Investment Opportunity

[FreezingandHot]

Hi All

I have an opportunity to purchase my first IP property.

Here is the senario.

The properties (there are 2 on the one site) are for sale at
$410,000, they are brick & tile and about 4 years old. I
intend to make an offer below this, maybe $380,000.
They currently have a rental return of $595.00 per week.

The problem I face with my decision is that I am nervous about
the price and how much I am contemplating spending and also
the location is not what I would have liked to purchase. I realise
that I have to think like an investor and not have an emotional
attachment to these properties but am finding this very hard to do.

The vendor has told me not to worry about this fact of location but
who can be sure that he is saying just what I want to hear.

If there is anyone on this forum who could give words of encouragement
or any advice on what I should do.

Would be very well recieved.

Patrick

[cube]

Hi Patrick,

They are your rules, not the vendors!

Don't be frightened to pull out if you feel it isn't right for you - plenty more fish in the sea!

cube

[FreezingandHot]

Thanks Cube


Very True. I have set the rules, and need to stick to them.

Patrick

[Josko]

Hi FreezingHot,

Those figures work out to be over 10%, this is good is it not, maybe I am not working them out correctly.

What is it about the location that is not to your liking, is it something specific (i.e. close to railroad tracks) or is it that it is just in a different compass position?

[FreezingandHot]

Hi Ivi

The issue I have is that it is down a long drive maybe 10-20 metres
and as you may know on either side of the driveway there are all near
new houses as a lot of other sites that I have seen.

It does look as if there are quite a lot of houses on this lot but they are
all new brick and tile and in very good condition.

The railway line is about 300-400 meters away but I don't see this as
much of an issue. The houses are situated in Takanini, not the best location in the south but by no means the worst.

I quess what I am concerned about is a) the money I am looking at
spending and b) What kind of tenant I can attract to this property.

The figures do look attractive, bearing in mind that the investment
will be borrowed from the equity we have in our own home.


Still confused!

Patrick

[FreezingandHot]

Also Ivi

How did you work out a 10% yield?

Could you please so me your equation to get this.

Patrick

[PHenry]

Hi FreezingHot, (like that name)

It might be worthwhile trying to identify what exactly it is that is making you procrastinate about this. Once you've identified that then you can decide if you think the cause is rational or irrational (im not being nasty here)

irrational: Marked by a lack of accord with reason or sound judgment

Generally speaking once you figure out that there is no good reason why your not doing something it becomes a lot easier to do it. But as previously mentioned if there is a rational reason for concern then get it addressed (if possible) or walk away.

Good luck

[FreezingandHot]

Hi Paul

Thanks also.

Yes a good process to think about. Eliminate the real concerns
if in fact there are any.

I suppose $400,000 is making me a little hazzy!

Thanks for advice

Patrick

[Josko]

Thank you for sharing the additional information, personally I learn so much more when there is some practical detail to questions that have some aspect of emotion attached to them.

Yes, the 10% was an iviisim*, it looks more like 7.6%

I guess what I am concerned about is

a) the money I am looking at spending and
b) What kind of tenant I can attract to this property.

a) This dilemma, I profess can only be answered by you, and your financial advisers (stick strictly to the investment rules on this one).

b) The answer to this one in my opinion, is related to how long can you wait for a good tenant (financially).

Hey I hope that helps, still new to property investing, but I put a lot of thought into it.

*see if you are paying attention or just making it up as i go along.

Best wishes to your decision.

ivi

[PHenry]

A couple of quick suggestions if it is purely the amount that is of concern.

• knock a zero of all the figures when running the numbers.
  look for another deal that requires a sum your comfortable with.
  run some what-if scenarios to see how much fluctuation you can handle.

Im sure others can come up with other suggestions as well.

[fudosan]

Hi Patrick,

My calculation of gross yield is 595 x 52 weeks/ 380,000 = 8.1% only.

Is the street basically clean and tidy? Is the house close to transport, school, shops, parks, etc.? If the answers are positive, then I'll feel more comfortable.

Is the weekly rental the actual rent they are getting from the existing tenants? Is it over or under the market rent? If it is under rented, you may get a new tenant at a higher rent and that will be nice.

[hort1]

Hi Freezinghot

The above is somthing to think about I don't know how ivi got the 10% I make it closer to 8% at that rent and keeping your R&M down you should have a after tax cash flow of some where between 3 & 4 thousand that is if you can finance the deal at 7.5% or less.
It will cost you around $36-40 a week out of your own pocket before you get the tax at the end of the year, in saying that you can get it weekly if you are a wage earner, your accountant will tell you about that.
Most important keep to YOUR rules.

Good Luck do your home work and you will be fine.

Cheer's

[FreezingandHot]

Thanks for all the great advice.

Fudosan, the property is close to the main Gt South Road (transport)
and also the train. The rent being collected at the moment from them
both is 300 each and in Takanini is just about right. I could raise this
by about 10 but if it is all positivlly geared then I am not worried.

The street is clean and most of the surrouning houses are in great condition.

I would be happy with an 8% yield.

Patrick

[kolzee]

Hi Freezinghot,

It's great that you can start a thread like this and get some really good genuine advice from some experienced investors.

It also seems that in many cases you are able to answer your own questions and clarify the issues when you work through them individually (a good lesson for all of us!).

From what i've read then, it seems the main concern is the sum of cash being invested. My advice with this is that you should ensure that you are comfortable with this, and i think it's important to keep a buffer fund to cover vacancies, inherited problems, etc.

Unless you have another means of sourcing cash in an emergency situation i feel you need to consider this carefully.

Why not start from scratch though, in terms of working out what your threshold is (including allowing for immediate vacancy, emergency buffer, transaction costs, etc)? Once you have done this, if the $380k fits under this then all well and good - you should be comfortable with it. If not, find one that you are.

Final piece of advice is that there is always another deal around the corner. There are very few genuine once in a lifetime opportunities so don't be afraid to walk away!

Good luck and keep us posted on your progress.

kolzee

[Fritz]

Thanks for all the great advice.
I would be happy with an 8% yield.
Patrick

Patrick,
been following your post for a while, and have seen many similar, so I thought I post this little calculation I use as a quick once over. You can set it up on a spreadsheet easily (in fact the original dolf de roos book has something similar in it)

For starters, yes it is a 8.14% gross yield

Meaning you get a gross return of $595 p/w = $30'940 p.a.
Divide that by purchase price 380K = 8.14%.

Some valuers and I do the same would then look at expenses, ie 8% management, rates (say $1000 or $2000 if 2 titles), 8% R/M, insurance say $1000 (ease of adding), and most importantly vacancy (ask a decent property manager).

In your case you are looking at:

Revenue: 30'940

-Expenses:
Management $2476
Rates $1000 (assuming one title)
R&M $2476
Insurance $1000
Vacancy (let's say 3 weeks) $1785
SUBTOTAL: $8737

EBITDA: 22'203
(operating profit Earnings before Interest and Depreciation and ammortisation)

Meaning if you put in ALL THE CASH of 380K you would then end up with a 22'203 / 380K * 100= 5.84% NETT yield or interest on your money.(same as ROI as you put up all cash)
(before tax, comparable to bank interest, apples = apples)


So having it in more then one title will decrease your net yield (you have more costs, more rates) and most gross yields you see advertised just gloss over that fact, but it will affect how much $$ is left IN YOUR POCKET. Gross yield is a very crude and ineffective way looking at things. (imagine 5 units block gross 20K p.a. rent, 100K to buy, your gross yield is 20% yippiee. MINUS body corporate or strata titles, rates, ins., vacancy, on all say 15K = 5K profit or 5% nett yield EEEK)

Yes, you may manage it yourself, but this is still a cost. Yes, you may not have that R&M, but you have to provide for it as eventually you will need a new roof, things leak and break.

I simply look at it like a business profit/loss statement.

Now comes the finance.

Say you finance all of it at 7.5% interest only:
EBITDA $22203
380K at 7.5% = 28'500
YOU LOSE $6297.
On $0 down (it is all financed) your ROI would be the following:
-$6297 / $1 (if you use $0 you get infinity) = -6297%

OK, lets say you put up 100K.
EBITDA $22203
100K down
280K financed at 7.5% = $21'000
YOU MAKE $1203

ROI (Return on investment)
$1203/100K (your deposit) = 1.2%

Happier ???

Then you could play with vacancy going up to 10%, rents dropping, interest rising, rents rising, etc. what will happen ? Can you raise rents to make it break even ? Build a minor dwelling? Add a room? Turn it into a boarding house ? What could you do to make more rent of it?

Are you still comfortable you can achieve this budget ???

Still, someone will argue this is a crude way of looking at it, and there may be capital gain, or depreciation etc. Yes there is, but that is a bonus. To me, depreciation is a bonus as is cg. (it may go down after the April review) governments may introduce a cg tax, who knows? Can you predict the future ? Anybody ? Let me know and I will play Lotto instead.

All you can determine right now without a crystal ball, how much will it cost me/make me, is this within MY RULES, and will I proceed or walk away, or can I alter this deal to fit my rules.

In my book, your deal fails on all fronts. That does not mean it fails your rules.

Your call. But have a laugh while you are at it. Only he who does nothing makes no mistakes.

Congratulations, you are on your way. Just by looking at this deal and sharing information you would have learned something new and are better equipped. Celebrate ! Happy to help as lots of people have helped me.

F.

PS: NEVER believe what the vendor tells you without checking. Check it out with a competent property manager, or better yet, 2 competent pm. Next thing you know pigs fly past the property every Sunday and there are no rent vacancies ever, and the r&m bills get looked after by the fairies.