Hi Thommo
I really appreciate your feedback on my post. I didn’t think it would stir up such feelings of disapprovement and dismay, I deeply am sorry for that.
The message was simply intended to talk through the reasons why I "personally" would not have pursued this deal. Although I did point out what the cashflow outcome was at a purchase price of $410,000 for Iggy's purchaser, I really didn’t and wouldn’t comment about Iggy's purchasers decision as it would depend entirely on his/her financial situation and current portfolio and cashflow commitments and intended purpose of this investment.
I did point out that there could have been development potential, chance to increase rents, high cashflow, untapped market, renovation, etc as well which would have been a motivation to buy...but on cashflow alone, I would have discounted this purchase. There are clearly a number of different options available to the new purchaser, which can be implemented either to improve the bottom line (cashflow impact) or increase capital outcomes, the options are endless really depending on available time, capital, and cashflow.
I presented the figures, which we knew about and applied the assumptions that I would use to assess the deal. I personally assess all my "potential" deals against these criteria, but as an investor I am mainly investing in more affordable markets like Adelaide, and other regional areas around Australia so this approach may not be suitable or comparable for all markets. My approach "generally" is to find 3 cashflow properties for every 1 negative to have 4 properties supporting themselves. I also only have 7 properties though, so am really just a beginner compared to others on the forum that are more experienced investors like yourself.
Using your suggested rentals based on your research of $140 per week per unit, I also get neutral cashflow at a purchase price of $450,000. When compared to the actual purchase price of $410,000 the cashflow situation appears to be:
Purchase Price = $410,000
Deposit = $102,500
Loan = $328,000
Rent = 5 * 2BR @ $140 = $700
Costs per week @ 30% = $(210)
Loan per week @ 7.07% = $(446)
Net Profit per week = $44
Gross Yield = 8.5%
Net Yield = 0.5%
ROI Yr1 = 48%
Therefore total Return on investment will take approximately 2 years.
I would be reluctant to label my calculations "dodgy" like you have pointed out, just because I used the current rents that are being generated from the units rather than fair market value (based on the further research you have conducted). My analysis was strictly limited to a financial analysis only, I did not look up the local Townsville papers to confirm rents, nor did I drive by and take a look at the property.
The point of my original post, was Acey pointed out that the deal did not sound very good, and Iggy inquired whether it was a bad deal for the buyer or the seller, and I felt that writing down the reasons why I "personally" would not pursue the deal, would be beneficial to others reading this forum, and I had some spare time on my hands yesterday
Putting aside whether it is a good or bad deal for Iggy's counterpart, I was also trying to point out that for Iggy, he needed the money so he needed to get out. He could have renovated, increased rents, sold off individually also, but chose not to due to time, capital and cashflow restrictions. Not all investors would be able to carry the load of a cashflow negative property and hence could get into trouble quite quickly especially if rents could not be increased to $140 or the renovations costs were significant. I am happy for Iggy and the new purchaser that between them they have reached a win-win outcome. But I would still have not pursued this deal due to the ROI and Cashflow based on numbers provided.
As I work full time and invest part time, I have to evaluate several (hundred) properties to determine ones that I will seriously pursue. I don’t have the time to chase all deals nor confirm the validity of all purchase prices or market rents. When looking at properties (around Australia and NZ) I cant just drive by all deals or read the local paper of all deals, I hope that you can appreciate that this is not an option for all.
Your comment that the analysis that I have conducted is damning on RE generally, a stance of which you do not disapprove, I very much disagree with this part of your post. I would like to assure you that I am very positive in terms of RE as a viable investment in light of current price/earnings and am actively searching for good deals to pursue further. I am currently searching for a block of flats (preferably 8 plus) in Cairns, so am evaluating these kinds of deals quite regularly.
There has to be a way to filter out some deals, and the method that I have described (which you have also used) works well for me most of the time, and I thought that I would share that with the forum.
Your comment that you have your reputation to maintain, I too would be disappointed if my reputation became “Corsa provides dodgy numbers” and “Corsa provided damning advice on Real Estate as an investment”.
Thanks again for your post Thommo, I really appreciate your feedback on my post and hope that my post clarifying this position has helped you further understand my point of view.
Best Wishes
Corsa
