First Time Buyer - Investment Property - Central Auckland

[Wuket]

Hi all,

I am looking at my first investment property and after reading some of the threads here I am slightly concerned/confused.

I have around $150K saved I can use as a desposit. Most of my other money is in shares and other investments and I am looking for some exposure to the property market. I am looking for a place to rent out.

I know that, given it's a rental, I shouldn't be emotional about the place, but I want something nice and central (been looking around Mt Eden, Epsom, Remuera, fringes, etc). I've found a unit in the Mt Eden area of Auckland that rents for mid $300's currently and can probably be purchased for around $350 to $400K.

I've done the sums and know the rental income won't cover interest on a mortgage/rates/insurance/etc, but I do believe that in 25 years the place will be worth more than what I could earn putting my deposit into some sort of fund plus contributing the rental shortfall to that (i.e unit value in 25 years = $xxxx versus putting $150K into a fund + the rental shortfall as a weekly contribution at around 7% pa for 25 years).

My confusion comes from people here talking about buying places that might rent for $300 pw and the purchase price is only $200K or less. I've been looking for a while and never seen anything like that. From what I can tell from looking for a few months, if a place rents for $300pw, the price is roughly around $300K, $500pw the price is around $500K, etc. I guess this is because I am looking in the central areas where house prices are inflated?

Any advice or insight appreciated. I am fairly happy with the numbers and just more confused with all the other amazing yields being talked about here. I guess if I want those I would need to look further out? Would you consider it "stupid" to be doing what I intend to?

Cheers,

M

[Keithw]

You've answered your own question really.
The areas you are looking in are best suited for owner occupiers & seldom make economic sense as rentals, unless you deliberately buy a place for its future capital gain & are prepared to subsidise it to that end, in which case rent just makes it easier to hold.

$300pw for 300k is nowhere near cash positive & 400pw for 400k or even 500pw for 500k is even worse.
The higher you go in value, the worse will be the rental return, which is why the typical cash positive rental is in the 200 - 300k range.
For 300k around central areas all you will likely get will be apartments (or maybe a very old & rundown property), which also have Body Corps, which tend to be the killer in the deal. For instance a 320k unit earning $440pw is not even cash positive (with current interest rates of 7%) once the body corp fees are paid.

The lower the value of the property, the higher its yeild, & the higher the yeild needs to be in order to cover real $ expenses, (as opposed to % expenses - which none are, except interest).
eg a 10k repair bill (roof repairs etc) on a property only bringing in 10k rent per year, consumes the whole years income, whereas on a property bringing in 20k it might be more managable.
But that doesnt mean there is not good returns to be had from some of the smaller apartments, currently selling in the 120 - 180k & renting for 280 - 300pw. However these are not likely to get much capital gain based on past history.

Alternatively go south, where you can find 200k 3 bed houses.
By the time you get to 330k being rented for 320pw -eg a new 3 bed house in Pukekohe - you are in cash negative territory again.

Many properties are manufactured into CF+ve through the addition of minor dwellings or an extra room, or the addition of a second house on the same section.

Another way properties are often bought CF+ is by buying several at a time in one block- the old concrete block units etc, Usually vendors with multiple units want to get rid of several at once & are likely to be more negotiable.

I think the moral behind the story is that it takes work & careful selection of good properties, its not just a matter of buying any old thing.

[Momo]

Hi Wuket:
There is nothing" stupid" of what you intend to do.Some investor prefer central Auckland because of it tend to have higher capital growth because of the strong demand while some investors prefer South Auckland because of it's high yield. It really depends on what is your main goal of investment. If you are looking for higher yield, you probably need to look for South part of Auckland ( Papatoetoe, Manurewa, Otahuhu) where you can find 2 bedroom units renting $280-$300 for $200,000 or less.

I personally think cash flow positive is very important when you are looking to invest in the long term. If you are not getting positive cash flow at the current interest rate, you really need to be careful because if the interest rate hike to 8-9% as few years ago, will you be able to service the loan?

There are a lot of experienced investors in this forum. I am sure they will give you some other perspectives Good luck!

[Shane D]

Wuket,

Good on you for making the first moves in property investment.

Before you go any further I think you should go and see a bank to see how much they will lend you (with your $150k deposit).

Once you are pre-approved for a confirmed $$$ figure then you can focus on propeties that match your price and buying criteria.

For example
The bank says they will loan you $600K and require you to put in your $150k deposit (80% LVR).

You now know you have up to $750k pre-approved to spend and you build a buying strategy around that.

For $750k I would look for 2 x 2bdrm flats or a Home and Income property. This should at least bump up your yeild past the terrible numbers you were disussing in your opening thread. 6% - 7% should be possible in central Auck suburbs today.

So go and a mortgage broker or bank asap. Then come back and discuss step 2.

Shane

[Wuket]

Hi all, many thanks for the responses, I will have a good read and consider them shortly.

Just quickly, I already have preapproval for a loan of $580,000 on a property up to $725,000. I'm also not worried about servicing the loan if interest rates rise as I have good cashflow from other ventures.

Basically, I am looking to build my wealth through some exposure to property. Happy to do it via strict rental yields or less rentals but bigger capital gains (I guess this later strategy is the one I am currently considering).

Cheers

[NovInvestor]

Mt Eden (outside double grammar zone) you should be able to buy units around $300k, rents $350+

[Shane D]

Hi all, many thanks for the responses, I will have a good read and consider them shortly.

Just quickly, I already have preapproval for a loan of $580,000 on a property up to $725,000. I'm also not worried about servicing the loan if interest rates rise as I have good cashflow from other ventures.

Basically, I am looking to build my wealth through some exposure to property. Happy to do it via strict rental yields or less rentals but bigger capital gains (I guess this later strategy is the one I am currently considering).

Cheers

Wuket,

$725,000 puts you in a very strong buying position if you pick the right property. What I mean by this is although the owner occupied market is strong in the Auckland inner city suburbs, I believe the investment property market is much weaker. so the trick would be to find a property that does NOT appeal to those buying a home. You are likely to less competition @ the $725,000 end of the investor market. A multiple income property such as I have linked below could be a good strategy.

http://www.trademe.co.nz/property/residential-property-for-sale/auction-360188535.htm

Note:
The yield looks crap on this particular house. My main point is the kind of multi-income type property can be a good yield strategy. sorry I should ahve tried to dig up a better link.

Just a thought. You will need to formulate a stategy that fits you.

Shane D

[Wuket]

Awesome, thanks Shane, will get digging myself