Cashflow positive residential real estate that is.
We just executed a 2 year leasing deal for our former PPoR. We purchased it for 96K bought back in early '98 and it's been a cashflow drain ever since. Whilst we lived there initially, it caused grief trying to get it up to spec. We thought we got a bargain because it was so skanky and neglected. The people we bought it off paid 108K for it back in '94 when it was in tiptop condition, and then proceeded to trash it. We came along and picked it up in it's full trashed glory.....as you do when you're young - right ?? No 2 bedroom executive apartment with all the flash gear for us.
It had good bones, (land and structural strength) but looked dreadful. It took 2 years of chipping away on most weekends to put it right, something like what you see below.
When we moved out in 2001, we managed to lease it out for $ 180 per week, but with the increase in outgoings during the time (especially the added burden of Land Tax now that it wasn't our PPoR) the place was cashflow negative.
The only consolation was the increase in capital growth due to it being on a triplex block of dirt. We held on and put up with the whining and whinging of several tenants who proceeded to ignore the rent and trash the place again. Joy. Part of the game apparently.
We finally secured a good tenant back in '04 and she's been there ever since. Supposedly a battler - but better "stuff" than what we own.
Rental was $ 180 p.w. for the first 3 years, and we managed to squeeze $ 187 p.w. out of her last year. Did anyone notice we were not able to secure a rental increase in over 6 years ?? Not through lack of trying of course, but they simply wouldn't pay....
When I say good, I mean the best of our residential tenants, that is - she doesn't trash the place and actually looks after it and has made it her 'home', which we fully encourage.
The property has cost us to own all up including everything, on average $ 267 p.w., over the past 4 years. So we've been subsidising her to the tune of $ 87 per week for the past 4 years, a total of 18K.
Anyway, her 2 year Lease is coming to an end, and therefore I sent her note last week saying that if she wished to stay, the rent was going to jump up to $ 300 p.w. as the rent was ridiculously to low. May seem harsh and too bigger jump, but it was market. We had a bit of an argy bargy, and she offered to pay $ 250 p.w. for the first year and $ 280 p.w. for the second year. The intent to stay was clear.
We finally agreed yesterday and signed off on a 2 year Lease at a fixed rate of $ 280 p.w. for the full term.
For the very first time in our investing career, we shall own a residential property and it won't cost us anything to hold. At $ 13 p.w. free cashflow - probably only $ 9 p.w. after I pay tax on the profit, it should only take 38 years to square up the cashflow deficit endured so far.
Of course, the real prize "the big picture" that people refer to, is the cap gains made on the dirt, which has gone from 96K up to 600K. This has been leveraged into more productive ventures, so all is well I suppose, but it is nice to have the property off my back finally.
In terms of gross yield, it depends what you relate it back to, but compared to the initial purchase price, it was doing 10.1% and is now signed up to do 15.1%.
Of course, to any other poor sod who bought the place off me for 600K the place was doing 1.6% and has now gone up to 2.4%. At a 100% loan at 8% plus outgoings , it'll cost you about $ 1,000 - $ 280 = $ 720 p.w. Any takers ??
Due to this imbalance, people often ask me why I don't smack the old place down and build three brand new townhouses. We investigated this option, but after paying the 11% capital contributions tax plus all the other fees the council imposes, plus obviously the building cost, plus 2 years of building headache and headworks impositions, I gave up in the end.
Having to listen and tend to the private needs and wishes of one tenant is bad enough, the thought of taking out another big loan only to listen to three of them clicking their fingers and whinge at me makes me cringe. Of course, I could unload all three and be part of the toffy developing set, but the amount of CGT payable doesn't appeal either. I play this game for me, not me and the ATO.
Anyway, I write this spiel as evidence when people say, "Don't worry about cashflow, if you hang on for a bit, the rents naturally increase and soon it'll be cashflow positive." Well, that is true to a point, but damn it's a long time to wait, and the $ 9 p.w. after tax in my pocket ain't exactly buying my freedom. Mr Land Tax just needs to stretch his wings a bit and that'll scoop that up in a flash.
We just executed a 2 year leasing deal for our former PPoR. We purchased it for 96K bought back in early '98 and it's been a cashflow drain ever since. Whilst we lived there initially, it caused grief trying to get it up to spec. We thought we got a bargain because it was so skanky and neglected. The people we bought it off paid 108K for it back in '94 when it was in tiptop condition, and then proceeded to trash it. We came along and picked it up in it's full trashed glory.....as you do when you're young - right ?? No 2 bedroom executive apartment with all the flash gear for us.
It had good bones, (land and structural strength) but looked dreadful. It took 2 years of chipping away on most weekends to put it right, something like what you see below.
When we moved out in 2001, we managed to lease it out for $ 180 per week, but with the increase in outgoings during the time (especially the added burden of Land Tax now that it wasn't our PPoR) the place was cashflow negative.
The only consolation was the increase in capital growth due to it being on a triplex block of dirt. We held on and put up with the whining and whinging of several tenants who proceeded to ignore the rent and trash the place again. Joy. Part of the game apparently.
We finally secured a good tenant back in '04 and she's been there ever since. Supposedly a battler - but better "stuff" than what we own.
Rental was $ 180 p.w. for the first 3 years, and we managed to squeeze $ 187 p.w. out of her last year. Did anyone notice we were not able to secure a rental increase in over 6 years ?? Not through lack of trying of course, but they simply wouldn't pay....
When I say good, I mean the best of our residential tenants, that is - she doesn't trash the place and actually looks after it and has made it her 'home', which we fully encourage.
The property has cost us to own all up including everything, on average $ 267 p.w., over the past 4 years. So we've been subsidising her to the tune of $ 87 per week for the past 4 years, a total of 18K.
Anyway, her 2 year Lease is coming to an end, and therefore I sent her note last week saying that if she wished to stay, the rent was going to jump up to $ 300 p.w. as the rent was ridiculously to low. May seem harsh and too bigger jump, but it was market. We had a bit of an argy bargy, and she offered to pay $ 250 p.w. for the first year and $ 280 p.w. for the second year. The intent to stay was clear.
We finally agreed yesterday and signed off on a 2 year Lease at a fixed rate of $ 280 p.w. for the full term.
For the very first time in our investing career, we shall own a residential property and it won't cost us anything to hold. At $ 13 p.w. free cashflow - probably only $ 9 p.w. after I pay tax on the profit, it should only take 38 years to square up the cashflow deficit endured so far.
Of course, the real prize "the big picture" that people refer to, is the cap gains made on the dirt, which has gone from 96K up to 600K. This has been leveraged into more productive ventures, so all is well I suppose, but it is nice to have the property off my back finally.
In terms of gross yield, it depends what you relate it back to, but compared to the initial purchase price, it was doing 10.1% and is now signed up to do 15.1%.
Of course, to any other poor sod who bought the place off me for 600K the place was doing 1.6% and has now gone up to 2.4%. At a 100% loan at 8% plus outgoings , it'll cost you about $ 1,000 - $ 280 = $ 720 p.w. Any takers ??
Due to this imbalance, people often ask me why I don't smack the old place down and build three brand new townhouses. We investigated this option, but after paying the 11% capital contributions tax plus all the other fees the council imposes, plus obviously the building cost, plus 2 years of building headache and headworks impositions, I gave up in the end.
Having to listen and tend to the private needs and wishes of one tenant is bad enough, the thought of taking out another big loan only to listen to three of them clicking their fingers and whinge at me makes me cringe. Of course, I could unload all three and be part of the toffy developing set, but the amount of CGT payable doesn't appeal either. I play this game for me, not me and the ATO.
Anyway, I write this spiel as evidence when people say, "Don't worry about cashflow, if you hang on for a bit, the rents naturally increase and soon it'll be cashflow positive." Well, that is true to a point, but damn it's a long time to wait, and the $ 9 p.w. after tax in my pocket ain't exactly buying my freedom. Mr Land Tax just needs to stretch his wings a bit and that'll scoop that up in a flash.
