Which unit would you buy?.. Does quality matter?

[jmillar]

Do you consider the quality of the property when purchasing? For example, if you have an opportunity to buy 1 of 2 properties:

#1 is a small 1970's unit for 7.2% yield and $10k BMV in a neglected complex full of tenants
#2 is 1990's unit providing 6.9% yield at market value but is within a nice complex in a nicer part of town with a high percentage of owner occupiers

So which one do you buy if you want growth?

While the numbers are more favourable on Prop #1, would Prop #2 outperform it long term with regards to rental return, capital gains and ease of revaluation?

I know this all depends on the individual circumstance, but do you take quality into consideration when doing numbers?

 

[Rolf Latham]

no 2 miht have some depreciation left too

ta
rolf

 

[see_change]

If there isn't a major difference in return ( that isn't a significant difference 7 v 10 % I'd think about it ) I'd go for the second every day .

Cliff

 

[monalisa]

I would also go for the second one. We have so far focussed on properties <25 years old - depreciation has helped out with cashflow.

 

[mrmonopoly]

Without all the other information it is difficult to give a valid answer, however based on the limited information you have provided it is likely that the cash flow benefits from the left over depreciation of the 90's property would override the .3% difference in gross yield.

The fact that it is also larger, in a nicer complex (although nicer can mean higher strata/lower NET yield), in a better area and with a higher percentage of owner occupiers suggests it is more likely to attract higher demand which in turn will lead to CG.

 

[jmillar]

Thanks for the helpful replies, this suggests there is more to analysing a deal than just looking at the basic numbers.

I have never calculated how much difference depreciation can make to the cash flow as I have considered this to be a 'bonus' but maybe it's worth running some numbers on this..

 

[jaspn]

What is a property's age limit for depreciation?

 

[monalisa]

What is a property's age limit for depreciation?

Capital works (building allowance) came in some time September 1987 - so you will have building depreciation for properties built after Sept 1987 - this is the bigger chunk of the claim anyway.

 

[DaveM]

If all you care about is pure return/cashflow then #1.

For tenant quality, CG and overall ease of ownership, I would go #2 every day of the week

 

[strongy1986]

Jmiillar

The capital allowance for buildings is 2.5% a year

So if the cost was 100k (to builder) then you will get a 2500 deduction every year until 40 years after construction date. If your on a 30% tax rate then that would be a bonus $750 for cash flow , not bad really

I know what you mean with the depreciation is a bonus thing but if you are going to purchase a unit or apartment then I would consider it very important

Land then not so much

What's your strategy?
It appears to be cash flow?

Ours is to purchase about 2.3 worth of property in 2 stages (savings constraint)
Both stages are the same and the asset mix is as follows

Subdividae block in capital city for around 400k , 5% rental yield
Subdividable block in a large regional for around 250, over 6% yield
Any house in cap or large regional for 250 with yield over 7%
Anything in far flung locations with yield over 10%, all up costs 250k

That gives a yield of about 6.8% which would be about neutral cash low at current rates
Plan is to do the above mix twice and then in ten years or whenever the time is right subdivide the 4 blocks. Hopefully they are worth double when this occurs and that will pay off a substantial chunk of loans. Then just wait it out until loans are paid off. Should be around 70k cash flow positive after selling off blocks if all go's to plan (keeping part of block with house on it)

So basically why i wrote that was to say that you don't need to purchase all your properties at that 7% cash flow level. You can split it up So your overall portfolio is at that yield.
The pros are that you can subdivide and still keep your income stream for the property
The cons are that we will be exposed to some riskier cash flow properties!


No advice intended!

 

[jmillar]

Ben,

Thanks a lot for your info. A friend of mine just told me their townhouses and units depreciate by $3-5k/yr but even if we use $2500 pa as a guide for a basic 2bdr unit, thus $750 in my pocket at 30% tax. This equates to $14.40/week or a 0.34% bonus yield based on $220k PP. Therefore, this brings a 6.8% yield prop up to almost 7.2% yield, which is something I certainly never considered!

Re: my goals and structure of purchases, at this stage I'm purchasing properties which will allow me to recycle equity so that I can continue to purchase property in the short term. They also need to be neutrally geared (or negative by no more than $25/week, if this is justified by its equity position). I may look at buying houses on land, commercial property, high yielding regional IPs etc later on, but stage one of my strategy is to purchase properties that fit the above description. I'm only 21 so I'd like to get at least 10 of these by the time I'm 26 and then I can buy different stuff.

Thanks again for the advice re: depreciation.

EDIT: Mistake in calculations.

 

[mflying]

Do you consider the quality of the property when purchasing? For example, if you have an opportunity to buy 1 of 2 properties:

#1 is a small 1970's unit for 7.2% yield and $10k BMV in a neglected complex full of tenants
#2 is 1990's unit providing 6.9% yield at market value but is within a nice complex in a nicer part of town with a high percentage of owner occupiers

So which one do you buy if you want growth?

While the numbers are more favourable on Prop #1, would Prop #2 outperform it long term with regards to rental return, capital gains and ease of revaluation?

I know this all depends on the individual circumstance, but do you take quality into consideration when doing numbers?

what is a purchase price??

how is yield calculated??

I calculate my yield at 105% purchase cost + 2% above current interest rate to be on a safer side (Any depreciation is a bonus)

 

[jmillar]

mflying, it was a basic hypothetical example mate.

PS there are a lot of chocolate lovers on this forum..

 

[strongy1986]

I wish I had bought something when i was 21. I missed a Massive boom! At that stage though i had only ever thought about buying a house as a ppor and was pretty much resigned to the fact that houses were too expensive

 

[westminster]

I would choose #2 providing:

1. location (ie comparable street, distance to city etc) was even
2. strata fees even
3. insurance fees even (can be a lot higher for older complexes)


I would choose #2 because
1. assumption of less maintenance due to age
2. assumption of easier to rent as less available in complex due to mainly owner occupiers
3. assumption of good body corporate due to high number of owner occupiers
4. assumption of depreciation available
5. assumption of better tenants being attracted to nicer complex