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1st rental - 4 bed or 3 bed

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  • 1st rental - 4 bed or 3 bed

    We've had our own house for 15 years and have almost paid it off (well, 4 years to go anyway).
    We're considering buying a rental so that when our kids are in their 20s they can split the rental up & use that money for a deposit on their own homes.

    There are 2 homes that we're looking at: 1 is 3 bedrooms zoned for a great primary school & the best public high school in the area. It's in a street I would be more than happy to live in. Average rent in this area is $310/wk (+/- $20)

    Another is 4 bedroomed - only zoned for the primary school & not the high school. It's in an area that I would live in if I had to, but wouldn't be my first choice IYKWIM. Average rental for 4 beds in this area is $350/wk (+/- $40)

    Both look low maintenance, similarly priced.

    Based on these facts the 4 bedder looks like a better option, doesn't it? What else is there to consider?

  • #2
    I think it's difficult to make a call based on limited information about your personal circumstances. You've also left out the yield.
    All else being constant (assuming both in same area), a higher yield is better.

    If your sole purpose behind property investment is to provide equity for your kids I wonder if it's a wise move, as there are various ways to structure your affairs to effect the same outcome. Like paying off your mortgage then providing a capped guarantee for the kids?
    Owning one rental involves a lot of work and generally there's economies of scale in owning multiple rentals.

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    • #3
      You need to work out return on investment - rates, maintenance, interest etc will all effect your return. How easy are they to rent ie how much down time bewteen tenants will you have. Rent doesn't tell us much at all.

      Reading the forums here will be a good start.

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      • #4
        Have a look at the demographs in the area and who is most likely to rent and/or buy it off you and what do they want? Talk to the property managers in the area and see if there are any trends with the rents eg. I spoke to a rental manager who said the demand for properties in Manurewa with sleepouts is backsliding fast to the point where a new tenancy is getting $100pw less because no one wants sleepouts anymore.

        Is there a possibility to add value to any of the properties?

        You say they are similarly priced, what are other 3/4 bedroom houses priced at in the area, is this a cheap 4 bedroom or an expensive 3 bedroom?

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        • #5
          Buy them both.
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          • #6
            I'd go for the 3-bed in the better school zone.

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            • #7
              Both are low priced for the area. Both are ex-Waiouru houses moved onto a small section here, & painted etc. New piles, new roofs. I don't think there's much renovation to be done to either to improve their price.
              ROI is definitely higher for the 4 bed than the 3 bed. 4 bed is selling for for $220k, 3 bed for $230k. Rates are about $1500 each/yr. No idea about maintenance costs, but aiming for lowest cost maintenance-wise (hence looking at these 2 houses). We've fully renovated 2 houses so far (that we've lived in ourselves), so we know how much effort can go into it.
              We know a few property managers through work, and will more than likely get the rental property managed. We've been talking about catching up with PMs re the 4 bed/3 bed issue.




              Originally posted by grip View Post
              Like paying off your mortgage then providing a capped guarantee for the kids?
              Owning one rental involves a lot of work and generally there's economies of scale in owning multiple rentals.
              Capped guarantee? What is this? Is it like being a guarantor for your kids' houses or like lending them money from the extra you've saved from keeping your mortgage after you've paid it off?
              Tell me more about the economies of scale in multiple rentals I'm reasonable risk averse, so it's taken me years of being a mortagee to consider being a multiple mortgagee.

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              • #8
                Capped guarantee.

                Guarantee the kids loan to a maximum dollar value. EG. They need 24K then sign the guarantee for only 24K
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                • #9
                  If it was me, the 3 bedroom house in zone for the best high school in the area and primary school.

                  But I think when it comes down to it don't base your decision on the amount of bedrooms in the house. Look at how much you are likely going to purchase the house for, the amount of rent you will get weekly and the type of tenants you are likely to get.

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                  • #10
                    Originally posted by arches View Post
                    Capped guarantee? What is this? Is it like being a guarantor for your kids' houses or like lending them money from the extra you've saved from keeping your mortgage after you've paid it off?
                    Tell me more about the economies of scale in multiple rentals I'm reasonable risk averse, so it's taken me years of being a mortagee to consider being a multiple mortgagee.
                    Capped guarantee = limit the bank to a fixed amount eg 50K
                    A lot of people become guarantors not knowing that they are in fact guaranteeing the entire loan borrowed by the kids (which in many cases are in the hundreds of thousands.

                    Economies of scale = as with any business, the more products you sell the more you can spread the costs.
                    eg accountant charges $1300 per year to do your accounts for 1 property. Each additional rental property would incur a fee of $300. Economies of scale.
                    eg 2: you set up systems, contracts etc to manage rental property.
                    Managing the second and third would take you much less time now that you have everything set up.

                    I would go for the higher yield, assuming you are in a small town near Waiouru, given limited capital gains.

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                    • #11
                      Wowse my Chartered Accountant charges $500 for personal returns x2 and rental return (one rental property).

                      Would depend on the age of the kids - as if they buy a house now & 20 years down the track they will be in line with the property market rises with the rental property as opposed to guarenteeing a loan in 20 years we may all need 1 million dollar loans.

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                      • #12
                        20 years down the track 1 million dollars may be the equivalent of two years salary for most. Who knows what happens. For me, I wait for the government valuations to come out and remove my self from the guarantee asap.
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                        • #13
                          Originally posted by KyronGosse View Post
                          I spoke to a rental manager who said the demand for properties in Manurewa with sleepouts is backsliding fast to the point where a new tenancy is getting $100pw less because no one wants sleepouts anymore.
                          Kyron,

                          Interesting observation, although I think it is more an oversupply of these Manurewa properties with sleepouts rather than "no one wants sleepouts anymore"

                          It was a big trend for cashflow investors over the last couple of years to convert the double garage to sleepouts. I knew trouble was brewing 12 months ago for investors when I did a Trademe search for 5 bedrooms houses (3 beddie + sleepout) and found Manurewa was flooded with them.

                          Shane

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