thanks for replying arriety and skater,
Yes,I am doing thread searches as we type on best insurance,public/private liability ...thanks

skater,I have thought 'Is the great income return' somehow figured into the purchase price...
Obviously looking around the area ,and if the price seems too inflated,Well!There you go....but in this case it doesn't seem so
Mind you there are no exact same houses 'same bedroom count'to compare..but worse case scenerio I have compared it to a reg 4 bedder and whilst more expensive I do have better views and the extra rooms..so
How can you tell???
Is there a ratio or formula?

*position is 5.5kms from CBD
*good growth I expect
*I have crubched figs on having to either rent out rooms to people myself or get specialist PM (usually charging 10% not 8% as in reg IP)still seems good and much better than reg.res.income..
Also have 2 more back up plans to either do better reform and onsell at any time...or as there s no internal staircase could do upper/lower unit in future....
Bank will lend 80LVR....
When the numbers add up ...is it best not to worry about the emotional doubts??
My IP's at present are just reg brick homes rented to couples..
this is first time to have 7,8/9 people under a roof (and a weatherboard at that)
Am i being a worrywort to take rumours into concideration?
How else can I check?
taa

 

[Brenda Irwin]

I would tend to ignore rumours although they do serve to make you more cautious which can be a good thing.
Instead, I would write down all the returns, income, service you expect from this investment and from this landlord. After that write down all the bad things which could arise like what if the landlord never pays any of the utilities in the agreement.
Next, I would check out the State rent authority website. In Qld it is www.rta.qld.gov.au and see what rights/obligations you and your landlord and the tenants have. Also, if needed, you could get a lawyer to draft up a lease which spells out all those obligations so if the landlord defaults, you have something on paper.
Don't think you are being hard or difficult, it is just business and if everyone knows the guidelines and responsibilities from the outset, it will save any quibbling or legal action later.
Cheers Brenda.

 

[The Y-man]

Hi,
I am in the process of buying a multi-(5~10) bedroom IP,that owner wants to lease back....(and rent out rooms-semi boarding house?)
everything is in writing:
$*00p/w guaranteed (as in it's up to him fill the rooms)*12%
3 year lease agreement (I understand I forgo the opportunity to up rent during this time)
He also pays the utilities.
$10k-bond
The owner seems to have many multi-room places.....Why is he selling,if it's such a great return?He seem to have more places he is remodelling and onselling/keeping and needs the cashflow...
Of course I am looking into all necessary insurances etc and that all things that should be registered are....
My problem is that another REagent I asked for an opinion (not the one I am buying off)has put a few doubts in my mind about the history of this
person...albeit long ago(trouble with BSA,plus even a fire was mentioned)(seemed fine when met)
Tried google search,BSA etc..nothing.
Now this is a great deal...and I kind of feel on one hand that as this person will be living in the prop during lease... there is accountability there .
Does one confront a person with such doubts?
I don't know either owner nor other RE from Adam or Eve....
Could other RE have alterier motive?who knows..?
It is a great deal and buying it will take my business away from 'other agent'(they were looking for reg.multi unit places for me)
What I would like to know is how many of you would err on the side of caution..?
or totally go the other way of Not guilty until proven otherwise (facts etc)
Of course I have plan B stategies if the lease didn't pan out after a while...

it's the BSA trouble/fire rumours (p.s.building inspection was fine)that i would like comments on..please

please give opinions ...pos or neg
Anything else I can do,check or is it the correct thing to do to just ask (in person or via solicitor)...but as you can understand it'll be a long 3 years if I upset them

thanks

I have a similar situation in one of our IP's.

The tenant signed a 2 year lease, and subletting (with our initial approval) by the room.

The tenant came with good references - pays rent on time, property in good shape.

HOWEVER - the sub-tenants are causing no end of trouble for the neighbours - loud music / shouting late at night, frequent police call outs, at least one incident that required an ambulance, etc etc.

Interestingly, there has been no damage to the property - although we suspect the head tenant cleans the place up in a mighty hurry whenever notice is given. They also pay the rent without fail (often earlier than required).

Unfortunately (depending on how you see it), the neighbours know us quite well from when we used to self manage the place - they feel very threatened, and are not getting much sleep. The cynical might say that we have deliberately done this to run them out so we can buy their property..... but I assure you, this was not the intent. We feel very sorry for the neighbours (elderley retired couple), and have explained that due to the lease, the only action that can be taken at this point is a "disturbing of peace" notice from them to the agents.

Cheers,
The Y-man

 

[crest133]

Sounds very much like a motel lease. There are many already written which cover all the grey areas. Ask a motel broker for a copy of a motel lease, could give you some clues.
Some reasons why he would sell a good thing to you :
1. he needs capital, this releases capital from the business
2. the cash on cash return for him as a lessee may be greater than your 12%as a freehold owner and lessor.
3. it may not be such a good thing.
Assess it slowly.
good luck
cheers
crest133

 

[rumin]

Thanks everyone,
...here's the numbers
purchase price 470k
3 year lease 800p/w
it doesn't look terrible from the outside it looks like a nice big house.
Iand price alone 325k 5.5km from CBD
It's not a motel or anything just a nice big house fit to share.
(tenents at present 30/40ish )pension people
The surrounding area is nice leafy residential with bus stop right outside a walk to train & shopping...


Anyway,if other numbers are needed I'll post but I want to get onto my next point..

...that I did some diging and whist I found no 'fire' as such I did find
that they are a bit of a big cheese (WERE?name would not be appropriate)(and you wouldn't know by just looking)
big developements many,many mill'ns$$
....But from old newspaper articles ,
**I got stories of clients that bought (not a house like my project)small inner city units "guaranteed returns" blah,blah were well behind in receiving rents..ie Mr&Mrs.S trying to collect 5 months back pay $21k..the list is long!
**A plasterer chasing $73k in work done...
**etc,etc148 unsecured creditors trying to recoup $1.8 million
**also repairs to numerous building flaws which have remained unattended for six months or more, including cracks in material and water damage that has ruined plaster, carpets and electrical fittings.
**trouble with BSA
**even the ATO was on his tais for $2000k
these were all 8 or so years ago ..and only finding this out on a Sunday...
Of couse I'll be calling my lawyer and finding out what happened to all of this but it is certainly unlikly for them to uphold my little paper lease and 470K prop??
but who knows has he changed??
.....I think the REA who is selling this has something to answer to,too..
Is it o.k. to know all of the above and still say..
Yeah....no probs with those things (repairs/painting they have to do as per annnexure for finishing sched)..ther'yre good for 'em,I could vouch for 'em etc!!!
Of couse everything is in writing but I'M ANGRY a huge franchaise REA can blatently say that...Do they have no morals...
Maybe he would have done the repairs but I feel it's withholding info ..
AM I WRONG??
Anywho will call lawyer first to see what I should/shouldn't say...
Any other advise??
taa

 

[Dazz]

Cheers rumin for the PM.

I'll show you those 7 knots later on...

As I said previously, try something a little less daunting for your first non-ressy step out. Also, a Lessee with a tad more integrity might assist your endeavours.

On the bright side, the dirt at 69% is getting up there. No good but if he won't pay.

Try throwing your ressy hat off and analyse the deal with a different set of criteria. Your house and unit knowledge doesn't always work in this different environment.

 

[rumin]

Thankx Dazzling...could you please explain more about "Try throwing your ressy hat off and analyse the deal with a different set of criteria. Your house and unit knowledge doesn't always work in this different environment."

I'd like to learn from my mistakes here...
also you said Dirt is 69%,not bad.....so The deal it's self crunches out o.k. right?but whether this dude will follow through is the only prob right?

Anyone else?

If the figures are there(very good)but the credibility isn't would 100% of the formites here "not touch it with a 10 ft pole"

..I'm not tempting fate,no way
but trying to make a learning experience outta this..

would any of you think 'high risk high return'?
and just try to get your lawyer to do an extra good job on the contracts???

Although I don't know whether mine could compare to theirs that are doing million $ cases

 

[aquila]

Hi,
I think there might be a bit of not being able to see the wood for the trees.
A piece of information I would look for is who currently ownes the property, in his personal name or is it asset protected? Is there a mortgage on the property if so who is the lender because their loan could be larger than your proposed three year deal and I would expect that they did their own due diligence on the vendor. If the property has no mortgage then the leads to a lot more questions.

Thats my 2 cents worth.

Rgds,

aquila

 

[Twitch]

I would strongly urge you to contact the relevant local council to find out
1) what permit(s) is/are required to house that number of people under one roof
2) does the house have those permit(s)

I have a house with 6 individuals leasing a room each. I can tell you in Victoria that it is a requirement that I have a "prescribed accomodation" permit. Whilst not expensive in itself (only $200/yr), the cost of compliance can be expensive. For example, I had to install an additional hot water service as standard ones do not have sufficient capacity.

Now if I had >10 habitable rooms (b/r + living areas) I would have also had to have a planning permit. I believe once you get to that level you are in a whole new ball game, eg, fire regs and sprinkler systems (which cost 5 figures), each room having to be a fire cell, etc.

So there is a world of difference between 5 people, and having 10 people, which is the range you gave.

I would suspect that if permits were no in place and it all went pear shaped, the council will be looking at you as the owner, to make good any modifications. Also, if things went really wrong (eg a fire) your insurance policy may not cover you if you are not carrying out a legal business (eg 6 or more people and no permit in place), or because you have residential insurance when the property is being used for commercial purposes (ie, more than 1 leasee = commercial in the eyes of banks and insurance companies).

All this is easily figured out by ringing the council, so make sure you do it.

I know for sure that in the area I lease out my rooms, most houses are unlicenced, and there is a house nearby with 10 bedrooms that the owner cannot offload because it has no permits in place at all. The cost for them to get compliance would possibly run into 6 figures. Make sure you don't get caught by one of these!!

Good luck.