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Comments or advice please about property investment situation

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  • Comments or advice please about property investment situation

    Hi everyone. It's been a while since I posted but I've been lurking again.

    I'd value your thoughts on my situation.

    I'm a kiwi living overseas. I have 3 investment properties in NZ. The last two I bought shortly before I left NZ (mid 2011) because I knew I better buy while the market was favourable and while I had NZ income so the banks would lend to me.

    My first property is in New Plymouth but I wanted to get my foot in the door in Auckland because of the greater potential for values rising there, housing shortage etc.

    So I bought two neighbouring houses in an average Otahuhu neighbourhood, an area I'm hoping will be a good strategic location for future growth, near schools and accessible to motorway. They look like 80s construction but were built in the 90s. I got them under valuation, so have a bit of equity in them. At purchase, they looked like they would be slightly cash flow positive or neutral. Have great tenants and a good property manager.

    BUT. These properties have dampness and mould issues. I got a plumber in to assess the situation and recommend solutions. Seems we have a few issues contributing here: dirty/blocked stormwater drains, heavy rains cause water to flow down the driveway (slight gradient) and run under the houses, trouble with guttering design causing water to get in at the eaves during heavy rain, that sort of thing. Additionally, the houses are built on fill on what was originally probably a swampy area that drained off to a waterway nearby, hence the natural tendency for heavy rain to cause water to flow across the property. In winter the small lawn areas get a bit mushy, I'm told.

    So, the plumber has recommended a few solutions. Put a gutter guard in, clean/flush the stormwater drains, fix the flashing on the roof, clean the spouting, install a strip drain on the driveway to divert run-off, put in insulation, do a mould treatment and install HRV or other ventilation system. Ideally, re-paint interior with mould-resistant paint.

    Ok, these all sound sensible, and would hopefully alleviate or solve the mould and dampness issues the tenants are having. As you can imagine, doing all of this times two will come up to quite a sum.

    I don't want to see these buildings deteriorate, and while the houses are not flash by any means, I'd ideally like to maintain them in a way that's pleasant to live in and not a health hazard to the tenants. But to do all this work will mean forsaking any profit from my property portfolio for the couple of years at least. Assuming that the work done has the desired effect, eventually the work would be paid for by the rental income of all 3 properties and then eventually the portfolio would become nicely cash flow positive.

    I don't need the cash flow right now, so can sustain the loss of cash flow in the interim. But I've been wondering whether these two properties weren't such a good buy after all and whether I ought to sell them rather than plough more money into fixing them up properly.

    Trouble is, if I sold them, I would find it hard to purchase again because I no longer live in NZ and don't have the NZ job income to support an application for a new mortgage. I would be left with the one New Plymouth property which would be nicely cash flow positive, but without the foot-in-the door of owning property in Auckland. And we're all aware of the pressure on rents and house prices in Auckland.

    I'm in it for the long haul - that is, I see my property investment as a long term strategy to build security and income for later in life (I'm in my mid-30s now). I don't need the cash flow income from these properties now, but what would serve me best in the long term?

    Here are some basic figures:

    The two AKL houses were purchased for about $247,000 each (reg val at $285,000).
    Probably looking at 15,000 - 20,000 or more to sort each house. Each house getting $375 per week. If mould issues could be sorted, I could look at raising this to $385 p/w.

    I borrowed the deposit for the AKL houses on my NP house which was mortgage free, so essentially the AKL houses are 100% financed. But if we look at the portfolio as a whole, it's about $830,000 worth of property with about $500,000 of borrowing, or approx 60% LVR.

    Cash for getting work done would come partly from rental income of all three properties, and the rest from my revolving credit account. I would have the work done gradually over the next year.

    What say you, PTers? Sell out of these damp houses and run with the remaining equity, or invest in improving/maintaining them so that their value will pay off in the longer term future, either through long-term income or a later sale?

    I guess part of my conundrum comes from not being sure whether I should be assessing my portfolio as a whole, or assessing the profitability (and future potential) of each house on its own merits. Thanks people.

  • #2
    Originally posted by Branca View Post
    I'm a kiwi living overseas.
    Me too. This can cause problems with expense & how well jobs are done. Do you have anyone over there to check the work out for you, or is your property manager one of the good ones?

    Originally posted by Branca View Post
    So, the plumber has recommended a few solutions. Put a gutter guard in, clean/flush the stormwater drains, fix the flashing on the roof, clean the spouting, install a strip drain on the driveway to divert run-off, put in insulation, do a mould treatment and install HRV or other ventilation system. Ideally, re-paint interior with mould-resistant paint.
    Other people who know Auckland will reply as to whether to keep the places or not. I'd keep them.

    Either way I would get a breakdown of costs, then work my way through.

    I'd probably start with the roof (flashing & gutters) so the house isn't falling down, then the stormwater drains, then the driveway, then inside.

    Luckily in Auckland insulation isn't as important as the South Island, and the tenants are still alive (so far). Hopefully they have a Community Services Card & you can get the insulation partly paid for by the Govt, but I'd leave it until last.

    You may not need a ventilation system or mould resistant paint once the rest is done - although some tenants are pretty bad at ventilating.

    Good luck, hope it turns out well for you. It could have been much worse


    • #3
      Do you have a priority list for the work? In case it is only some of those issues causing the problem. The plumber sounds pretty thorough, but maybe too thorough. (Like a 120% solution when 80% or less will be good enough.)

      Also as Tan said, tenants can be bad at ventilating. Plenty of non-leaky houses have mould issues. Can you get the property manager to have a good look at the mould and talk to tenants about how they are ventilating. Ventilation systems are pricey and might not be needed.

      As Tan said if tenants have a community services card, that will reduce the cost of insulation significantly. If the roof space is not wet / damp then no reason to wait to do that. There is a limited pool of money so may have to wait a bit for insulation.


      • #4
        Hi everyone.

        Yes I'm happy with my property manager and she has talked to the tenants. The plumber is recommended by the property manager, so I can't vouch for him, but I also have a builder friend who has checked the places out and may do some of the work suggested by the plumber. I have quotes for most of the work already, I'm just waiting on my builder friend's recommendation of the priority order of work, but he's been a bit slow in replying due to being busy. He's a great reliable builder but crap at answering emails.

        I'm pretty sure the problem goes beyond the tenants not airing the house out. One of them regularly cleans with anti-mould products but it just grows back as fast as she can get rid of it. I have already installed vent fans in the bathrooms too.

        I agree it makes good sense to do the outer work first before fixing up any interior surfaces, Tan, I will keep your recommendation in mind. I've been trying to run some numbers and I'm figuring that it should take 2-3 years of the portfolio's income to pay for all the work. If I spread the work out over two years I should be able to avoid increasing my borrowing. E.g. do the roof, gutters, drains, and maybe insulation this year, followed by new paint and possibly a vent system next year.

        Perhaps I should leave the ventilation system till nearly last, and see what difference the other measures make. What about supplying the tenants with a de-humidifier instead?

        I just checked the dbh website and see that the median rent in the area has risen since I last checked it, so that's encouraging. I might be able to justify a rent raise later this year.