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  1. #1
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default 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.

  2. #2
    Join Date
    Jun 2004
    Location
    Auckland
    Posts
    2,103

    Default

    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.

  3. #3
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default

    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.

  4. #4
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default

    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.

  5. #5

    Default

    Hi Freezinghot,

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

    Steve
    Steven Goodey - CEO PropertyTutors Wellington

    www.propertytutors.com

  6. #6
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default

    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.

  7. #7
    Join Date
    Jun 2004
    Location
    Auckland
    Posts
    2,103

    Default

    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.

  8. #8
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default

    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.

  9. #9
    Join Date
    Feb 2005
    Location
    Auckland
    Posts
    624

    Default

    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.

  10. #10
    Join Date
    Jun 2004
    Location
    Auckland
    Posts
    2,103

    Default

    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.


 

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