From: Michael Croft
What follows is a reply to reno questions/email which I thought may interest some of you.
It’s a tough one and marginal from my perspective, but it all depends on your strategy. Based on the figures provided I would anticipate little or no growth for the next 3-4 years in either cap gain or rents. Can you sit around that long and wear a 1 – 2 % interest rate rise as well? Or is there something more productive you could be doing with the money?
Personally I am looking for a combination of long term good growth and cash flow. Over the next twelve months I anticipate lenders will tighten their criteria anticipating a rise in interest rates and a possible fall in property values in some areas/types so a possible tightening of LVR’s too. Also the valuers are under attack from their professional indemnity insurers; the premiums have skyrocketed and risk management has become a primary element of a practice (read increasing conservative valuations). All of this means you need to; buy well, add value, increase cashflow, minimise outgoings and so on, so that the gods and lenders smile on you.
If you have money to burn (as this one is neg geared), are confident of your research and the cap gains in the long run, and it fits your game plan, or there is redevelopment potential, etc it may be worth pursuing. 7.6% average cap gain in the last 10 years is OK, a 4.2% gross rental return (acquisition and reno) is not good but may be for the area? We consistently (30 year average) achieve 8% cap growth and 9% plus for gross rental return. I say this not to impress you but to impress upon you that both high growth and rental returns are possible (find/read ‘Well done Geoff!!!’ on the forum). The potential to add to value and rent is the key ;-) Multiple income streams from the one property eg house and flat, a stunning and cheap reno, a combination of the two, etc.
If you really have your heart set on this property (and you know you shouldn’t buy on emotion) and as you say they are not motivated, pay their price on your terms. Eg. go for a 6 month settlement with unrestricted (and vacant) access after exchange. Solicitors hate this but do the reno before you settle, organise the tenants before hand as well and have a revaluation before settlement. Please note this is not a recommendation to buy this specific property.
My answers are not very specific or helpful so ask any more questions you have. I don’t buy to a specific set of criteria, if the numbers work I’m happy, but some rules of thumb are; I like don’t wanters, slightly above the median price for the suburb, good land component 30%+, multiple income streams are a bonus, good reno potential (I like them dirty and run down but structurally sound), redevelopment potential is a bonus, all the usual on any property selection checklist – quiet street, close to CBD, schools, transport, etc. There are always trade offs to be made as no property is perfect - as with most things in life it’s a matter of balance.
A note on the numbers; if they work i.e. capital growth and rental return are high, most of the other stuff falls into place, all you have to watch out for is the anomalies eg. Demolition orders, future council resumptions, structural issues, etc. these your solicitor and your research/due diligence should pick up. I’m not a control freak (really truly) but if I don’t control the body corporate I don’t buy strata.
Anyway good luck with it! Michael Croft.
What follows is a reply to reno questions/email which I thought may interest some of you.
It’s a tough one and marginal from my perspective, but it all depends on your strategy. Based on the figures provided I would anticipate little or no growth for the next 3-4 years in either cap gain or rents. Can you sit around that long and wear a 1 – 2 % interest rate rise as well? Or is there something more productive you could be doing with the money?
Personally I am looking for a combination of long term good growth and cash flow. Over the next twelve months I anticipate lenders will tighten their criteria anticipating a rise in interest rates and a possible fall in property values in some areas/types so a possible tightening of LVR’s too. Also the valuers are under attack from their professional indemnity insurers; the premiums have skyrocketed and risk management has become a primary element of a practice (read increasing conservative valuations). All of this means you need to; buy well, add value, increase cashflow, minimise outgoings and so on, so that the gods and lenders smile on you.
If you have money to burn (as this one is neg geared), are confident of your research and the cap gains in the long run, and it fits your game plan, or there is redevelopment potential, etc it may be worth pursuing. 7.6% average cap gain in the last 10 years is OK, a 4.2% gross rental return (acquisition and reno) is not good but may be for the area? We consistently (30 year average) achieve 8% cap growth and 9% plus for gross rental return. I say this not to impress you but to impress upon you that both high growth and rental returns are possible (find/read ‘Well done Geoff!!!’ on the forum). The potential to add to value and rent is the key ;-) Multiple income streams from the one property eg house and flat, a stunning and cheap reno, a combination of the two, etc.
If you really have your heart set on this property (and you know you shouldn’t buy on emotion) and as you say they are not motivated, pay their price on your terms. Eg. go for a 6 month settlement with unrestricted (and vacant) access after exchange. Solicitors hate this but do the reno before you settle, organise the tenants before hand as well and have a revaluation before settlement. Please note this is not a recommendation to buy this specific property.
My answers are not very specific or helpful so ask any more questions you have. I don’t buy to a specific set of criteria, if the numbers work I’m happy, but some rules of thumb are; I like don’t wanters, slightly above the median price for the suburb, good land component 30%+, multiple income streams are a bonus, good reno potential (I like them dirty and run down but structurally sound), redevelopment potential is a bonus, all the usual on any property selection checklist – quiet street, close to CBD, schools, transport, etc. There are always trade offs to be made as no property is perfect - as with most things in life it’s a matter of balance.
A note on the numbers; if they work i.e. capital growth and rental return are high, most of the other stuff falls into place, all you have to watch out for is the anomalies eg. Demolition orders, future council resumptions, structural issues, etc. these your solicitor and your research/due diligence should pick up. I’m not a control freak (really truly) but if I don’t control the body corporate I don’t buy strata.
Anyway good luck with it! Michael Croft.
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