First Timers, What have we done???

[GeePee]

Hi All,

My partner and I purchased our first rental property a few weeks ago in West Auckland. We managed to secure the property $60k under its value.

It is on a full section, so is sub dividable and the house is located at the front allowing for this. The house is sound and livable but needs to be brought in to the 21st century at some stage.

The house is rentable in its current state and rental prices in the area are for between $420 - 460 p/w. Needless to say, as in most Auckland rental properties, we will be 'topping up' this investment quite a fair bit. We estimate approx $1500 per month taking in to account rates, insurances, maintenance etc and receiving $450 p/w in rental income.

We are able to sustain this 'top up' on the current fixed rates but things will be tight.

My question is simple. Have we made a sound investment? Obviously we are running this property at a loss and even after tax write offs etc we estimate we will be putting in around $13k annually.

I wonder if we have made the write decision? Have we invested in the wrong market(Auckland that is)???

PS Sorry if I sound a tad 'Green' as this is our first foray in to the property investment(besides our own home of course)


Nervous Greenies

[artemis]

Well it's done now, so look to the future. In a few years time, once the mortgage has been paid down a bit and rent has gradually increased, your equity will have increased and the property may well be cashflow positive. Most of us started off just like you.

Meantime, you will find lots of helpful information on this site, so just ask. Most of us will tell you that putting effort into finding good tenants is the number one priority. Compromise on that and you will likely regret it.

And read every word of the information on the DBH website about rights and responsibilities of landlords.

[mrsaneperson]

Well if the purchase is a sound investment your next "most important" investment will be "careful" selection of a tenant .
Some tips:1.Get tenant refs particularly prior housing ones both older & present situations that you can seek bonafides on.
2. If putting a rental ad on trademe any emailed enquiries usually have a feedback rating for the person enquiring. Avoid negative feedback rated indviduals.

[Leftette]

Get a property manager. I am not a PM so have no vested interest when making that recommendation. If not already factored in, it'll make your losses even worse, but it'll help you sleep at night.

[artemis]

Get a property manager. I am not a PM so have no vested interest when making that recommendation. If not already factored in, it'll make your losses even worse, but it'll help you sleep at night.

There are good and not so good PMs. Owners, especially inexperienced ones, tend to find out the hard way about the latter type. There's a lot to be said for learning how to do it yourself. IMHO.

GeePee, suggest join your local Property Investors Association, which will usually give you access to credit checking and TINZ. And more.

[Leftette]

That may be true, but I wasn't suggesting they get a bad one.

[mrsaneperson]

There are so many PM's out there. A dime a dozen. Every 2nd radiolive commercial i hear about a new PM service guaranteeing "no loss of rent" blah de blah..

They've seen a lucrative market and they're all jumping onboard to make a quick buck. With the right tenant you'll never know if you have a good PM or bad one. Only when the shit hits the fan and you get the tenant from Hell will you then know. Although why did they get you the tenant from Hell in the first place?LOL

[ramong]

No one has actually answer the question "Have we made a sound investment?".

The answer is : No, it's a terrible investment, especially if its your first. It will be very difficult for you to buy another in a very long time if you are saying it's tight now. You have definitely paid too much for the house and i personally could not call this scenario an investment.
Anyway, it's like the first guy said.... you have done it now... best that you minimise your losses by looking after it carefully.

[Rosco]

Hi GeePee,

There is no perfect answer. Many people will differ on whether you have made a good investment or not, and only time will really tell. Without knowing the exact house and area, plus price you paid it is also hard to work out if it is good or not.

First thing I would look at is minimizing the loss/hurt
- Can you do simple things to improve the rental income? second lounge converted to bedroom, heatpump for more rent, just increase the rent, room by room rent (hard work) etc
- Can you work with a mortgage broker to establish a mortgage strategy to minimize the risk of rising interest rates - bear in mind these could go up on Thursday!
- What happens if you have an accident, die etc - I would suggest a good review of your life and risk insurance with a good broker. Try http://one50group.co.nz/
- maximize any tax losses - I suggest having an initial meeting with a good property accountant, who is also a chartered accountant. This will cost you for good advice, but will be well worth it. Having the losses going to the highest earner and using chattels depreciation could make a reasonable difference for you.

After meeting with these people, and before putting any advice into practice, I would then look at the hard question, Is this a good rental that you should keep?
- work out the new loss per year, and possible loss if interest rates goes up further. Incorporate tax refunds to show your true cash loss. A property accountant can help with this
- review what capital gain you expect on the property for the next 5 years. Talk to a couple of different real estate agents to get an idea, and also a valuer.

is the capital gain you expect significantly more than the cash loss over 5 years? If not, then you need to sell!

Ross

[flyernzl]

Depends on what you are trying to acheive.

If your aim is to obtain an additional cash income source then you have been hung out to dry, bro.

However, if your aim is long-term capital accumulation then you have probably not done too badly.

Your immediate aim will probably be to maximise you cash inflow and minimise your cash outflow, so you need to rapidly learn about the business you are now in - the accomodation business.

As has been said, join the Auckland Property Investors Association (the sub will now be a tax deductable expense for you), attend the meetings and learn heaps.

[ramong]

I think people are being too nice. This is a terrible investment. They have stated they will be paying out $13,000 PER YEAR to keep this going. This is not an investment. I doubt they will gain any ground in the next 5 years. It's going to be a lot of stress and heartache for them.

[Rosco]

Hi Ramong,

How do you know it will be a bad investment?

If the property is worth $500,000 and goes up 5% per year, that's $25,000 gain. Over 5 years is $125,000 vs cost of $65,000 at $13,000 per year.

I'm not saying its ideal either, but it depends on the circumstances. They also mentioned that they feel they have purchased it well, and it is sub dividable. So there are a couple of advantages to the property, and maybe the cashflow can be turned around.

Unfortunately the average property investor buys a rental that loses $5k to $10k in cash per year. The major issue with a lot of these investments is that they are in areas that aren't going up well in value. At least with this posters property, there is a potential for it to increase well in value as it is Auckland based (not saying Auckland will jump up either!).

Ross

[ramong]

Hi ross,
My opinion : Any investment which keeps you in a day job (rat race) today/tomorrow is a bad one.
I invested in managed funds a number of years ago and although the investment returned 60%+ on maturity over 3ish years i still would rather have a cashflow investment like property, but the property has to be neutral or positive.

Even with their potential capital gains, the additional $13k after tax cash they have to find each year on top of their personal accommodation costs is creating such a heavy burden on their investing its not going to get them anywhere fast. They also state the property needs renovating. The subdivision is a bonus, however they will have to be careful that the council development contributions, surveyors costs and other costs dont burn away much of the profits. At the end of the day, at least they are trying. I think they will learn a valuable lesson from this.

[flyernzl]

GeePee -are you out there? - can you please tell us your thought processes when you decided to buy this property?

We do not wish to criticise, we'd like more information from people like you so that we can provide more advice through APIA in order to guide new investors like yourself.

[GeePee]

Hi All,

Thanks for the great feedback and honesty.

We bought our first home about 4 years ago in Te Atatu Peninsular. We got a really good buy with the owner desperate to sell and we secured it for about $30k under its then value. People who are familiar with the Auckland market will know it is a real growth area. In the following 4 years we have gradually spent approx $50K on the property(new kitchen, large covered deck and entertaining area, new bathroom and landscaping) and it has nearly doubled in value in this time.

The house prices were rising so fast in the area it was almost hard fathom. We though we would take advantage of the trend and buy again knowing we would pay a higher price but counting on our knowledge of the area we though we could create something similar to what we have. So to answer the question about why we bought......long term capital gains and land-banking with the possible sub divide.

We have family who will be our first tenants and it has been agreed that they will pay $450 p/w. They are very reliable.

We have money in reserve that could improve the property to gain more rent and there is plenty of cosmetic stuff we could do, new paint through out, new electric fittings, pull the carpet up to expose the Rimu flooring. We could spend around $5K and maybe get an extra $10 to $20 p/w.

We have established our lending structure through our broker that works well for our financial situation and sees us secure for the next 5 years. We have income and life insurances set up but they will need to be reviewed with this new purchase.

We have engaged an accountant to seek advice on ownership structure and tax write offs etc. I'm not sure if she is a property accountant though so I think I am going to try someone else. Best not to take the first offer they say.

We also have an 'out' if things get too tough. The property has massive potential as does the area. We could sell it 'as is' (keep in mind we bought it $60K under what it was valued at) or invest another $30K in decks, bi-fold doors, kitchen and bathroom and sell on at a healthy profit. I have experience in this area having completed works on our own house so I know whats involved, the costs and the returns on these improvements.

I feel a lot better after reading all of your comments as its good to see that my concerns are real and I must proceed with caution.

GeePee