Choose and compare your niche market

[kickingbird]

I'd be interested to hear from the forumites which market and why.

When comparing buy, do-up and sell returns there seems to be a nice chunk of cash involved...and a nice chunk of risk.

Buy and hold offers passive and hopefully longterm income

Now do you invest in the high end of the market, say $300K and upwards and if so why( as I am not familiar in this end but interested ),

or in the market seeming to be more talked about being the lower end Tokoroa, Taumaranui ( or any other such area offering low purchase price and double digit rent returns ) and that multiplied by a large portfolio of them to make a nice buck.

I am currently exploring the development side of property, buying subdividable and building homes to either sell and fund the next project or keep as brand new rentals to build up the portfolio of next to no maintenance rentals ( for hopefully 10 years or so ) and attracting a higher class of tenant ( that sounds terrible..perhaps just one who thinks they deserve better ).
It seems to me it may be more cost effective to purchase a home on a large section and end up with a brand new rental accompanied by an older one for a fraction of the price you would pay to purchase a new home.
Eg. if it costs me $30k to subdivide and $150k to build I've spent $180k ( plus a few unknowns) for an achievable rental return of $300/wk giving me close to a 10% return and a brand new rental! Sounds good. So why isn't everyone doing this?

I'd love to hear why you, as an investor, have been convinced to tow the line you do, and how you came to decide this.


Live and learn, perspective is your greatest asset.

[FR]

Re: Choose and compare your niche market

if it costs me $30k to subdivide and $150k to build I've spent $180k ( plus a few unknowns) for an achievable rental return of $300/wk giving me close to a 10% return and a brand new rental!

What about the cost of the land?

[RentMaster]

Re: Choose and compare your niche market

So why isn't everyone doing this?

I think a lot of people dont do it because of the risk, and the time, and the hassle. You cant buy it one day and rent it the next. But for the people who do go down than long road the returns do look good.

[kickingbird]

Re: Choose and compare your niche market

if it costs me $30k to subdivide and $150k to build I've spent $180k ( plus a few unknowns) for an achievable rental return of $300/wk giving me close to a 10% return and a brand new rental!

What about the cost of the land?

The cost of the land is gobbled up when I resell the original house for market value ( as I bought under with a big section ).
eg. I just did a deal where the house cost $228k, it was bought for about 30k under market value.
The value of a 3bed town house on 1012m2 and the same house on 600m2 isn't that different at the moment here. People in town don't really want a lot of land to care for...and it was a marriage separation so got it for a good dollar...ambulance chasers I know...
If I resell the original house after subdivision for $220-230k ( achievable by comparable sales ) I have bought the back section for $-2k to $8k plus subdivision costs of say $30k. so $28k to $38k all up plus building costs of $150k. ( under 10% actually in this scenario if renting at $300/wk )

But I'll most likely build two 2 bedroom units on the back and rent out each for $220/wk with not much increase in building cost keeping the m2 to about the same as the townhouse. ( here building is about $1000-1200 per m2)

We shall see, it is in the process now.

[Cliffy]

Hi kickingbird,

I have looked at doing some deals similar to this.

What puts me off is having capital tied up until the new house is constructed - hence my post last week about whether you can sell the existing house before the new title is issued to recoup capital.

I have just finished having a new house built on a rental and with time to get bulding consents, resource consents, construction etc., it's taken over a year.

I think I could have used that capital elsewhere and had better returns.

[kickingbird]

Hey Fair enough Cliffy,

The capital can be tied up for some time.

For me to bother the returns have to be such as to cover the interest on the interest only loan for the time it takes to build and sell with enough incentive left over.
I am interested in doing 2-3 at a time for this reason making the risk higher and the profits bigger and hopefully within the same time frame all working simultaneously.

A valid point you make and worth consideration....time is money.

As to the sale of the homes, I will be marketing them off the plans as soon as they are drawn up and sold subject to title's being issued...as you probably know that could save 3-4 months of permit time.

[Julian]

kickingbird,
Do you have a contingency plan if the market turns and you can't sell your houses for the price you want, or if they take an extra six months to sell? Development intrigues me, as the returns can be fantastic, but with the bigger returns comes bigger risk - well, usually. Developers are usually the first to get burnt when the market turns sour. Would you put tenants in if the properties didn't sell quickly and if so would this cover your costs?
Julian

[Propoholic]

Hi kickingbird

Now do you invest in the high end of the market, say $300K and upwards and if so why( as I am not familiar in this end but interested ),

or in the market seeming to be more talked about being the lower end Tokoroa, Taumaranui ( or any other such area offering low purchase price and double digit rent returns ) and that multiplied by a large portfolio of them to make a nice buck.

I suppose over time I have become more focussed in the investing (buy and hold) area I buy in. This investing area ( Mt Eden, Mt Albert) has gelled over 20 years partly due to specific planning & strategy and partly due to these areas becoming my stomping ground!

Some of the results I have benefitted from point to the strategy of becoming knowledgeable or specialised in a number of investing locations. Some of the benefits I have gained have been:-

No property damage over twenty years
No rent defaults over twenty years
No tenant runners over twenty years
One tenancy tribunal hearing
Low level of tenant wear and tear
A ready stream of high quality tenants

Of course the above central city areas are extremely hard, in a strong economy, to purchase or create (value adding etc) +ve cashflow property. However, more of these central city +ve cashflow properties become available in the softer parts of the property cycle. To make purchases in these areas to match your property buying rules you may haveto become counter cyclical.

Would you prefer to purchase an investment property in Grey Lynn or Gore, Pt Chev or Putaruru, Takapuna or Taneatua? There are serious long term considerations in owning properties in such diverse demographics as above.

In the softer periods of the economy you always get a flight (tenants and purchasers) to quality property. However in recent years 'quality' isnt such the flavour of the moment. In a strong economy any property in any location is very rentable and will probably get good capital appreciation. Seminar presenters are advising investors to buy on the numbers, unfortunately 2+2 in Takapuna is very different from 2+2 in Taneatua.

A $5000.00 finders fee for a property in Putaruru or Taneatua is good business isnt it

[kickingbird]

kickingbird,
Do you have a contingency plan if the market turns and you can't sell your houses for the price you want, or if they take an extra six months to sell? Development intrigues me, as the returns can be fantastic, but with the bigger returns comes bigger risk - well, usually. Developers are usually the first to get burnt when the market turns sour. Would you put tenants in if the properties didn't sell quickly and if so would this cover your costs?
Julian

Hey Julian,
I start with the two rules most forumites (yourself most likely included) would agree with.
Everything sells for a price and you make your buck when you buy.

My contingency plan (plan A) is that I have bought well below market value in an area that is always in demand here with a realistic selling price and a margin of profit that can be attained even with an under value sell.

When I began this project I jotted down the best case and the worst and banked on the worst, and everything running better than that a bonus.

Contingency plan B is also in place and I have built the process around specific pull out positions that will still allow a return, so the process can be guaged while it runs and can make a buck at a few of the stages to completion. Basically breaking it down to phases and limiting the risk to a small step to the next phase rather than from start to finish.

I must say I am not the guru on this sort of thing, just eager to try my hand at something I really find interesting and would like to spend a good few years fine tuning and enjoying along the way....when it ceases to be enjoyable it ceases for good.

[kickingbird]

propoholic,

Hey thanks for sharing, that is exactly what I love to read about, where others are workin and why. Personally I would like to work some of the areas attracting a better class of tenant ( how do you phrase that so it doesn't sound so demeaning? ) ...anyway the top end with less maintenance to the buildings and the tenants..interesting, thanks for sharing.


ps - that $5000 finders fee isn't bad at all...you got any +ive cashies at the moment?

[essence]

Hi Kickingbird

Reading this thread with interest.

May I ask, how's your development progressing? Did you come across any pitfalls that you could share with us? How were the time-frames with Councils/builders etc?

Thanks in anticipation.

[kickingbird]

Hey Essence,

Well I have been busy and not reading and posting lately...missing it actually...
The developing is coming along nicely.
I am currently looking for a section to buy. I have found I can take this a step further and relocate the existing house onto a bare section and flick off for a quick $50-60k profit.
Once the house is moved I start with surveying and pay for subdividing with the gst refund that I will claim being a LAQC.
I am currently talking with building companies and have quotes for the townhouses at $210k each to build, with a selling expectation of $390-450k each.
I spoke to a seasoned developer yesterday who told me a good rule of thumb is 1/3,1/3,1/3....being 1/3 land purchase, 1/3 development cost, 1/3 profit.
It has been a hectic time as I know a minimal amount about the accounting side and that's a bit stressful but I love the developing and deal making...I have a guy doing the accounting for me and making sure the books are balancing.
I should be looking at a 11-12month process being 3 months until the ground is prepared and titles through, 3 months until buildings are drawn and planned and scheduled and 5-6 months to build them to completion.
At the end of that I'm looking forward to that 1/3....

I'll keep in touch.

Anyone with a plan that works out there for them...I'd love to hear about it. Keep it coming!