Investment Property in Adelaide CBD - 6% Rental Return

[Bentley]

Hi everybody. Its my first post here! Like many of the members here, I've been a long time lurker in the forums. Reading and learning a lot from all useful information here.

My wife and I are looking to buy an investment property in Adelaide CBD and looking for some advise here. We saw a 2 bedroom apartment which is off the plan. Price is about $550K. Construction is expected to start soon and settlement in late 2015. The developer has given us the option of having a 6% rental return for 2 years from the date of settlement.

In a nutshell the terms of the rental return is as follows;

- Rent paid monthly in arrears equal to 6% of the purchase price of the apartment

- Term of lease is 2 years

- Rent to be paid to us irrespective of whether a tenant is in place or not

- Normal charges i.e rates, taxes and property management fees are to be paid by us.

Of course, I can just decline the offer for the 6% rental return from the developer and just go ahead and purchase the property at the same price and look for my own rental/investment options that might give me a higher rate of returns.

I've read some of the older threads on the pitfalls of going with lease back options for display homes etc.... where many such deals are done with the a $2 shelf company being the one paying back your rent, not necessarily the actual building company per se.

I would like to get advise from members here if it is indeed a good option to go with the 2 years 6% rental return option and what are some of the things I should be looking out for? Many thanks!

 

[jim1964]

Hey Bentley,if i was spending $550k i would be looking for better than 6%,Adelaide CBD is a great long term buy,but im interested in why your not chasing better yeilds,with better long term CG,just my 2c worth.I could get 2 houses for what you are spending returning 9-10%

 

[Brady]

Haven't read your post as it's long and I'm on my phone.

But I skimmed and read OTP and rental guarantee, all I can say now is run.

So many better options for $550k in SA.

 

[ardi]

Hey Bentley,if i was spending $550k i would be looking for better than 6%,Adelaide CBD is a great long term buy,but im interested in why your not chasing better yeilds,with better long term CG,just my 2c worth.I could get 2 houses for what you are spending returning 9-10%

Where at mate, I'm interested

 

[pinkboy]

Where at mate, I'm interested

Jump on Google and punch in 'Somersoft', 'slumlord', 'CJay'!



pinkboy

 

[Bentley]

Haven't read your post as it's long and I'm on my phone.

But I skimmed and read OTP and rental guarantee, all I can say now is run.

So many better options for $550k in SA.

Hi. Thank for that. Appreciate if you could share why OTP and rental guarantee is a recipe for disaster?

 

[D.T.]

Hi. Thank for that. Appreciate if you could share why OTP and rental guarantee is a recipe for disaster?

1) How do you know if the unit will be worth what you think it is on completion?
2) How do you know it'll even complete?
3) If you want to lease it, how will you go competing against the other 5 dozen identical places?
4) Ditto #3 if selling it
5) If its a decent investment, why does it need a guarantee and not able to stand on its own 2 feet? What happens after that time?
6) Think of the maths of rental guarantee, eg 500k with none or 600k with a 20k rental guarantee and pocket the other 80k?
7) How do you know another OTP is going to spring up on the block next door, making #1 through #5 even worse?

 

[Bentley]

Hey Bentley,if i was spending $550k i would be looking for better than 6%,Adelaide CBD is a great long term buy,but im interested in why your not chasing better yeilds,with better long term CG,just my 2c worth.I could get 2 houses for what you are spending returning 9-10%

Hi Jim. Thanks. What would your recommendation be for achieving a higher than 6% return in Adelaide CBD?

We are currently living in the suburbs now and have fully paid our property. Reason we are looking to get an apartment in the city is we might be looking to sell our house and move into the apartment in 5 years time as we are looking to enrol our kid in one of the schools near the City. We prefer an apartment which has 2 bedrooms, 2 bathrooms and a carpark.
I've seen numerous OTP apartments in the Adelaide CBD that are being marketed and its possible to get something along the $470K - $500K levels, but they either don't have a carpark or only have 1 bathroom. Also, they tend to be on the 1st or 2nd floor.

 

[Brady]

Dtraeger has given you some great reasons why OTP and rental guarantee are a big no no. Search here on SS and you will find more. You also mentioned yourself there are many for sale at the moment, so a lot of supply?

I think you would be better off purhasing a quality IP and renting in the city personally, if you're content on a apartment in the CBD.

Where in SA do you currently live? Rather then in the CBD could you manage say 10-15km outside the CBD? North? South? East?

 

[quoll]

we might be looking to sell our house and move into the apartment in 5 years time

That apartment might be the same price or cheaper in 5 years time ?? then again it might only be 10% more expensive ??

Will it double ? Probably not, will the cheapie house in the burbs double, a lot more potential for this to happen.

Personally if I was looking for an apartment in the city, I'd look at stuff that has been finished, and go shopping for something at a 20% discount, low ball them and see who wants to sell.

Cheers
Graeme

 

[jim1964]

Hi Jim. Thanks. What would your recommendation be for achieving a higher than 6% return in Adelaide CBD?

Just to clarify,i wasnt reflecting 9-10% returns out of Adelaide CBD.These returns would be in close proximity to Adelaide for commuting.

 

[irawin]

re: schools

Are you thinking public high school or private?

If public - check the zoning area (houses in suburbs rather than apartments) for Adelaide high, private - I think you will have choices.

 

[Deltaberry]

6% on a CBD apartment is worse than 5% on an inner city freehold. Period.

 

[Bentley]

Dtraeger has given you some great reasons why OTP and rental guarantee are a big no no. Search here on SS and you will find more. You also mentioned yourself there are many for sale at the moment, so a lot of supply?

I think you would be better off purhasing a quality IP and renting in the city personally, if you're content on a apartment in the CBD.

Where in SA do you currently live? Rather then in the CBD could you manage say 10-15km outside the CBD? North? South? East?

Yes, there are quite a number of OTP apartments for sale in Adelaide now. Most of them are expected to be completed end 2014/ early 2015. But most of them are priced over $450K. Most of the cheaper units have already been snapped up last year before the $8500 housing grant ended.

We currently live about 10km out from the city in Northgate.

 

[Wandering]

What are your reasons for wanting to by an OTP unit?
How does their sale price match up to comparable units that are already completed and are on the market?

I would ignore the short term rent back. I'm a value investor and the number one thing for me is comparable sales to find the true value. Forget the glitzy OTP guff, forget the rent back. Focus on the real proven value.

 

[Bentley]

That apartment might be the same price or cheaper in 5 years time ?? then again it might only be 10% more expensive ??

Will it double ? Probably not, will the cheapie house in the burbs double, a lot more potential for this to happen.

Personally if I was looking for an apartment in the city, I'd look at stuff that has been finished, and go shopping for something at a 20% discount, low ball them and see who wants to sell.

Cheers
Graeme

Thanks Graeme. We are also weighing our options with regards to purchasing a completed apartment in the CDB and paying the stamp duty vs buying OTP.

One of the reasons for thinking about getting an OTP is we only have funds to pay the 10% deposit now. We expect to have the other 10% by early next year. If I wanted to buy a finished apartment, I would need the 20% deposit now else would need to need to take LMI.

 

[Bentley]

What are your reasons for wanting to by an OTP unit?
How does their sale price match up to comparable units that are already completed and are on the market?

I would ignore the short term rent back. I'm a value investor and the number one thing for me is comparable sales to find the true value. Forget the glitzy OTP guff, forget the rent back. Focus on the real proven value.

Main reason is the $0 stamp duty. Comparable apartments in the city, which are much older and slightly smaller are selling for about $100K less. They are mostly 1st or 2nd floor units. I know low floor doesn't count for nuts when you are looking at rental and tenants are not going to pay a premium for staying at a high floor apartment. I was hoping the high floor might translate to a higher selling price in the future as Adelaide CBD doesn't have many tall apartment buildings.

 

[S.T]

Main reason is the $0 stamp duty. Comparable apartments in the city, which are much older and slightly smaller are selling for about $100K less. They are mostly 1st or 2nd floor units. I know low floor doesn't count for nuts when you are looking at rental and tenants are not going to pay a premium for staying at a high floor apartment. I was hoping the high floor might translate to a higher selling price in the future as Adelaide CBD doesn't have many tall apartment buildings.

So uh, is stamp duty costing you around 100k? Why wouldn't you look at the slightly older apartments?

 

[Bentley]

So uh, is stamp duty costing you around 100k? Why wouldn't you look at the slightly older apartments?

Hi. We are also looking at older apartments as well as Torrens titled houses. Unfortunately there aren't many houses for under $500K in the CBD.

For a 5 - 10 years investment time frame, is a Torrens title townhouse in the CBD a better investment than an apartment?

 

[D.T.]

Hi. We are also looking at older apartments as well as Torrens titled houses. Unfortunately there aren't many houses for under $500K in the CBD.

For a 5 - 10 years investment time frame, is a Torrens title townhouse in the CBD a better investment than an apartment?

By a factor of infinity