How long term are you willing to look when investing in Resi Property?

[jingo]

I certainly invested in residential property at the right time and managed to accumulate a few quickly, gaining a reasonable amount of equity in the portfolio. However, recently, we have been hit with a lot of repairs across the portfolio. Admittedly, nothing major, but it all adds up. Today was a hot water system in our first Ip which we have held for 11 yrs.

The repairs have been coming regularly lately - Monday was the hot water system in another IP - doesn't need replacing, but still, there will be a repair bill to contend with.

Last week, a heater needed attending in another, and we are told that in time we will need to replace the hydronic heater in this property. Earlier this year, it was hot plates in an ip, along with other 'little things' here and there! Not to mention a tenant who ran off and left a mighty mess, leaving us without rent for 5 months. (Insurance only covered a small portion of this loss).

Thinking from a philosophical viewpoint, I know that when I replace an item, like a hot water system, or stove, etc, the new item should last for another 10 yrs or so.

I also know that residential property is a proven builder of wealth over time and protects an investor against inflation. It's also a reliable asset to use as security to invest in other assets - shares, commercial property etc.

My game plan is to hold our existing IP's (mainly due to the amount of CGT I would have to pay by selling, and the fact that our portfolio is not too far off neutral) and in time, to invest in commercial property and shares to benefit from the higher yield and other benefits.

How do other investors in residential property deal with holding costs and repairs? Do you accept these as part and parcel of investing in residential property? Do you have a neutrally geared portfolio? Or do you become frustrated and have thoughts of selling?

I would be interested to hear other's thoughts/experiences.

Regards Jason.

 

[el caballo]

Jason,

My recollection is that you have very high equity and well funded offset accounts, so I would not be inclined in the slightest to sell. Repairs are a tax deductible fact of IPs, and can be covered fairly easily by cash buffers in offset accounts. A temporary inconvenience ....

Cheers,
Greg

 

[The Fence]

Jason, I'd have second thoughts about your signature.

Don't sweat the small stuff

 

[Trogdor]

Sounds like you have done extremely well to date so there is an argument to keep on doing more of the same.

That said, for me, after two resis (of which one is now ppor) id had enough for, in part, similar reasons and hence next two were CIPs, plus quite a bit of shares (a similar portfolio in and out of the smsf)

Less stress and in my mind better, but to be fair at times also different stress.

Worth contemplating.

 

[Jamie M]

How do other investors in residential property deal with holding costs and repairs? Do you accept these as part and parcel of investing in residential property? Do you have a neutrally geared portfolio? Or do you become frustrated and have thoughts of selling?

I factor in a maintenance cost for each IP annually to help me determine the overall holding costs for that year.

So I guess expecting to fork out something each year for each IP softens the blow when the call from the PM comes in saying that x broke and is going to cost x.

Large costs like hot water systems are a bummer (had one the other day too) - but they happen.

Cheers

Jamie

 

[want2bewealthy]

Jason! I hope you've been well.

Mate, you've done well by holding resi for quite a good while now and inspired me many years ago by doing so.

Fact is: property is testing but those few who can get past the (sometimes) constant hastles and expenses will 'win'. You probably know that the majority of investors topple over within a short year or two for this very reason. Do I feel like selling sometimes. YES!! Occasionally the outgoings and dramas have me thinking but I just remember that it will all blow over and we'll make the goal (only 4 years to go!) Just these past two weeks we've had a whinging tenant about water issues in the backyard (they really are picky) a leaking aircon (into the tenants dresser) a bevelled tap seat in the shower recess wall, a threat from body corp to fine me for a tenant who left a cardboard box in the bin area (they want to make us pay for them picking it up) and the week before that we had a cupboard door repair, fan repair and leaking taps in an interstate prop

I'd really find it hard holding lots of resi IP's and we only have the three and our own home but those three are about the very edge of my stress and sanity limits. Any more and I'd probably have a heart attack.

Eventually maintenance is going to catch up with us all and a total reno/makeover is going to fall due. That's a pain, no doubt about it but for the money we can make it's pretty easy work really and when you think about it, a repaint in 7 years time since ownership and a little bathroom updating n things might cost $8k or so? but might also lift the rent and capital value by as much depending. Bottom line is: try to stress less and hold your ground. Everyone feels the pinch sometimes, and if you've got another 5-10 years time up your sleeve you'll be glad you did

 

[mumbai]

I have just one IP. It hasn't even gone for rent yet. I am renovating with the budget I had in mind. Was on track until my PPOR hot water system chose to blow off, stove top playing up and dad asked for some urgent financial help. All these when I already have an overseas trip planned in 3 weeks, where I am already 'spending' few grands (

Now, I have 2 tradesmen finishing the job in a week and I have just enough to pay them leaving no buffer for my PPOR jobs !!

 

[jingo]

Thanks for all your reponses. They have been great to read.

Thanks Greg, - our equity is good and buffers strong. No problems there. Yes, nature of Ip's is that the investor is responsible for maintaining, repairing etc. Just we have had our fair share of things to fix over the past two years. (around 10K per year across the portfolio). It adds up.

Selling is not wise in our situation. The capital gains tax and selling costs just don't make it a viable option. Best to hold on and use the equity to invest in other asset classes. (ie com prop/shares)

Thanks, The Fence. Yes, need to review the signature!! Seems a little contradictory at this point in time - although the intention from the outset was to invest long term and hold on to our resi stuff - which we have done!

Thanks Trogdo, Love your plan and agree whole heartedly with the resi side of things!! Been looking at com deals and certainly have the equity to jump into that asset class. It looks more than likely that we will head that way, together with shares. I am sure both have their own stresses to deal with, but I am ready now!!

Thanks Jamie, yes, good idea to factor in repairs. We have been hit with our fair share over the past two years. Admittedly, some of them could be classed as improvements (ie replacing blinds, installing a couple of extractor fans in bathrooms etc). So I don't anticipate these will need to be done again for a while!

Thanks for your comments, Want2bewealthy. I'm glad you are doing so well with your IP's and house. There is no doubt, resi ip's are a great way to build equity and then from there it's possible to leverage into com prop and shares. Yes, I can certainly relate to your comments about tenants becoming more choosy, hard to please etc, quick to place the blame on landlord etc. It becomes wearing after a while! I'm not about to sell up - but I guess highlighting both good and bad makes for a more objective assessment of this asset class!

Hi Rajnhets,

I think it's called 'murphy's law' when everything seems to go wrong at once!! I hope you enjoy your trip and are able to have your ip rented soon.

Ip's have served me well up to this point and I know without them my wife and I wouldn't be financially where we are now! Still, I like to be objective and look at all the costs involved in running the portfolio.

I just did an interesting calculation (well to me anyway), and compared the running costs in % terms to that of a managed fund. Annually, our portfolio costs .5 percent of the value of the portfolio to run (allows for repairs, but excludes tax, in which case it would be less). Most managed funds cost between .5-2% of funds under management in fees. Food for thought!!

Thanks everyone, looking forward to reading other's input as well.

Regards Jason.

 

[oracle]

I would be interested to hear other's thoughts/experiences.

Regards Jason.

Resi property for me is long term investment. 15 years at the very least. You do occasionally think of selling the lot and putting money into high yielding assets like shares and/or commercial property. But then I think resi property is going to be my back up plan for retirement if nothing else works out. So selling is out of question.

Just we have had our fair share of things to fix over the past two years. (around 10K per year across the portfolio). It adds up.

...

I just did an interesting calculation (well to me anyway), and compared the running costs in % terms to that of a managed fund. Annually, our portfolio costs .0055% of the value of the portfolio to run (allows for repairs, but excludes tax, in which case it would be less).

Assuming $10K is 0.0055% of your portfolio value. Based on my maths knowledge that portfolio is worth around $180 million . That is a great achievement!!!

Cheers,
Oracle.

 

[Dan_p]

I have just one IP. It hasn't even gone for rent yet. I am renovating with the budget I had in mind. Was on track until my PPOR hot water system chose to blow off, stove top playing up and dad asked for some urgent financial help. All these when I already have an overseas trip planned in 3 weeks, where I am already 'spending' few grands (

Now, I have 2 tradesmen finishing the job in a week and I have just enough to pay them leaving no buffer for my PPOR jobs !!

Thats a tricky situation. I hope you work things out.

 

[jingo]

Resi property for me is long term investment. 15 years at the very least. You do occasionally think of selling the lot and putting money into high yielding assets like shares and/or commercial property. But then I think resi property is going to be my back up plan for retirement if nothing else works out. So selling is out of question.



Assuming $10K is 0.0055% of your portfolio value. Based on my maths knowledge that portfolio is worth around $180 million . That is a great achievement!!!

Cheers,
Oracle.

Thanks Oracle,

Yes, thoughts of selling up and putting the proceeds into com prop/shares are tempting! But yes, resi has been a proven solid performer over time.

Thanks for alerting me to the mistake with my maths! I've edited it above! 180 mil from resi- I'd like to see someone do that!!

 

[The Fence]

That interesting calc you did....when you say running costs...goes that include interest rates, advertising for tenants, repairs etc...?
Like ALL running costs..?

 

[jingo]

That interesting calc you did....when you say running costs...goes that include interest rates, advertising for tenants, repairs etc...?
Like ALL running costs..?

Hi Fence,

It includes interest, all outgoings, repairs ($1000 per prop). Vacancy 2 wks per prop. Doesn't allow for tax returns in which case the figure would most likely be lower.

It is really a meaningless calculation, in a feeble attempt to compare the running costs to investing in a managed fund or into a retail super fund. All good fun, but not something for me to get too hung up on!!

The real aim is financial freedom and the best way to achieve this moving forward.

It's why I enjoy this site. People willingly share their ideas, thoughts and achievements.

 

[The Fence]

I totally understand what you are saying, but that calc is interesting in that it gives a certain...dimension to investing not often thought about.

Interesting & fun I guess.

 

[el caballo]

Jason,

I don't recall your numbers explicitly from your previous posts, but do have a vague recollection of them being relatively substantial. Hence, $10k per year would not perturb me in the slightest.

On the other hand, if this is not giving you the financial freedom to which you aspire, it may be time to adjust the path forward. Either way, a great position to be in.

Greg

 

[handyandy]

Thinking about your title I would have to say we are in a contradiction.

I look very long term - have been into IP's since 1985 just about can't get longer than that unless your older

But we have always looked very short term in relation to neutral gearing and forget negative gearing.

I have always recognised that there is a cost in holding property and one of those costs is changeover of tenants. So years ago we decided that we needed excess properties to ensure that we had sufficient income to live of (forget LOE) and plenty of income to cover all the expenses including all the maintenance and renovations.

As a result my business is now looking after all my properties. We employ our two sons who now do the heavy lifting and my wife and I do all the bookwork and management (we still employ PM's).

We also kept all our property purchases close to home (except the USA) and our sons now live in the middle of each cluster. They both selected a property to live in.

As far as maintenance we would change over at least 10 water heaters a year. We replaced the gutters on one property.

We renovated a unit (Kitchen & bathroom tiled substantial area of unit and new carpet the rest, paint, light fittings, upgrade power, repair fly screens, new blinds, new stove). Renovated another unit - new bathroom, new carpet (used carpet squares just to see what the diff will be) ceiling repairs, repaint, new blinds new stove.

These would have been more major. Then in addition we have had another 7 properties turnover where we go in and do everything needed to bring them back up to our grade that doesn't include removing kitchen and bathroom but would include substantial repaints and endless cleaning.

Presently am going through a patch of stove repairs. We find that a stove will need a couple of elements in it's live which we can now buy for $20 each rather than the $50+ genuine ones. We replace these ourselves but we will readily replace the whole stove. This year we bought one new one but in the main we buy second hand stoves from Ebay and the like. Had to buy a new one as we needed it there and then.

We can do all this at minimal cost firstly because I try and source all material at a substantial discount and i would say mainly because do just about all the work ourselves.

I am finding it very frustrating having invested in the USA where we can't manage our costs to the same degree. The other frustration is that we didn't get big enough to give us the financial clout to actively manage these properties. I needed 20 odd to ensure that there was sufficient income to allow one of us to be over there for 1/2 the year might have been 2 months 3 times a year or whatever it would have taken. W e only managed to get 11 properties ( before the prices rose beyond our rate of gross return and property avail reduced) with a total gross income of about $160k but a lot will go on the same sort of expenses that you are encountering.

Last month we had an aircon go $3200, re vinyl a bathroom $350, fans and electrical $550 and the list goes on.

We are still finding our feet in the US but it's certainly not for the faint heart ted nor for the single IP property buyer. I have no doubt that many investors will end up in tears.

Cheers

 

[redwing]

Most managed funds cost between .5-2% of funds under management in fees. Food for thought!!

Then there's probably a performance fee

In our calculations we allow 2% for Miscellaneous costs (Property Management, Repairs etc).

 

[kathryn d]

I have started referring to 2012 as the "tenants from hell" year.

We had one tenant tear down an internal structural support wall, thus causing the roof to sag (transportable home) and render our 3 bedroom , into a unfinished 2 bedroom. Live wires everywhere etc. We immediately kicked him out (same day) and brought in a carpenter to make safe.
Cost of $5k to return property back into same condition he rented it in. We were awarded $200 at tribunal. We appealed, and won the full amount. Next summer we start collecting.

We then decided to bring back to our standard the other transportables in the same street (3 others). After completion one tenant moved in (the very next day). As soon as rent was do the next month, he claimed dangerous mold and mushrooms growing from walls. Refused to pay rent, and then he wanted compensation (aka blackmail) we refused. He called newpaper reporter, doctored some evidence, didn't put us in a good light.We demanded the reporter do another story from our side (as he didn't have the facts).When reporter realised what was going on, he asked for follow ups. A month later he did a third story. The tenant finally left after not paying rent for 2 months, calling building inspector, contacting a lawyer etc.
We have won every claim, but he was setting us up for a civil case for mold.
The tenancy director even visited the property after us begging her to....which helped immensly. We will start collecting next summer.
(Tenant made a hole so the bedroom ceiling would fill up with water, just before he vacated. This collapsed the ceiling) Annoying, but minor damage.

Another Tenant moves into a house. They start off ok. Very quickly get behind, and then refuse to pay. They started breaking interior windows, the glass door on oven, and in the 5 months never put any garbage for collection outside. They threw it all in basement. We won costs owing $3k. Start collecting next summer.

Another tenant moves into a furnished home. Brings her 2 cats. Mental problems and now she has 15 cats who never go outside. We evict, and it needs all furnishings tosses. Carpets removed.Repainted etc.
Costs $2500

Tenants in our 11 unit family building.Our live in supers retire. We hire a replacement. Within a week, we are having issues with the new guy. Decides he didn't feel like making the bank deposit. He starts ignoring our directions.We finally have him escorted from property by police. We have great supers now. The carpenter and his wife we used all summer live there now (also the nephew of retired supers)
Tenants in this building think they can pay rent whenever they want, walk away from a contract when they feel like it, and paint if they want to.
We paid to have the apts painted, and then they move in and paint their own colors when they are forbidden. We are not permitted to collect enough bond to cover any of this (2 weeks). They do a crappy job or as one tenant who painted the ceilings and walls a neon pink, and wondered why we did keep her bond.

Another tenant we evicted, and she refused to leave. Still in court over this one. She finally left when we got an eviction order. All her garbage was there, and it was dirty. She also stole our fridge and stove. We have a partial win, but the tenancy officer thinks we should pay for her water, when it is not in her lease. Costs $3000

We have replaced a commercial water heater system.Replaced 3 oil tanks.
Updated many properties as we could no longer get the smell of the previous tenants out. Replaced 2 fridges and stoves, and repaired many others. Repaired a few washers and dryers.Windows in properties.

We usually put everything on credit cards, with 0-3 % interest (transfer them around to take advantage of promotions) and pay them off over the winter.

It's all a part of doing business.
If it was normal wear and tear, it is easier to handle.
Over half of this was tenant damage, or trying to work the system.

Good thing that on 15 Nov, our RTA is changing. Instead of waiting for 30 days in rental arrears, we can evict after 15 days. If the tenant doesn't appeal, we can request eviction without a hearing.

Jingo...you sound like you are handling thigs very well.
Just remember you will win the game in the long run.
Either set aside a certain amount for each property for maintenance/repairs or have access to credit.

 

[MTR]

Thinking about your title I would have to say we are in a contradiction.

I look very long term - have been into IP's since 1985 just about can't get longer than that unless your older

But we have always looked very short term in relation to neutral gearing and forget negative gearing.

I have always recognised that there is a cost in holding property and one of those costs is changeover of tenants. So years ago we decided that we needed excess properties to ensure that we had sufficient income to live of (forget LOE) and plenty of income to cover all the expenses including all the maintenance and renovations.

As a result my business is now looking after all my properties. We employ our two sons who now do the heavy lifting and my wife and I do all the bookwork and management (we still employ PM's).

We also kept all our property purchases close to home (except the USA) and our sons now live in the middle of each cluster. They both selected a property to live in.

As far as maintenance we would change over at least 10 water heaters a year. We replaced the gutters on one property.

We renovated a unit (Kitchen & bathroom tiled substantial area of unit and new carpet the rest, paint, light fittings, upgrade power, repair fly screens, new blinds, new stove). Renovated another unit - new bathroom, new carpet (used carpet squares just to see what the diff will be) ceiling repairs, repaint, new blinds new stove.

These would have been more major. Then in addition we have had another 7 properties turnover where we go in and do everything needed to bring them back up to our grade that doesn't include removing kitchen and bathroom but would include substantial repaints and endless cleaning.

Presently am going through a patch of stove repairs. We find that a stove will need a couple of elements in it's live which we can now buy for $20 each rather than the $50+ genuine ones. We replace these ourselves but we will readily replace the whole stove. This year we bought one new one but in the main we buy second hand stoves from Ebay and the like. Had to buy a new one as we needed it there and then.

We can do all this at minimal cost firstly because I try and source all material at a substantial discount and i would say mainly because do just about all the work ourselves.

I am finding it very frustrating having invested in the USA where we can't manage our costs to the same degree. The other frustration is that we didn't get big enough to give us the financial clout to actively manage these properties. I needed 20 odd to ensure that there was sufficient income to allow one of us to be over there for 1/2 the year might have been 2 months 3 times a year or whatever it would have taken. W e only managed to get 11 properties ( before the prices rose beyond our rate of gross return and property avail reduced) with a total gross income of about $160k but a lot will go on the same sort of expenses that you are encountering.

Last month we had an aircon go $3200, re vinyl a bathroom $350, fans and electrical $550 and the list goes on.

We are still finding our feet in the US but it's certainly not for the faint heart ted nor for the single IP property buyer. I have no doubt that many investors will end up in tears.

Cheers

Hi HA
It has now been over 12 months since buying/holding property in US and I would agree it is not for the faint hearted. We purchased 8 properties and similar to your situation prices started rising which put the brakes on any further purchases.

What I have found is the tenants are very hard on the properties, more wear and tear. When a tenant moves out the properties need to be re-painted which certainly effects the cashflow, now the big one is if the tenant decides not to pay rent well just gotta hope they don't trash your house.

I have close to $40K in my US bank account at the moment but I estimate am down by at least $10K due to slippage. Once again just reiterates the importance of buying US properties at the right price and you need volume to make it work.

I agree, it is frustrating, however the saving grace is the growth which is happening faster than I expected.

Cheers, MTR

 

[Trogdor]

If these posts highlight one thing, its that resi IP is not a passive income solution, some of you seem to have almost full time jobs in keeping on top of all this!!