Opinions on Pensioner Rental Units

[Mick A]

Hi all

I would like any opinions on the purchase of Pensioner Rental Units.

Background
The units are located in a bayside location in Brisbane. The complex consists of 83 one bedroom fully furnished units, with two community buildings - recreation and dining and on site management. There are two rental increases per year. The rent paid is 85% of aged pension + 85% of rental assistance. The rent is paid directly by the Federal Government fortnightly. The rents normally increase inline with the increase to the aged pension. Then tennants reside in their own fully furnished one bedroom unit which includes livingroom, bathroom, 64.4M2 with outdoor area 18M2. the tennants also receive three meals per day and weekly linen service.

The offer is the sale of two units on one title for $198,000.00 plus usual purchase costs. total costs $206935.00.

Financials
Weekly rent per pair of units $448.12
Total annual rent $$23302.24 (assume 100% occupancy)
Total annual expenses $10443.43 (assume 100% occupancy) net return on investment is 6.5%
other deductions: depreciation of building $1848 and depreciation of fixtures $5711.
Based on 80% borrowing with an interest rate of 7%, should be a positive cash flow of $96 per week.

Negatives:

The major bank will only lend 60% of purchase price, second tier banks will lend 80%. I am interested in opinions on the future viability of this type of investment and any obvious risks that I may have overlooked.

Regards

Mick A.

 

[Luke]

Sounds like a Margaret Lomas +ve cashflow property - yes?

Luke

 

[asy]

Mick...

The units you are looking at seem quite good. I looked at a house across the road and the vendors were moving in to this development. (I assume I know which it is, all the details match).

This particular area of BNE is rife with oldies... That is, there are lots of ppl in the area who have been there for ever, and are still in their original houses, but want to move to easier accomodation, and stay in the area. Also, it is close to transport, and shopping.

I didn't make much more investigation into it, as it was outside my client's parameters, but sounded good and looked nice, from what I could see.

The only thing I would check is the flood levels, the area looked a little low-lying to me, although that was on a quick drive-past, so I may be wrong there...

let us know how it goes.

asy

 

[geoffw]

Cashflow seems great- nothing wrong with that.

But also check out the capital growth. If there's ten years of cashflow at 10%, and it does not have the likelihood of growth, then a bank deposit might perform better. If there is growth as well, then go fo it.

I looked at an investment in a hotel room a few years back. The return was a guaranteed amount- something like 8% pa. But the sale price was the same as the vendor had bought the unit for six years previously. It was a cash investment with better returns than a bank- nothing more.

 

[Macca]

I am a little uncomfortable with placing the success of the investment in the hands of management. If they don't do the right thing then vacancies will occur and you can't rent to the general public.

Also you are reliant on the gov't to continue increasing pensions, which on the surface would seem fairly safe, but isn't the super levee supposed to replace pensions.

Perhaps in the future a lot of people will be on part pensions, part super. I suppose they can restructure the rents and charges.

Which gov't would be silly enough to say no more pension rises.

Macca

 

[Kevmeister]

I don't know if I like the idea of having the two units on one title. To me it simpler makes it harder to sell later.

Only an investor (?) would buy two units of this type on one title, wouldn't they? To my mind that means you ordinarily won't necessarily be selling this kind of unit to the kind of people that are supposed to be accomodated in them (although they could live in one and use the other as an investment I guess).

 

[Ross Sneddon]

Hi

I looked at the figures on this development initially about six months ago although I haven't visited the site. I have also looked at similar developments elsewhere.

The Governments general concept is to assist elderly pensioners with little or no assets and are unable to rent under their own name.

Instead of the Government providing accommodation for pensioners, it is encouraging the construction of this type of development to investors and guarantees income at 85% of the aged pension as encouragement, increasing as the pension increases.

Two units jointly are usually about 60m2 to 80m2 in size, half that for each and are sold as a pair. Banks won't lend for units this size (30m2 to 40m2) so two are offered as a single sale. As they are mostly one bedroom single units, single beds, an elderly couple require two units. They are mostly provided fully furnished. I don't know how you would go refinancing when a resale is made at a later date.

Cash flow is good at about 8% but that's it. Capital Gain is about CPI or CPI plus 1% maximum. As an investment, they are of doubtful value, providing a combined Return on Investment of 8% to 10% per annum.

There is no kitchen as such, but there is a jug, toaster, microwave, mini frig. and that's about it. The tenants attend at a common dining room for meals. The management provide meals, I think two per day but this is to be checked. Therefore magamement is part of the total deal. No local agent etc.,

The upside is that there is a nil vacancy rate as rents are guaranteed and these are filled when the tenant moves on to total care elsewhere or the big tenancy in the sky.

The better the quality, the higher the price and better the facilities. Some families buy one to accommodate their parent(s) and write the deal off as an investment. Cuts both ways, investment and helping the ageing parent(s).

I was hesitant in suggesting this type of investment to clients. Maybe you feel different.

Regards

Ross

 

[XBenX]

The limited resale market is what make me worry about these developments - cashflow is great but since they lack kitchens and you have to go through the central manager to let the unit you have a _very_ narrow group of future purchasers

this is all just my opinion though - id love to hear K growth opportunities for these developements are great (and have someone show me how) - in that case ill take 10 thanks

 

[slash]

I have also been looking at these types of investments.

How does one go about getting an evaluation for these units ?. Is it actually possible ? Can they be compared with other one bedroom units in the same suburb./town ?

Regards

Tony

 

[XBenX]

If they have the same facilities and have the same usage rights then I cant see why not (having said they I dont know of many that can)

 

[Pete]

As an investment, the units described are not inline with my personal strategy, and hence have no appeal to me. However, what really jumps out at me, and has prompted this message, is that 85% of the pension is taken for rent. What a scary thought.


I noticed similar figures on the full back cover advertisement of the current (June/July 2003) API magazine.

The second paragraph: "... rented out to pensioners who will pay 85% of their aged pension plus 100% of the Federal Government Rental Allowance as rent." Further into the ad it mentions automatic CPI adjustment every 6 months.


I can imagine quite a few people approaching retirement in the next generation will fare little better. They might have some funds for the first ten years, but when that is gone, they'll have to live very simply and cheaply.

I suspect, even if one tried to educate more people about such matters, that many would not take notice. Time will tell.