Wish I had more deposits for beach bargains

[Propertunity]

We have come across sooooooooooo many bargains in the last 3 months, I just wish I had some more 20% deposits to take advantage of them. We get across these kinds of deals on average about once every 3 - 4 weeks but we scour the market daily.

One was in Copacabana - a 5 brm double storey house with a swimming pool. No ocean views but only a 250m level walk to the patrolled surf beach. Sure it had bad presentation and needed $20K spent on it.
Listed @ $565K and no takers (probably because of the presentation). REA calls and says the owners (divorcing) will take $450K for a quick sale. Land value is over $500K here for goodness sake. Even if you knocked the house down and re-built for $250K, you cannot buy 250m from the beach for $700K - more like $850K.

Another was an ocean front reserve property at The Entrance with 2 houses on it. An old 3brm fibro with polished wood floors and a 2brm manfactured home on it. Owners accepted an offer of $540K. The houses could rent for $300 + $220 = $520 per week. So almost a 5% yield - nothing normally to get excited about but on the beachfront you'd only expect maybe 2 - 3% yield which is the trade-off for high CG. Again if you rebuilt for $260K your costs would be $800K for H&L. End value for brand new on the beach - closer to $1M+

Up until this year I have always been an advocate of buy & never sell......but I'm seriously considering selling a couple of IPs to get cashed up for opportunities like this. The struggle I'm having is that I don't have any dogs in my portfolio that I want to shoot - they are all tenanted and past CG has been fine and current yields are fantastic at over 7%.

What to do, what to do ........

 

[Rolf Latham]

Lenders Mortgage Insurance ?

ta
rolf

 

[Propertunity]

Lenders Mortgage Insurance ?

Yeah Rolf I guess I could do some MI but the last lot cost me nearly $10K and I got a bit turned off the idea
Admittedly this was a 95% LVR lo-doc a couple of years ago when they were around.

 

[Rolf Latham]

Hiya

If the cost of interest of the LMI is a real issue, then maybe those deals arent as appealing.

If the following applies, then the LMI premium is simply a cost of business no less than Stamps are.


1. Does the deal make sense at 90 %, can I service it ?
2. Am I borrowing from a balance sheet lender ?
3. Is my income secure ?
4. Do I expect strong capital gain to offset the costs ?

Lots of is there, but in general, if the deal works at 80, it will work at 90 %.

I know many will disagree with me, and indeed feel that any gearing above 50 % is an issue. Thats ok, every person has a different risk profile, and that view has to be respected.

ta
rolf

 

[Propertunity]

If the cost of interest of the LMI is a real issue, then maybe those deals arent as appealing.
If the following applies, then the LMI premium is simply a cost of business no less than Stamps are.

No, I agree with you Rolf, I look upon LMI as simply the cost of doing business also.

1. Does the deal make sense at 90 %, can I service it ?

Well really the deal has to make sense to me at 106% because like most PI's I'd borrow the deposit and costs off another IP's equity anyway.

2. Am I borrowing from a balance sheet lender ?

Ahhh yes, this was/is the issue with those of us with some non-bank loans like mobius and others. (in the words of Basil Fawlty, B@$T@RDS!)

3. Is my income secure ?

Who knows? We may actually be kidding ourselves. It is fine for those of us who are self-employed but my Son-IL just got made redundant from a very secure job. His large company got merged with an even larger company and he was surplus to requirements. Who'd a thunk it?

4. Do I expect strong capital gain to offset the costs ?

Again, yes we expect strong CG from the beach areas 1 hour from Sydney but 'market sentiment' will be a strong factor in the immediate term I expect. However, I think a longer range view would instil confidence that RE always returns to trend.

I know many will disagree with me, and indeed feel that any gearing above 50 % is an issue. Thats ok, every person has a different risk profile, and that view has to be respected.

Obviously in my own case, I have a reasonable appetite for risk - I have 2 x 95% LVR lo-docs amongst a much larger portfolio of only 80% LVR's - but still much higher than the conservative 50% figure you mention.

Thanks for giving me some food for thought Rolf. Talk soon.

 

[asdf]

The problem with beachside is the cash flow. It will take a massive chunk out of your portfolio to hold it up. Plus factor in the wear and tear also. Those $2-$3k a week places will be reducing their rates 30-50%, vacancy will increase and its going to trickle down to the mid end too. But you're right many beach side in NSW looking VERY cheap at the moment.

 

[Propertunity]

Those $2-$3k a week places will be reducing their rates 30-50%, vacancy will increase and its going to trickle down to the mid end too.

Hi asdf,

Are you saying that you think the normal holiday letting figures of $2-3K per week (admittedly you only get that for maybe 8 weeks of the year) will fall 30-50%? Because if so - I have not seen it. REA's report almost full vacancy for the last lot of holidays as ppl stayed in Aust. to holiday - their staycation as some put it.

 

[want2bewealthy]

Wow..

You're tempting me to sell one, I have great faith in the beachside properties as they just grow so quick, especially if you can create 50k profit from the start.
if worst comes to worst and times are tough for servicing the shortfall, just take some equity, tax deductible funding and you keep your cash.

Its very tempting.

 

[Propertunity]

Its very tempting.

Now don't be greedy. I thought you just purchased in Frankston?

 

[want2bewealthy]

Now don't be greedy. I thought you just purchased in Frankston?

Yea I did but you can have your cake and eat it too

 

[Propertunity]

Yea I did but you can have your cake and eat it too

Ok Marie Antoinette........PM me if you can't resist temptation lol. I suppose there are enough good deals to share around - and I can't buy them all

 

[atti]

i know this comment wouldnt make you happy, but have you thought about a buffer if rent drops ?? i wouldnt call a 80% loan on a house in a slowing down slumping economy a bargain ... just a thought, as you probaly know i am predicting a storm ahead of us.

 

[Propertunity]

atti, I don't think the LVR has a lot to do with the possible cheap buy price of an IP by the beach. If the IP is worth $550K and you can buy it for $450K then you are effectively locking in $100K of equity ..........and to my mind that is a bargain.

Servicing the debt is another issue altogether.

Yes, I know you are

predicting a storm ahead of us.

but I think that has more to do with your current view of the world as stated in another thread:

but i am unemployed maybe for long term (very badly broken wrist) from accident.i am looking for other options to make me money and support me living for long term.

Others in employment would perhaps see this time as a blip on the CG chart and take massive action to capitalise on any bargain buys in order to set themselves up to profit from the next boom to come (whenever that may be).

 

[evand]

Isn't the house 'worth' $450k?

It might have been worth $550k 2 years ago but it might have been worth $350k 5 years ago.

And it will probably be worth $400k in 6 months to a year. So possibly not quite a bargain.

If the IP is worth $550K and you can buy it for $450K then you are effectively locking in $100K of equity ..........and to my mind that is a bargain.

 

[asdf]

Hi asdf,

Are you saying that you think the normal holiday letting figures of $2-3K per week (admittedly you only get that for maybe 8 weeks of the year) will fall 30-50%? Because if so - I have not seen it. REA's report almost full vacancy for the last lot of holidays as ppl stayed in Aust. to holiday - their staycation as some put it.

Yeah I reckon theres a high likelihood that they will going forward. Even holidaying in Australia costs money. How many families can shell out $3000 a week to go away in the peak periods. Maybe the $100-$150 a night caravan or camping trips will take over. And on 8 week holiday rental only with 15% PM fees, its not going to be sustainable. If you want to then use it personally also, it no longer becomes an investment play. I think cash will still be king over the next couple years. But hey, if I had the cash, I'd buy one. Sounds like a bargain.

 

[Propertunity]

Isn't the house 'worth' $450k?

It might have been worth $550k 2 years ago but it might have been worth $350k 5 years ago.

And it will probably be worth $400k in 6 months to a year. So possibly not quite a bargain.

Perhaps I should more accurately have said 'market value' in lieu of 'worth'.
Bearing in mind that the 'market value' of a property is the price it could be expected to realise if it was sold on the open market on a particular date, by a willing but not anxious seller, to a willing but not anxious buyer, in an arm's length transaction.

And before we get bogged down by possible interpretations of 'market value', the definition I am using is the legal one referred to as the "willing buyer willing seller theory" as determined by the High Court of Australia in "Spencer Vs The Commonwealth".

On that basis then, the (proposed sale) would be well under market value because the vendors are anxious sellers.

 

[evand]

That's all pretty complex and i know the definition but don't worry about that stuff.

I suppose the thing is they might be anxious but it hasn't sold yet.

Can i ask if you are an ex RE agent?

On that basis then, the (proposed sale) would be well under market value because the vendors are anxious sellers.

 

[Propertunity]

That's all pretty complex ....

Well I don't see that it is that complex. The thing is the vendors are anxious and it represents an opportunity to purchase below market value.

Can i ask if you are an ex RE agent?

Yes, very ex though - 20+ years ago. It seems many (not all of course) BA's are.

 

[auror]

What's happening on the beach house front? I've been looking at those too, as an IP, thinking it might be nice to move into one day... although I know this is mixing business and pleasure so I'm wary of making an emotional decision rather than a cold hard financial one!

 

[Propertunity]

What's happening on the beach house front? I've been looking at those too, as an IP, thinking it might be nice

Good thing about beach front is the high CG over the long term. Because prices have taken a bit of a hit as ppl unload their holiday homes and rents continue to do well, the yields are also up on what would be considered normal.

A lot of what you see on the internet on domain.com & re.com is sold or in the process of getting sold. Agents are reporting that there is a lot more activity now in the $600-700K market from the 2nd tier of buyers and
investors. Even properties that have been on the market for 3 – 4 months in the past are now starting to sell.