Buying Criteria

[ShaunP]

Hi everyone

I am getting a family member to buy investment properties on my behalf in another part of the country and I am just trying to write down a detailed list of buying criteria. I was wondering what everyones buying criterias were. I have two main points so far being that the properties must be:

a. 20% below FMV

b. cashflow positive

Any suggestions would be much appreciated

Cheers
Shaun

[SuperDad]

Hi Shaun,

Is your relative in Invercargill? (I ask because 20% below FMV and CF+ive are thin on the ground around most parts, from what I hear.)

One of my criteria is that the property must be on its own piece of dirt. Long after the house has rotted away, the dirt will be there appreciating in value. My grandchildren will grow rich off the pieces of dirt I buy.

Paul.

[Orkibi]

Hi Shaun,

(I ask because 20% below FMV and CF+ive are thin on the ground around most parts, from what I hear.)

Hi Paul,
Can you please exsplan that part, didn't understand it.

Cheers
Hadar

[SuperDad]

Hi Hadar,

What I mean is that it is hard to find properties that one can buy for 20% below fair market value(FMV). Suppose that a house is "worth" $200000. To purchase this house at 20% below FMV, one needs to pay $160000. Hard, but not impossible.

More realisitc is buying a house and increasing such that one's total outlay amounts to 80% of the after-renovation value (ARV). But this isn't what Shaun is instructing his family member to do.

And even if you can get the property at 20% below FMV, it is still hard to find properties that are cashflow positive (CF+). This means that the property expenses (mortgage, rates, insurance, repairs) are more than covered by the cashflow the property generates.

This cashflow can be generated in two ways. The first is through rental income alone. If the rental income alone covers all expenses (mortgage, rates, insurance, maintenance), then the property is CF+ pre-tax. But if the rental income doesn't cover all expenses, then one can get a tax refund by making a loss (mainly through claiming depreciation). Sometimes this loss is so great that the tax refund it generates, together with the rental income, is enough to cover the mortgage, rates, insurance and maintenance. This is known as having a property that is CF+ after-tax.

Sorry if this is a bit simplistic. I've not long returned home from teaching, and I'm in school master mode.

Paul.

[Orkibi]

Great reply!!
Thanks Paul.
H

[ShaunP]

Thanks Paul
She is actually in Invercargill

I suppose another criteria could be that the property must be in a good area and permanent material. I'm struggling to come up with much more because all that really matters to me is the purchase price being around 20% below FMV & cashflow positive.

[JohnL]

A reasonable area can be very important if you are looking at a rental. When there is a surplus of rental stock (and there will be at some stage), then its the badly maintained houses in the areas no one wants to live that will stay empty.

John

[rustica]

Rules

Hi SeanP
Other things you may want to consider are:

Landsize
Land type (cross lease-freehold)
Driveway access (ROW/steep or not)
Locality to schools, shopping centres
State of property ( will you fo them up or not)
Number of bedrooms
Zoning

Hope this helps

[FatBelly]

I would also be looking for properties where I can add some value. Its all very well trying to buy at 20% below MV, but if you arent seen spending some money to add some value (ie. thru reno or adding a room etc) then your finance company is not going to be so accommodating when you try and re-mortgage at the MV straight away to recycle your deposit.

I've just found that by doing this, and spending $6-7k on new carpets/paint etc, finance companies will refinance to the MV within a week - but if I just buy well under MV and do nothing, they will make me wait at least 3 months before refinancing to the MV.

[GO DO IT]

Balancing cashflow and capital gain

Great to read investors comments, very inspiring.

We balance out our holding portfolio, generally we buy 4 or 5 positively geared properties with 1 negative one, the negative one must have a positve twist, like high residential for future development, subdividible, will take a minor dwelling etc.

Now that we have over 40 holding properties (to be honest don't know the exact count), we are getting more picky as far as purchasing lower maintainance properties. Brick and ali joinery are great long-term.

We worked out initially that if we found positively geared properties we could keep purchasing one after the other, which has been awesome.

We still look for cashflow positive and find some that we pass on to other people, we have now established good tradesman in areas where we buy 'clusters' of properties. Once we have purchased 1 in an area, generally we will look for another 4 or 5 quickly. This works well for property management, maintainance etc. And every now and then we take a trip down the country and visit some of our houses.

We love doing what we do and congratulate others who step out, take the action and learn.

Cheers

[rustica]

[quote=FatBelly;52931]
I've just found that by doing this, and spending $6-7k on new carpets/paint etc, finance companies will refinance to the MV within a week -

Yes they do, we bought a property in May 06 in Piha (9 months delayed settlement and 4 month early access for repairs and renos) for $700K spent $8k, RV $885, a second tier lender financed 80% of RV on settlement, this meant quite a low cash depost required