What would you do in my shoes? (Need help with analysis for first time investor)

[KT_Blues]

Hi All,
I decided to try myself in real estate investing and after loads of reading and research bought a property that I thought was doing well. Now, 1,5 years later my review of the property left me at crossroads. I would like to know what would you do with it if you were me.
Here is high level figures, let me know if you need more information.
Purchased: 305K (3 bedroom old house on 600 sq.m leveled block)
Location: Point Clair NSW ? the major road
Rented out: 370 p/w
Costs: loan + rates & management fees, water & other expenses = $21,052
Income from property: $16,797
Losses: $4,256 or $355 per month
That gives me: 5,5% rental yield
Current property assessment from managing agent 340-360K

Would you sell it or keep it?
More details:
- Property is P&I, so there is potential to reduce expenses by going principal only
- Managing agent takes 10% to rent out property
- $10 of each weekly rental payment goes toward managing loan and trees

 

[mumbai]

Hi All,
I decided to try myself in real estate investing and after loads of reading and research bought a property that I thought was doing well. Now, 1,5 years later my review of the property left me at crossroads. I would like to know what would you do with it if you were me.
Here is high level figures, let me know if you need more information.
Purchased: 305K (3 bedroom old house on 600 sq.m leveled block)
Location: Point Clair NSW ? the major road
Rented out: 370 p/w
Costs: loan + rates & management fees, water & other expenses = $21,052
Income from property: $16,797
Losses: $4,256 or $355 per month
That gives me: 5,5% rental yield
Current property assessment from managing agent 340-360K

Would you sell it or keep it?

Keep it. Seems like the property is doing alright.

More details:
- Property is P&I, so there is potential to reduce expenses by going principal only
- Managing agent takes 10% to rent out property
- $10 of each weekly rental payment goes toward managing loan and trees

what does 10% to rent out mean? you mean the managing fee or once leasing fee?

what does managing loan and trees involve and why so much weekly?

 

[KT_Blues]

Keep it. Seems like the property is doing alright.

Thank you for advice. I wouldn't be able to buy many properties if they cost me much to maintain. Is this how investment in properties usually works?

what does 10% to rent out mean? you mean the managing fee or once leasing fee?

I meant ongoing managing fees from the real estate

what does managing loan and trees involve and why so much weekly?

its loan mowing once a month and removing dead tree branches plus cleaning gutters three times a year

 

[Bantam Roosta]

Hi All,
I decided to try myself in real estate investing and after loads of reading and research bought a property that I thought was doing well. Now, 1,5 years later my review of the property left me at crossroads. I would like to know what would you do with it if you were me.
Here is high level figures, let me know if you need more information.
Purchased: 305K (3 bedroom old house on 600 sq.m leveled block)
Location: Point Clair NSW ? the major road
Rented out: 370 p/w
Costs: loan + rates & management fees, water & other expenses = $21,052
Income from property: $16,797
Losses: $4,256 or $355 per month
That gives me: 5,5% rental yield
Current property assessment from managing agent 340-360K

Would you sell it or keep it?
More details:
- Property is P&I, so there is potential to reduce expenses by going principal only
- Managing agent takes 10% to rent out property
- $10 of each weekly rental payment goes toward managing loan and trees

The details don't add up. Rented at $370 p/w = $19,240. After playing with your figures, I think you have started with $370, taken off the 10% PM fees, then taken off the $10 loan and trees payment (whatever this is), which would give you the income figure you have provided, but that is misleading. Income is income. Expenses are expenses. You have also included management fees in your costs. Which is it?

Go IO and you should be close to +ve.

In 1.5 years it has increased in value by 15% and should be near enough to +ve. Assuming you see no issues with the location you have purchased in (I have no idea on this), then I cannot see any reason why you would sell.

BR

 

[starter]

Is 10% management normal for the area? Can you negotiate it down a bit? Any chance of passing the maintenance costs lawn and trees to the tenant? Also I would definitely go interest only. Those things would help with getting the holding costs down.

Property sounds like it's performing reasonably well.

 

[jackbak]

Hi KT, so you're getting approx 6% yield and the CG has been between 12-18% in 18 months. Can you explain in more detail why you are considering selling?

 

[HD_ACE]

so there is potential to reduce expenses by going principal only

Which bank offers this? I will be switching over for sure

 

[Peter_Tersteeg]

Despite what everyone wants, most properties in Australia are negative geared when they're first purchased. You've suggested your rental yield is 5.5% which would be considered quite good in many areas; it's above average for Point Clair (according to Residex).

It's costing you $355 per month. You've head the property for 18 months and it's increased by possibly as much as 20% in that time. I don't think you've done to badly here.

Keep in mind that the rental income will increase over time. 10 years from now you'll probably look back and be very happy about keeping this property.

Also keep in mind that very few people purchase many multiple properties in a short time frame. Most start off with 1 every year or two as their affordability allows.

 

[alexlee]

Also the 4,256 loss is before tax. After tax (assuming 30% tax rate), it's 2,979
Assuming there is 3k of depreciation a year, the net loss is 2k a year after tax.

It's gone up 15% (about 50k) in 18 months.

What else do you want?

 

[ZachAnSel]

Hi All,
I decided to try myself in real estate investing and after loads of reading and research bought a property that I thought was doing well. Now, 1,5 years later my review of the property left me at crossroads. I would like to know what would you do with it if you were me.
Here is high level figures, let me know if you need more information.
Purchased: 305K (3 bedroom old house on 600 sq.m leveled block)
Location: Point Clair NSW ? the major road
Rented out: 370 p/w
Costs: loan + rates & management fees, water & other expenses = $21,052
Income from property: $16,797
Losses: $4,256 or $355 per month
That gives me: 5,5% rental yield
Current property assessment from managing agent 340-360K

Would you sell it or keep it?
More details:
- Property is P&I, so there is potential to reduce expenses by going principal only
- Managing agent takes 10% to rent out property
- $10 of each weekly rental payment goes toward managing loan and trees

I'm not sure what is your current cash flow level, do you have any issue to hold it?

If I dont have any issue from cash flow perspective, then I will hold it.

On top of that, I will seek refinance possibility to get 2 things :
1. Draw equity out to invest
2. Seek if another lender can give me better rates

 

[mumbai]

I meant ongoing managing fees from the real estate

I am not sure about your suburb, but 10% seems too high to me. I would shop around or re-negotiate a better deal with the PM

And, I would change to a IO immediately.

 

[srini]

Hi KT

As others have said...

* Your Property Management costs seems high, call a few PMs in the area and find out what they'll charge and see if your cost is not too high
* I run a free website called NumbrCrunchr (www.numbrcrunchr.com) that will project out the income/expenses for you. It may help to understand your cashflow over time to work out whether you want to keep or sell
* Based on your numbers, it is costing you around $80 per week. Is this something you can afford? As someone else mentioned, first properties are -ve geared for most people. So, you are not alone.

If I were you, I wouldn't sell unless I'm completely strapped for cash and have no other option but to sell. 5.5 to 6% is a reasonable return considering the capital growth you've had.

 

[vaughan]

... its loan mowing...

I like that. Jim's Mowing -> Jims Mortgages?

 

[Corey Batt]

It sounds like you're counting the P&I repayment as loan costs per month also?

Paying down principle shouldn't be factored into the profit and loss equation, as it's by your own choice, not a specific factor of the investment.

As a couple have touched on, you've had reasonable appreciation on the property with a yield you can't complain about. It sounds like a well rounded investment.

 

[KT_Blues]

The details don't add up. Rented at $370 p/w = $19,240. After playing with your figures, I think you have started with $370, taken off the 10% PM fees, then taken off the $10 loan and trees payment (whatever this is), which would give you the income figure you have provided, but that is misleading. Income is income. Expenses are expenses. You have also included management fees in your costs. Which is it?

Go IO and you should be close to +ve.

In 1.5 years it has increased in value by 15% and should be near enough to +ve. Assuming you see no issues with the location you have purchased in (I have no idea on this), then I cannot see any reason why you would sell.

BR

Yes, you are right. The numbers did not add up! I have double counted 10% management fees.
I also did not calculate rental yield correctly.
I've attached updated calculations. Now figures look better.

I've also projected, based on recommendations in this thread, that it would only cost me $8 a month to keep this property if I reduce monthly RE mgmt fees by $7 & switch to IO. Next year it might be cash neutral property if rent will go up!

 

[superAndrew]

Average yield for Point Clare is around 4.5%. So you are doing better than average.

12 month capital growth is 14.1%. However 5 year growth has only been 20.4% in Point Clare. So most of the growth happened in the last 12 months.

Point Clare vacancy rate is under 1%. So there is a demand for rentals.

Would I have invested in this suburb and property? Maybe not.

Would I sell? Not without exploring any other options to increase your cash flow so the property doesn't cost you to hold.

For your next investment I would focus on positive/neutral geared properties.

All the best

Andrew

 

[KT_Blues]

Is 10% management normal for the area? Can you negotiate it down a bit? Any chance of passing the maintenance costs lawn and trees to the tenant? Also I would definitely go interest only. Those things would help with getting the holding costs down.

Property sounds like it's performing reasonably well.

Many thanks for your advice. I will shop around. I looked at the agency statement and immediately noticed savings - they are charging $5 postage. I get all my correspondence via email which they than print and send me via snail mail. I will ask them to stop this asap.

 

[KT_Blues]

Despite what everyone wants, most properties in Australia are negative geared when they're first purchased. You've suggested your rental yield is 5.5% which would be considered quite good in many areas; it's above average for Point Clair (according to Residex).

It's costing you $355 per month. You've head the property for 18 months and it's increased by possibly as much as 20% in that time. I don't think you've done to badly here.

Keep in mind that the rental income will increase over time. 10 years from now you'll probably look back and be very happy about keeping this property.

Also keep in mind that very few people purchase many multiple properties in a short time frame. Most start off with 1 every year or two as their affordability allows.

Hi Peter,
Somehow no one ever admits to having negatively geared property, so I thought I was alone and did not do my research right. I am glad to see that this is not the case.
I will check out Residex.

 

[KT_Blues]

Also the 4,256 loss is before tax. After tax (assuming 30% tax rate), it's 2,979
Assuming there is 3k of depreciation a year, the net loss is 2k a year after tax.

Interesting topic. I haven't worked this financial year, I am on maternity leave, so I don't think I can use negative gearing to my advantage.

It's gone up 15% (about 50k) in 18 months.

What else do you want?

Like most people I would like not to be negatively geared. When I done the numbers last night I got a bit of a shock, so my first thought was to sell the property because it went up in price.

 

[KT_Blues]

Average yield for Point Clare is around 4.5%. So you are doing better than average.

12 month capital growth is 14.1%. However 5 year growth has only been 20.4% in Point Clare. So most of the growth happened in the last 12 months.

Point Clare vacancy rate is under 1%. So there is a demand for rentals.

Would I have invested in this suburb and property? Maybe not.

Would I sell? Not without exploring any other options to increase your cash flow so the property doesn't cost you to hold.

For your next investment I would focus on positive/neutral geared properties.

All the best

Andrew

Many thanks Andrew for that fantastic stats!
You see, my original strategy was to get neutrally geared property. It just did not work out for reasons I now clearly understand thanks to everyone in this thread!