Rent = 350pw. Whats it worth?

[Ray Brown]

Hi all,

Based on the weekly rent of $350pw....

How much would you pay for this old but sturdy 3br fibro house?

Similar houses in this North Queensland town go for $260K.

This one is 800m from CBD in quiet street.

The difference is the rent......
Because It has 2 x 1 bedroom bedsits (council approved) in the backyard.

Rates = $3100 pa

So based on the rent mainly.... Just a rough estimate of what you would pay for it.


cheers in advance

 

[geoffw]

I would not base anything purely on rent. Rent is just one thing in the equation.

.If the town is a declining town, losing population due to perhaps a declining industry, then I would be likely to lose value on the house in the longer term. I wouldn't touch it.

.If there is growth promise in the town, I would investigate further. It's a fibro- so there might be problems. It's obviously not a high class place. But what's the area like? Is it the worst in the street? If so I'd buy it; but if it's the same as the rest of the street, I'd be wary. The rent might be good, but if it's the sort of place which attracts low class tenants, be wary. Growth might be worse; you may have problems getting tenants to pay rent.

If it is the worst in the street, there's potential to bulldoze and do something good. If it's already approved fopr multiple occ, thgere's potential to really do something good- but only if the improvement fits in with the area.

Sorry, I haven't answered your question. In real estate, you're spending a lot of money. You owe it to yourself to really know where you're looking, what the potential is, what cap growth you may get. If you base your decision solely on rent, you have the possibility of coming a cropper.

 

[Ray Brown]

If you base your decision solely on rent, you have the possibility of coming a cropper.

I couldn't agree more.

Lets just say everything else has been ticked off your list as acceptable.

I know its an allmost impossible question but what I'm asking is more akin to the rental reality kind of thing I guess.

At $260K and 350pw its about 7% gross yield. It is a town is growing strongly and that may continue.

There are some investors out there who would like to go ahead on yeild,

Say it was in a nice part of Queanbeyan.

 

[skater]

Ray, it's all realative. The question is, What is it worth to you?

Where I live, if we go back to, say 2003, an average unrenovated 3 bed house would sell for $250-$270k, if you added a flat to the house the selling price would be likely to rise substantially, as there was more rent comming in. Of course this was the height of the boom. I didn't buy any as they were hugely overpriced.

However now, you can get the same 3 bed house for around $190-$210 (although there are still some vendors asking for more, they are not selling). If you added a flat to the house, it will not change the value much at all. The difference is that there are not many investors in the market at the moment. For instance I bought one last year (3 bed, brick, with Granny Flat) for $196k.

If the house & location are what you would like to buy anyway (without the flats), then I would say make an offer, but don't go too far past what a house by itself in similar condition would sell for.

 

[Peter Parker]

Based on the weekly rent of $350pw....

How much would you pay for this old but sturdy 3br fibro house?

Similar houses in this North Queensland town go for $260K.

The difference is the rent......
Because It has 2 x 1 bedroom bedsits (council approved) in the backyard.

Rates = $3100 pa

So based on the rent mainly.... Just a rough estimate of what you would pay for it.

Those HUGE council rates would put me off. Unlike the principal owing, these go up by CPI, so they will become an increasing percentage of your holding costs.

Those rates are about triple what I'd consider 'normal' for a country town and quadruple those of a nice suburb in a capital city.

If trying to assess worth relative to rent, at least factor the rates into it, so it can be compared to other areas, eg:

$350pw x 48 = $16 800 pa rental income ($13 700 after rates)

Consider a 'normal' town with $1000 pa council rates.

For the same after rate income, you only need $14 700pa gross rental income, or $306pw.

$306pw for a house worth $260k is a gross yield of 5.6%. If you get 52 weeks occupancy it rises to 6.1%.

Neither are anything special for a country location, and unless there are some other advantages, it looks a very ordinary deal.

Peter

 

[skater]

Ray, Peter has made a good point about those rates. I overlooked those. Is the reason for the rates the fact that you have 3 residences on the one block? Or are the rates that much for all houses in this town? Check into it.

Different councils have different rules in regards to rates. For instance my own PPOR is a dual occupancy (2 x 3 bed houses) & I pay the same rates for the both of them as I do for other single homes in the area. But I know some councils will charge extra if there are other residences on the same block.

I also have a block of 4 strata titled flats which if owned by 4 different people, the rates would be over $1000 for each of us, but because I own the block, the council gives me a discount & I only pay around $1500.

 

[Ray Brown]

If the house & location are what you would like to buy anyway (without the flats), then I would say make an offer, but don't go too far past what a house by itself in similar condition would sell for.

The rates I quote are the total including water, garbage, etc. The buggers charge me 3 x pedestals for the 3 loos, 3 x garbage collection etc. Even though many single dwellings have 3 toilets these days.

Its a bit of a ripoff.

I allready own it.

 

[JIT]

Rental Reality

Aahh...the old "rental reality" pops up again! Makes me cringe everytime I hear it!

Rental reality has been discussed many times before. There are many Navra fans here, so I'll just make a brief comment. I don't mean to stir the pot here and side track this thread.

Valuing residential property by looking at rental yields doesn't make any sense to me.

Valuing commercial property based on rental yield though is a lot more sensible. This is a critical difference between the way residential and commercial properties are valued. Another term is "cap rates" or "capitilisation rates". Applying this logic though to residential property just doesn't fit.

I am just speculating here though, I don't really know where the inspiration for "rental reality" came from...!

GSJ

 

[Ray Brown]

Valuing residential property by looking at rental yields doesn't make any sense to me. GSJ

Hi GSJ,

well it makes sense to me. I have limited cash flow, I'm bumping up against serviceability all the time.

If there are two similar IPs to chose from, one providing 3%, the other 7%, I have to choose the higher yield - or I can't buy it.

If I can buy ten of the same, then I'm on to a good thing. The net purchase holding costs are zero or better, any capital growth is a bonus. And so far, these last three years have been very good to me. If there is no capital growth for 5 years, its not a big problem.

 

[willair]

Ray.B.
can i just ask a simple question what is the UCV on this property,and what land area are you talking,this property is near the Cairns CBD?
willair..

 

[MJK]

Ray,

This deal is not positive cashflow unless your paying only $175K for it, or there abouts, so you must be buying for capital growth ?

MJK

 

[Ray Brown]

land area 700m2

UCV about $80K from memory

I allready own it.

Atherton.

 

[Peter Parker]

I allready own it.

So based on the rent mainly.... Just a rough estimate of what you would pay for it.

Just reading between the lines, I think Ray's thinking about selling it and trying to get our opinion on what an investor would pay.

This might help him determine a reasonable selling price, although there are varying opinions about the applicability of using rents in value calculations.

I suspect that the high rates would drive investors away.

But there are potential buyers for whom it could be the bees knees, and you may be able to get a good price if you seek them out.

These include the couple with adult kids or parents living at home and the would-be owner occupier on a lowish income who could rent out the bedsits to help with the mortgage.

In relation to the latter, say the house is worth $260k. Borrow 90% so that's $234k. Mortgage payments are about $500pw.

Rent both bedsits out for $75pw each or $150pw for the pair. Assume these account for $1500pa apportioned rates, which is $30pw. Ignoring other costs, that's about $120pw extra, so let's say $100pw clear.

So they could cut their mortgage payments by about 20%, and if they do get an aged relative etc later on they've got some flexibility to help them.

That's your market, not an investor scared by the high rates.

Peter

 

[grubar30]

Valuing residential property by looking at rental yields doesn't make any sense to me.

Any?....at all?...not one incy wincy tiny bit?

 

[MichaelW]

I am just speculating here though, I don't really know where the inspiration for "rental reality" came from...!

GSJ

GSJ,

I won't take this thread off topic, but I'll explain for Ray's benefit how RR works and can be applied here.

It basically presumes that rental yields always return to a constant level so are the best indicator of fair value for property. When property prices boom then rents lag this boom so yields drop. When property prices stagnate then rents catch up and sometimes get ahead of the price. All RR does is tell you which part of the cycle you're buying that property in. You average the yields for the last 5 years to get the "mean" yield for the postcode, then compare this with today's yield. If the yield today is lower than the average then property prices have gone too far and now is not a good time to buy. If, however, your rental yield is higher than the average then property has been stagnating for a while and is likely to move up again to catch up to historic yield levels.

Its not mensa, and really only tells you what point in the cycle your buying. Remember, there's cycles within cycles so it can help as it is postcode specific. But its all predicated on you believing that yields normalise over time and return to their mean levels. If this pans out then its useful.

So for Ray, I'd say what's the historic yield for this postcode? Use the current rent and extrapolate the price based on the historic yields. So, maybe this is 7% today, but if this postcode typically returns 10% then you'd be looking to pay less than the asking price.

Quick calculation:

$260K asking
$350pw likely rent
Assume 10% average long-term historic yield.
Then $350pw = $18,200pa X 100 / 10% = $182K rental reality value.

Or, this property is worth no more than $182K based on the typical yield in this postcode. Prices might keep going up for "other" reasons, but then that's just another part of the equation. RR assumes "everything else being equal".

Cheers,
Michael.

 

[JIT]

OK Michael, thanks for that post, that does make a little bit of sense in terms of helping you get an idea of where you are in the cycle, if you are not sure.

GSJ.