Investment: Where Next

[scottle]

Hi All,

First post for me but have read a lot on here over the years. I thought it was about time I share my story so far and hopefully get a bit of advice on where to go from here...

I've been increasingly interested in property since around 2006. I work in engineering consulting and have access to geotech, planning, stormwater ect. practitioners as well as being a Structural Engineer myself.

The first deal I managed to put together was in 2010 with settlement early 2011. As a single guy I managed to get a 3bed 'do up' property in West Auckland. I had 5% deposit with the intention of living in it. However the devastating events of last year saw me heading off to Christchurch the very same day as I settled on my new home.

I spent a year in Christchurch assessing buildings, designing strengthening works and amongst other things meeting my wonderful partner We have now returned to Auckland and are looking to buy a place together. But thats a different story...

The house in West Auckland cost around $4k in 'do up' to get it up to rentable standard. Being in Chch I got an agent to organise this and tenants who have been in there since May 2011. I got free insulation in the ceiling and floor as on of the tenants has a community serves card. I also got a heat pump on the retrofit your home scheme so can pay back through the rates (is this still tax deductible as rates or do I have to depreciate as a capital item?)

I kept pretty good records of incomings and outgoings over the time I have owned it

Purchase $292k
Net costs to now $31.5k (includes do up, interest, rent received, agent, house buying costs, tax refunds, insurance)
Mortgage owing $271k


I calculate the yield as 4.8% (rent less insurance, agent, rates / purchase price) is this the right method? This seems low for a rental when others on here are talking about 7-8%+.

I looked at some comparative sales for the area and it looks like I might squeak 85% LVR if I got a registered valuation done. This would remove the low equity penalty of 0.5% I am paying on the mortgage. But I'm reluctant to pay the $575 (i've got to use a panel valuer) only to have it not come up to the $320k value required.

The section is also big enough for a minor dwelling so I looked into this last year. With all of the PC sums, council costs etc. it was going to cost $210k to get done and from a finished value and increase in rent point of view I probably couldn't borrow to do it.

Also recently thought about extending, adding another bedroom and a garage. I was given a ballpark estimate of $2.5 to $3k per square metre for an extension which could push it to around $150k again I probably wouldn't be able to borrow based on the likely value or rent increase.

So I'm a bit stuck. The house doesn't meet our needs as a couple for a home. It needs to stay as a rental, but how can I get the yield up or add value and be able to borrow to do it? Hopefully I could leverage off equity to get the next one at some stage, but at the moment I'm a bit stuck as to see how this can happen save sitting around and waiting for capital gain! This is something I hoped I would not do as a landlord as I would rather be productively adding value/improving the standard of accommodation I provide.

Any comments welcome.

S

[flyernzl]

Current weekly rent?

[scottle]

$360 starting tomorrow! was $340

[AMR]

Whereabouts out west? For a 3 bedroom it sounds a bit underrented.

[flyernzl]

Right, for the rent you are getting you have overpaid.
(Early this year I bought a 3brm house in South Auckland. Price $197,500 plus 6K reno total $203,500 and I'm getting $380 a week for it).

However, what is done is done.
If you wish to keep the property you need to concentrate on getting the rent up, hopefully without spending much more on the place.

I'd look at what can be done cosmetically to spruce the place up - bathroom mirrors, light fittings, paint, that sort of thing. Aim for top rental dollar for that type of property in that sort of area.

It sounds like there are substantial grounds around the property - have you though about allowing pets? People who have a menagerie often have great difficulty in getting a place to rent and will pay over the odds if they can find a place that will allow their furry friends.

Brainstorm all options to get that rent as high as you can. You need to aim for $500 a week on those costings.

[PC]

What do you think it would sell for?
Sometimes you have to shoot the dog...
A small loss maybe easier to move on from.

[Ahar]

$360 starting tomorrow! was $340

Mmmmm.....don't forget you have to give the appropriate notice period.....

And you can only put the rent up every 6 months.......and if it's a fixed term tenancy AND there is no clause allowing rent reviews, then you are stuck until the tenancy ends

[scottle]

Thanks for the replies so far. I feel they are a little negative on the whole, but some useful thoughts.

Whereabouts out west? For a 3 bedroom it sounds a bit underrented.

Henderson. Max for 3 bed in the immediate area is around $400. DBH Market rent is $383 average and $360-$400. It's not in great shape due to someone else getting it to the bear minimum while I was down south, hence I think the price is about right at the moment.

Right, for the rent you are getting you have overpaid.

I bought $28k under cv at the time and you wouldn't have got a cheaper property at the time or now in the area. Hence I thought it a bit of a bargain. South Auckland is not my area, and to be honest I don't think it ever will be. There are plenty of rentals in the area I bought, so I figure somebody is making money somewhere or it wouldn't be done to the extent it is. I'm looking to make this work, and trying to figure out how.

Brainstorm all options to get that rent as high as you can. You need to aim for $500 a week on those costings.

Good idea with the brainstorming. Pet's are a no-go for various reasons, but i've looked at minor dwelling, and extension, (both too expensive) adding a garage, fencing the section, clean and paint exterior of house, re-do roof (decramastic and stone chip almost gone) do kitchen, do bathroom.... It goes on. However I'm just stuck with what to do for best results.

What do you think it would sell for?
Sometimes you have to shoot the dog...
A small loss maybe easier to move on from.

Taking into account _all_ costs so far I think I would make a small loss if I sold with an agent today. However I would like to hang on to it and work out the solution.

Mmmmm.....don't forget you have to give the appropriate notice period.....

And you can only put the rent up every 6 months.......and if it's a fixed term tenancy AND there is no clause allowing rent reviews, then you are stuck until the tenancy ends

Thanks Ahar. I trust the agent is doing all this in accordance with the law. The tenancy is periodic as far as I know. It has only gone up once in a year and it was just coincidence this is today (probably why I am thinking about it now)

I'm considering moving into the property to do the do up myself (with professionals where required) I just need to get a plan together as to what will work best. I worked out if I can get the rent to $420 per week (ambitious) without too much outlay (and hopefully capital gain will cover the outlay and reduce the mortgage interest) then on interest only it would be cash flow neutral. It's a bit tight, but then I did buy it with 5% down!

I let you know how it goes...

P.S. Does anyone know about the heat pump treatment with regard rates or depreciation?

[Branca]

P.S. Does anyone know about the heat pump treatment with regard rates or depreciation?

Hi there, according to my (unprofessional) knowledge, the heat pump can be depreciated and would be a capital expense, and therefore would not be deductible.

[eri]

"Thanks for the replies so far. I feel they are a little negative on the whole, but some useful thoughts."

if you want unconditional love

get a dog

but even then you have to feed it

[scottle]

"Thanks for the replies so far. I feel they are a little negative on the whole, but some useful thoughts."

if you want unconditional love

get a dog

but even then you have to feed it

And some not so useful.

[Ahar]

Sorry scottle.....it's not that we are being negative.....just realistic

And I just know that you are going what I have to say below, the wrong way

I also agree that you overpaid......

Just because it was the "cheapest" property you could find AND 28k under CV, it doens't mean that it was a good buy

It certainly doesn't mean you should have bought it.

So I'm a bit stuck. The house doesn't meet our needs as a couple for a home. It needs to stay as a rental, but how can I get the yield up or add value and be able to borrow to do it? Hopefully I could leverage off equity to get the next one at some stage, but at the moment I'm a bit stuck as to see how this can happen save sitting around and waiting for capital gain! This is something I hoped I would not do as a landlord as I would rather be productively adding value/improving the standard of accommodation I provide.

As for your comments above......being a bit stuck and waiting for capital gain ......

Many PI's take the view that one should buy for income......buying a property whereby the rent barely covers outgoings is a high risk proposition leading to counting on capital gain ......which might not happen for a long long time.

IMHO when a PI can't find a property with a high enough yield, then the PI can do one of two things...

1. work work and then work some more at finding a good investment....perhaps even consider a different area
2. or wait, and then wait even longer......rents will eventually go up......then work really really hard to find a great deal...not just one where your nose is just above the waterline

And yes, I agree with PC's sentiments that "Sometimes you have to shoot the dog.....A small loss maybe easier to move on from"

By the way, how many properties had you looked at before you bought this one?

And how many properties had you put offers on...before this one was accepted?

[scottle]

Thanks for the concern from my feelings, however I am being literal rather than emotional when I say comments are negative.

In the context of why I bought the property (to live in and do up with 5% deposit) it was a very good buy.

In the context of a simplistic gross yield calculation or with regard to cash flow it is not as good as it could be. But then I'm led to understand that (basically) you either have good cash flow or good capital gain (8% this year on this property by my reckoning) but rarely both.

So a waiting game it is. Well that and a mixture of targeted improvement over say the next two years to get the rent up or to utilise the size of the land somehow that works money wise. I'm a patient man...

In the meantime, we have gone conditional on a home in Greenlane so fingers crossed.

p.s.

By the way, how many properties had you looked at before you bought this one?

And how many properties had you put offers on...before this one was accepted?  

Over the four and a half years prior to buying I would estimate I looked at one to two hundred on screen. That's gis, planning maps, underground services, terraview, aerial photography, comparative sales type looking rather than just clicking on Trademe (which would be in the five hundreds or more I guess)

Actually visiting properties, open homes etc. would probably be around fifty or so out of the one to two hundred. Five offers before this one.

[TheLiberalLeft]

Scottle - you can get tired listening to the "buy at 8%+" talk around here. It's easier said than done. Scratch the surface and those sorts of returns are usually from dumps of places in dumps of areas with dumps for neighbours. I exaggerate, but you get the point.

Ask anyone investing around the mid-parts of Auckland, say North Shore, and you'll be averaging 4-6%.

In some nicer parts of Auckland 4% looks good.

No doubt there'll be the "I just bought in Torbay and am getting 8%" replies. I'm not saying it cannot be done, but I'd imagine it's a multi-flat situation, or illegal granny, or some such scenario.

[TheLiberalLeft]

...and wouldn't be in Rangitoto zone either.