I must admit, it is difficult to find positively geared properties in Melbourne. Most properties I have been looking at recently only return a yield of around 5-6%. The only way of producing positive returns in the current climate (that I can think of)is to look at value adding i.e. renovations and attempting to obtain higher rentals as a result.
Studios and One bedroom Apartments/Units : Possible to gain reasonably close to break even
Two bedroom Apartments + : Negatively geared by a couple of thousand on average
Townhouses : Negatively geared by approx $5K
Houses : Forget it!!! Unless you are a builder. Just keep preying that the land content will provide sustained Capital Growth
Before I answer, let's have a think about what we mean by "positively geared properties".
I guess the simple definition is where a property without any outside aid (income) produces enough income to meet all its expenses.
So simply we need to work out how much expenses are generated by a property and this will tell us how much income we need to generate to make it positive.
The biggest cost is interest on debt. There are two ways to adjust this cost;
- find a low interest rate
- use a small mortgage
For this example lets assume 100% borrowing (this could be achieved by draw downs from another property to pay for deposit)
Let's assume current interest is 8%
Say 2% for maintenance?
Sat 2% for land tax
Say 1% for miscelaneous (rates/insurance)
This doesnt factor legals/stamp duty or purchase costs.
This gives us a total of 13% of the property price, To break-even.
So on a $150,000 property, 13% = $19,500 or $375/wk
If we divided $375 by 2 we get $187.5 per week.
Previously someone posted an idea of divided a house into 2 units. Imagine a 4 bedroom house divided into two units each renting out for $190/wk?
Or a large edge of metro house with 6 rooms split into 3 units renting for $150/wk?
or imagine, buying a "messy" house cheap cleaning it up and then relocating another house into the back yard as another source of income?
Or a terrace with a top and bottom unit?
Basically, you are more likely to "make" a positively geared property than you are to find one.
At the moment, I wrap, that's how I'm making my positively geared properties, the stuff I've mentioned above I have yet to do, but I am looking into it. But there are those here that have done it and may be able to eloborate on this.
They may be able to provide better figures, or even a case study or two.
Work out the numbers (ie your investment model) then go find properties that match or with a little tinkering can match that model.
1) Create a model/system
2) Implement model
3) Goto step 1
This requires a bit of sit down thinking and creativity, asking questions, reading books for great ideas, or emulating others.
Look, the idea basically is to work out ways of 1) reducing or limiting your costs 2) and creating more income.
Reducing costs is about smart buying and renovating while boosting income is about how to fit more paying renters into the same amount of space.
1 person pays 1 weeks rent, 2 people pay 2 weeks worth of rent. As soon as you can get 2 people paying the same rent on one block of land you've increased your rent by 100%
Thanks for that Michael, certainly food for thought. Actually there was a post just recently by Michael Croft talking about exactly the same thing. Adding sunrooms, converting garages, dividing one house into two, converting attics into bedrooms etc.
Calling Michael Croft.
A real innovative additive I've seen in a recent house inspection was the adding of a "walk up into robe"....
The house was a terraced house within Sydney and had high ceilings as well as roof pitch. So what they did to create extra room was built a mezzanine level into a few of the bedrooms of which were then turned into the wardrobe and junk area. This in turn gave the room lots more usable space. The owners also rebuilt the ceiling to go upwards on the same slope as the roof again creating the image of large amounts space.
The rooms were standard 3x3m rooms etc and they looked enormous with the mezzanine level.
These guys really thought out of the square to create the new style of wardrobe and when it sold I'm sure they would have got a higher sale price simply cause of these additives. I'm not to sure on how much it would cost to do this but it could be well worth looking at for value adding.
The Mezzanine was done with a good hard wood (not sure what type though). With somewhat steep, narrow stairs leading up to the mezzanine level which was surrounded with the same wood as railings (same as stair case railings). They had carpeted floor with builtin's built into the wall with sliding glass doors, the builtins also had draws etc in them for shoes and shirts etc and down lights from the ceiling for light.
There are numerous properties around Melbourne returning around 9% gross rental.
Which equates to around 7.5% nett rental after all expenses.
We are talking about 1 or 2 bedroom apartments, quite small and are generally let out as Student Accommodation. Prices for these usually go from $170k - $200k with a rental return of $290 - $325 pw.
However these type of properties even though close to CBD will not increase much in Capital growth.
This is what I call positive cash flow.
I came close to purchasing one but to think that there will be minimal capital growth, really through me out. Also the fact that it is tenanted by students, you will not get many or any owner occupiers moving into the building which therefore makes it very difficult to sell for a better price.
Just my view, let me know what you all think.