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  • First offer on IP. What do you think

    Hi All

    I have found a property I am going to put an offer on.

    Here's the deal.

    2 bedroom B/T unit in block of 3.
    Good size bedrooms and lounge
    Needs work on inside but has great potential.
    Located close to Papakura town centre in great area.

    Rent per week - $250-$270

    Listing price: $179,000

    Our offer: $160,00 + 5000 for renovations



    Yield is 7.5%

    Can anyone give advice on whether this looks like a good deal on paper.

    I am meeting with Real estate agent tonight to make this offer, would
    appreiciate any advice.

    FH.
    Home Buyz
    [email protected]

  • #2
    Hi FreezingHot,

    On paper it may not look very attractive at 7.5%. If you need a rough figure, add 1.5 to 2% to the interest rate and that will be the yield you need to make it cashflow positive (before depreciation bonus is considered). For a more accurate calculation, you can do a cashflow analysis, as follows:

    Rent x 52 weeks
    minus Vacancy (say 2 weeks)
    minus Rates (you city council's website may have this info)
    minus Maintenance & repairs
    minus Property manager (if you're going to use one)
    minus Interest expense
    If this is still positive, that's an attractive deal.

    However, there are other aspects that may not be obvious in the numbers. If you can find ways to increase rent and add value such as adding a room, that will change the whole picture. The opposite is also true, where a very good deal on paper may have hidden problems (such as leaky building) that will cost you money and rent loss.

    Comment


    • #3
      Hi

      Thanks Fudosan

      Have just spoken to a Bank Loan adviser and borrowing
      $165,00 (100% financed) the repayments per week would
      be $313. Would have to put in around $30-40.00 per week
      to pay loan.

      Also would need to look after rates, insur and R&M.

      What do you think Fudosan. I am confused and am thinking
      against putting in the offer. Do not want to put too much
      of my own money into this IP.

      FH.
      Home Buyz
      [email protected]

      Comment


      • #4
        Hi Fudosan

        Not sure how you work out your calculation.

        Could you expand on how to get the real yield.

        Could you show me an example with the amount borrowed.

        $260(rent per week) x 52 weeks x 100 :- $165,000
        then your equation.

        Thanks
        FH.
        Home Buyz
        [email protected]

        Comment


        • #5
          Hi Freezinghot,

          You have mentioned what the rental renturn will be is that after the renovations or as is?

          Steve

          Comment


          • #6
            Hi Steve

            Yes the rent would be 260-270 after the renovation.

            Will now make an offer of $155,000 + 5000 for the renovation.

            FH.
            Home Buyz
            [email protected]

            Comment


            • #7
              Hi FreezingHot,

              A popular concept used is Gross Yield. It also has some variation, but I generally define it simply as

              Weekly Rent x 52 / Purchase price

              e.g. 260 x 52 / 155,000 = 8.7%

              Some investors may modify the formula and include the vacancy factor and renovation costs, but I just go with a simple one. When I am serious, I do a cashflow analysis as described above.

              Comment


              • #8
                Hi Fudosan

                Thanks for that.

                Is much clearer now. Using that simple formula shows you a general
                yield. I need to look at the deal a little closer for things such as
                rates, R&M, insurance etc as extra costs to see whether this is going to
                be a good investment.

                Thanks for your speedy reply.

                FH.
                Home Buyz
                [email protected]

                Comment


                • #9
                  Hi Fudosan

                  Have done some figures to include what you have written.

                  Here are the figures:

                  (rent) 260 x 52= $13,520
                  2 wks vacancy= $520
                  Rates(papakura)= $700
                  R&M = $600
                  Loan Interest = $14,300

                  Balance = $-2,600.

                  This does not look positive now but have spoken to my broker and
                  he says can claim back on depreciation of around $2,500 per annum.

                  Does this not make this a cashflow positive property now?

                  Any further comment?

                  Loan amount would now be for $160,000.

                  FH.
                  Home Buyz
                  [email protected]

                  Comment


                  • #10
                    I forget to include insurance. It seems that a lot of investors on this forum prefer the figure to be positive before depreciation which is considered as a bonus and gives you a buffer against unexpected expenses. However, you are to decide how much your margin of safety should be.

                    Comment


                    • #11
                      HI FH

                      Depreciation will diminish overtime so unless you are going to be repaying it rapidly, this will only help for a few years.

                      Thats why most of us don't like to count it.
                      New to property investing? See: Best PropertyTalk Threads for New and Old Investors And/Or:Propertytalk Wiki

                      Comment


                      • #12
                        Hi FH, with a cashflow of -$2600 p.a. you will be putting in $50 a week of your own money. It may not sound like much, but over time it adds up.

                        The big question is what will you get out of it for putting in that $50 a week? You won't be paying off the loan so won't be gaining equity. Over time most properties appreciate in value, however the next few years are likely to see little capital growth.

                        Are you happy to contribute $50 a week of your own money considering:
                        - you won't be paying off the mortgage
                        - it's unlikely you'll get much capital growth in the near future
                        - if you need to sell the property in the next few years you'll have to pay back most of the depreciation you claim, plus real estate agent fees, and legal fees

                        I'm not trying to be all doom and gloom here. Just make sure you clearly know what you are expecting to get out of this property, and have an exit plan if needed.

                        Good luck
                        Gerrard

                        Comment


                        • #13
                          Gerrard's comments are very valid, I think the next five years may be flat at the best with a possible reduction in capital value.
                          Look at a scenario with your proposed purchase of rents reducing by 10% & interest rates increasing by 2% (after fixed period expires?). For a unit in average condition (as against totally refurbished), I would allow $1000.00 - $1500.00 pa for repairs and maintenence.

                          There is an increasing market sentiment that we are at or near a market peak. If this is correct then there is a case for reviewing/modifying our buying strategy in the short term. My personal stance is that residential property prices will soften over the next 2 - 3 years and fixed interest rates will increase.

                          Comment


                          • #14
                            Thankyou all for the great replys.

                            It certainly seems that this property does not look all that great in terms of
                            return on investment. Do you all think then it is better for me to do one
                            of the following:

                            1) Save up a deposit (20%) so that my IP is cashflow positive

                            2) Look at buying a cheaper IP.

                            3) Wait till the housing market is in a slump

                            4) Forget the investment all together and put my $50.00 in the bank.

                            I believe I can make a successful IP investor but need a little guidance to do this,
                            I have learnt a lot over the past few months about investing in property and this site has been instumental in teaching me some great skills.

                            However I feel I'm in a hurry and need to slow down, I would prefer to have an investment where the princible & interest is paid, therefore increasing equity and
                            slowly owning the IP freehold.

                            What are your thoughts on my situation, I would appreciate any further thoughts on
                            what I should do.

                            I know the final decision to purchase lies with me but would like to know what experienced investors would do in my situation.

                            Regards

                            FH.
                            Home Buyz
                            [email protected]

                            Comment


                            • #15
                              Originally posted by FreezingHot
                              Thankyou all for the great replys.

                              4) Forget the investment all together and put my $50.00 in the bank.

                              I believe I can make a successful IP investor but need a little guidance to do this,...
                              FH,

                              you are well on your way and your questions are the right ones. You have worked out your basic numbers and understand the picture. Here is the all important question you now need to add to your question catalogue:

                              HOW CAN I CREATIVELY TURN THIS DEAL AROUND INTO POSITIVE CASHFLOW ???

                              - If you are sure you could increase your rent after some reno, you could finance for limited time say 1 year interest only, your picture would change as follows:

                              Rent 50x 270: $ 13500

                              Interest 165K IO: $12688 at 7.69%
                              Insurance: 300
                              R&M: $600
                              Rates: $700

                              Cash Loss: $788 as long as YOU manage it, the property can be maintained for about $600 per annum and sustains $270 rent with 2 weeks vacancy. Is that possible ??? Better, but still not great.

                              - How about paying less??? Things are slowing. As opposed to offering 155K offer 140K.

                              Now it looks like this: pay $140 , 5K reno:
                              Rent 50x 270: $ 13500

                              Interest 145K IO: $11150 at 7.69%
                              Insurance: 300
                              R&M: $600
                              Rates: $700

                              Surplus: $750 p.a. you managing it.

                              (Edited 9/5: Andrew from Rentmaster has agreed to host the spreadsheet which produced the above calculations and you can download it for FREE clicking on this link: http://www.rentmaster.co.nz/pt/fritzquickcalc.xls )

                              You are still not paying down any principal, but if you are a high wage earner, you could pledge to save the $50 a week you were willing to lose, PLUS your tax return and reduce the principle.

                              Have a plan that say after 2 years you have reduced it enought so it will stand P&I and you are away laughing.

                              Are you happier wiht these numbers ? What else could you (or our trusted forumites) think of to turn this deal around ? Is there a large lounge to make it 3 BR, can you build, add on, do anything to increase rent?

                              There is a direct correlation between what you pay to buy it and wether it will make or break. Get a simple spreadsheet and find that point. In the end, if you cannot turn it around, walk away and analyse the next deal, set the rules in place.

                              This way you get to look at more deals, make the offers, and move on if they do not get accepted.

                              Currently I have 5 offers on 4 different tables and I might get 1 deal out of it. Then again, thy may get torn up. Either way is fine by me. If they get torn up I go fishing, if they get accepted I got a good deal (OK, I still go fishing).

                              The trick is to speed up ANALYSING the deal, and making the offers that fit your rules. You have also got it right that sometimes it is best to just sit tight. It feels like you are missing out, but believe me it is far better to get that deal just right as opposed to kicking yourself afterwards and having to contribute to Julians 'what went wrong with my deal' thread here: http://propertytalk.co.nz/postt2597.html

                              Also, if your low low offer gets accepted there is enough room for you to get into your first deal at a low cost, there is enough margin to get out or hang on if it turned to shit, and you are on a steep learning curve. You can only learn so much from books, tapes and seminars, in the end you got to go and ACTUALLY DO IT.

                              And have a laugh while you are at it !!!

                              Cheers.

                              Fritz
                              Argue for your limitations and sure enough they're yours. - Richard Bach

                              Comment

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