IP Advice



From: James C

I have the opportunity to buy a brand new townhouse in a location about 10km out of the Melbourne CBD. The figures don’t look bad, but as it’s a lot of money to me I’d like all the opinions I can get.

Break down of the property:
Valuers Market Value $400k
Purchase Price (discount due to wholesale property)$320k
Initial outlay $10k
Rent ($300/week) $15k
Load Interest (i/o) $22k
Expenses $4k
Depreciation $14k
Income $Enough

This leaves me with a small positive cash follow for the first couple of years and then about $1k negative cash flow for the next 10 years.

I know the information is very high level, however I’m interest in your opinion on all aspects. Is the rent realistic for a townhouse of that value? Is the deprecation too high?

Your thoughts are appreciated!
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Reply: 1
From: PT Bear

A few things to consider...

Is the $400k value from a lender or from a valuer recommended by the marketer? A 400k townhouse 10km from the CBD does sound overpriced (without knowing the exact location/details).

You asked is the depreciation too high. Again, you need to ask yourself where the figure came from. Then cross reference it with a good accountant.

Have a close look as the area. Make sure you'll get capital growth. Long term this is where the money is.

On the positive side, rents do go up over time as well. If everything stacks up, you'll probably be positive after the best depreciations are lost.

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Reply: 1.1
From: Paul Zagoridis

$400K for a $300 per week rent return is a red flag to me. Most suburbs in Oz capital cities should do at least 4% gross rent.

It sounds like the the $320K "wholesale" is more likely the realistic current value.


Paul Zag
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Reply: 1.1.1
From: Carly Henderson

Hiya James,
I agree with Pauls "Red Flag" and I also agree with Bear's "sounds overpriced" but without seeing and knowing exact details it is more pie in the sky "opinions", however perhaps the rent quoted is conservative,and are you looking for long term investment or short term? Be sure to do your own investigations and get things on paper ask to see the valuations, and rental quotations.
Good luck,
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Reply: 1.2
From: James C

Thanks all for your responses.

The $400k is from the lender. I also think the $400k is over price however getting the property at $320k makes it more reasonable. Should I get the depreciation schedule before signing?

How did you calculate the 4%. I get 3.9% when using $400k or 4.9% when using the $320k. Are you saying that 4.9% means the rent is over valued? In which case $250 per week is more likely? It seems a little low for a brand new townhouse. Your advice is appreciated.

Thanks for you tips
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Reply: 1.2.1
From: Paul Zagoridis

On 7/24/01 9:31:00 PM, James Carvosso wrote:
>How did you calculate the 4%.
>I get 3.9% when using $400k or
>4.9% when using the $320k. Are
>you saying that 4.9% means the
>rent is over valued? In which
>case $250 per week is more
>likely? It seems a little low
>for a brand new townhouse.
>Your advice is appreciated.

3.9% is what it works out to. I was saying that you should be able to get at least 4% in Australian capital cities. And most cities should have many between 4.5% and 6%.

Improving returns by changing something is desirable. Recently I've found real estate agents and vendors are taking these improvements into account when setting prices. I've been told "spend $30K and it'll be worth $500K so it must therefore be worth $470K unrenovated".

Yes rent returns are not the only indicator. A development site in Paddington will yield 0.5%. But Rental yield is important to a house sold as a rental investment.

Paul Zag
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