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Spurner’s story – Building Cashflow and Equity in Any Market
Sounds like you have your priorities well in order. I know it's so cliche, but it's so true, that ultimately investing is really about having enough money to do what you want to do.
It's a great point! One I've given more than a few
passing thoughts to. Even asked a few old hands
for their perspective. I.e. if one sets a goal and
achieves it, what to do when/once there?
Move the goalposts?
Relax and do what the goal was intended to allow?
I'm keen to hear the views on that, from all comers,
not just Matt.
HE, yes exactly; people say treat running your investments like a business and it's so true. While single apartments and houses have very limited potential to be managed in a much more profitable way, there are still opportunities out there to get hold of something and profit by managing it better than the person did before you. I'm sure we can all think of some type of business we deal with which is terribly mismanaged or has substantial inefficiencies which can be solved. No "next" for a while, will wait 6-12 months and see how this one pans out!
Perry, excellent question, and something I have pondered over on a regular basis too. Such a big and important question I have started a new thread as I think it deserves it, rather than being lost in here.
It's a great point! One I've given more than a few
passing thoughts to. Even asked a few old hands
for their perspective. I.e. if one sets a goal and
achieves it, what to do when/once there?
Move the goalposts?
Relax and do what the goal was intended to allow?
I'm keen to hear the views on that, from all comers,
not just Matt.
Well we settled on the hostel I mentioned earlier, although it was the most complicated and biggest mission of a purchase so far. To save writing a novel I'll summarise that we ended up paying $75,000 more than the unconditionally agreed price, that the price still didn't cover all the vendors loans/mortgages, and that the agents lost out on all of their fees of ~$100,000. There is now a liquidator involved and although we have settled, they are still going over issues.
So much for the occupancy, there were 20+ rooms vacant at settlement, but I believe this was mostly due to the vendor keeping rooms available for nightly rentals. Weekly rentals were $150pw, but serviced rooms on a nightly basis were $19/night...
I flew back for about 6 days after settlement. Among the interesting discoveries; One 100% full building of 19 rooms had only 1 shower operational between the 19 people. One room in another building was not let out because it had a broken window. One room was an internet room which nobody used. 2 other rooms were vacant because they were only single rooms (not doubles).
The shower is now fixed and working, and the tenants are eternally grateful. The room with a broken window has now been repaired and rented (+$7800pa). The 3 other rooms have also been let (+$23400pa). Many of the vacant rooms have already been let, and we have just increased the rent for new tenants to $160pw. We have bought about 30 new Sleepyhead beds as some of the old beds were broken and pretty disgusting. We have replaced the carpet in 20+ rooms and some common areas as the old carpet was worn down to the floorboards. We've also started repainting inside and converting all the locks onto a single masterkey system, as there were 5 separate masterkey systems covering the rooms in a random order before, plus another set of keys which opened some other doors, plus some doors for which we had no keys. The new locks now need to be locked with a key too, as some tenants kept locking themselves out.
With the exception of the hassles surrounding settlement, everything has and is going very well and about as expected, pretty similar to past purchases, except on a bigger scale. I'm very happy with the tenants there too, different profile from the people I'd normally let flats to, but some really good people in there, including some characters.
From rough calculations, this property which was losing money and placed in receivership, is now past break even and is making money, after only 1 month of operation. I think the real money will be made when the renovations are finished, and all rooms are let at the higher rental. The aim is to have the place completely turned around and showing good profits within 9 months.
fantastic Matt. That one gets a standing ovation
notes have been taken and now I am donning my cheerleader outfit...
Where abouts in Nz was this deal Matt? Just town or city will do....no need for any more detail than you are comfy with.
I actually looked at the place many years ago. It later came on the market while I was overseas so passed on it, and somebody else bought it. Fast forward a few years and it's back on the market but I'm overseas again so pass again. However after many months on the market and offers which all fall over, the vendors are desperate, so I end up buying it (with someone else). The offer was cheeky and supposed to enrage them, or at the very least solicit a counter-offer, yet they accepted it as it was.
I've had something similar happen in the past too, a great deal which I wasn't able to settle on. Yet after some years pass I do buy the property, and for substantially less than the original price too.
Only just realised there were new posts here (I need to learn how to use the "notification/update" feature!) Rereading my last update it's hard to believe over 2 years have passed since settling on the lodge.
Well there has only been 2 purchase, both were at the peak of the housing crisis so got pretty good deals - one was a freestanding 3br house in Mt Victoria for $580K, got 100% finance and was offered 6 months finance at 4.99%, but opted for 5 years at 6.49%. The house was a bit tired so painted it out, recarpeted, changed the light fittings etc (sound familiar?), haven't had it revalued but have probably made a bit on it which isn't too bad considering the past 2 years.
The other purchase I have already posted the details in another thread but I'll paste the details here again - it was $740K for a 3 flat property and all 3 flats were empty at purchase. Front 2br flat was occupied by someone paying $250pw, after renovations (carpet/paint/kitchen/curtains) it was relet for $400pw. Middle flat was 4br, put in a new kitchen and rented it for $600pw. Back flat was a very spacious 1br previously rented for $240. I reconfigured the layout to create an extra bedroom and rented it for $380pw. Spent about $40k (?) on renovations. Borrowed 100% of the purchase price fixed at 5.99% interest only, so the cashflow was good.
The main difference between now and 2 years ago is cashflow, which has improved a lot. All the residential rents have gone up about 11% (6% the first year and 4.5% the second year), and interest costs have dropped
substantially, with most loans going down 2%, one even 2.5%.
The %'s look small but let me show you how important these increases/savings really are, and how small changes can have such a big impact on cashflow. Say you have a $300k property rented for $500pw fixed IO at 8% with 100% finance. After interest costs, you are making $38pw profit. Now if one year you can increase the rent by just 7%, either due to market rents increasing or due to some renovations, you have just DOUBLED your cahflow by increasing the rent only 7%. If interest rates drop to 7% then your cashflow would increase by 240%. This shows why it is a good idea to buy property which has potential for cashflow, and how dramatically it can be improved with 1 or 2 tweaks.
The lodge we purchased 2 years ago is going well. Occupancy fluctuates but averages over 90%, the rents haven't moved much with a standard room still going for $160pw but some of the larger/newer rooms are going for $200pw. Cashflow is excellent, bringing in $550K pa, but there are many operating expenses to come off that like loo paper, cleaning, electricity, and we hire a part-time manager who takes most tenant enquiries, shows the rooms, and signs people up. We look after the rent, paying bills, and organising maintenance. There's been a lot more involved with this property than initially expected, mostly due to the size of it. We spent $25K on beds, $10K on curtains, $60K on painting, even changing all the carpets cost $75K!
So overall the recession has had a positive impact on cashflow, mostly due to decreased borrowing costs. Values are static and infact my commercial property has been revalued down from $1.525m to $1.35m, but I am not bothered by this as I focus on cashflow, and have some plans for building housing on that site. The tax changes will have an impact, GST wise we'll
need to pay an extra $7K pa on the rent we receive from the lodge, and I expect expenses will go up another $8K+ pa due to the GST increase, although it would only take a small % rent increase to recover this. Removal of depreciation will of course mean paying more income tax and sooner, fortunately the book value on most of my properties is quite low already.
I'm taking a philosophical view anyway, I expect my financial position to be better after the changes than before.
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