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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 17, 2017 - 11:27 pm
The supply and demand for over 55’s in the region
So, there are 14 retirement villages in the council area, ranging from high care to independent living.
There are approximately 1100 dwellings across these 14 villages, of which around 300 dwellings are independent living (the type I am looking at).
ABS stats showed that there are approximately 18,000 over 50 year old’s in the council area, but it’s a city with many smaller regional towns surrounding it, so the pool of over 50 year old’s will be quite a bit larger.
In any case, for 1100 dwellings to be full then 6% of the target market (1100/18000 = 6%) would need to be living in them, and that’s if they all lived as singles (a lot of couples would be sharing).
ABS stats suggested 40% of the region are renters (however no data on the ages of these renters)
Looking at independent living, to fill 300 dwellings would require a 2% demand from the target market (300/18000 = 1.7%).
Conclusion: While the rents are a high % of the target markets income, I think demand will be good as the demographics show that it would take less than 2% of the residents in the immediate council area to require independent living residences for the supply to be used up.
I know for a fact that over 50% of these dwellings are owner occupier, so the pool of rental in this space is actually quite tiny, less than 150 dwellings. This surely suggests there will be a good demand.
This assumption was supported by the fact that 7 rental applications were received for this unit alone.
Next step: Meet with the broker tomorrow to see what the financing options are.
Current gut feel: I think I will add this one to the portfolio, if the finance works.
- This reply was modified 7 years, 3 months ago by Tom. Reason: Fixed formatting
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Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 17, 2017 - 7:45 pm
On the question of rent as a % of pension.
Aged Pension (over 65) – weekly pension rates
Single $404
Couple $609
Rent set at $220/week
Single – rent = 54% of pension (49% when rent assistance included)
Couple – rent = 36% of pension
Rent set at $240/week
Single – rent = 59% of pension (54% when rent assistance included)
Couple – rent = 39% of pension
This is a real worry as an investor – when housing stress is widely accepted to be 30% of income spent on rent/mortgage.
I think this is the biggest issue I’ve found so far. While the rents have been increasing by 1.2% a year for the past 5 years, there is not much wiggle room for increases beyond pension growth (As Corey commented at the start of this post).
Next step: Determine pension growth over past 10 years and forecast growth for next 10 years.
- This reply was modified 7 years, 3 months ago by Tom.
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Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 16, 2017 - 4:47 pm
Some further ABS stats:
25% of the population in the council area are 50 years or over (current/near term demand)
39% of the population in the council area are 40 years or over (future demand)
40% of residents rent (60% ownership)
As a forecast, if only 3% of this population require an over 55’s unit that is 530 individuals.
Next step: Quantify the number of over 55’s units in the council area to see if this demand is already met.
- This reply was modified 7 years, 3 months ago by Tom.
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 16, 2017 - 4:09 pm
You are correct Benny, It’s a great discussion and pushing me to research the over 55’s opportunity. I am enjoying questioning the assumptions, a great learning experience.
On the topic of questioning assumptions, I have obtained rental data from two agents who manage units in the complex. Over the past 5 years rental growth has been 1.6% per annual, for an 8% growth between 2011 to 2016/2017.
This seems like reasonable rental growth.
What type of growth do you (forum members/investors) factor in for residential houses?
An interesting bit of information I obtained. A unit is advertised for 240/week and has been in the market for a ‘longtime’. The unit I am looking at has a lease at 220/week, and had 7 applicants at that price. Clear indication that the market is price sensitive. 240/week is too high a price based on pensions I expect.
Next step – work out pensions for this age bracket and % of rent that 220 and 240 equate to.
- This reply was modified 7 years, 3 months ago by Tom.
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Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 11:38 pm
Cool, I consider ROI as well, and I agree, 7% is good benchmark.
I never buy houses requiring anymore then a cosmetic touch up or replacement (such as hot water etc).
I always use the building inspection finding to negotiate the contract price down for known issues (i.e. if the hot water needs replacing I will knock my contract price down by the replacement cost of the hot water unit)
I know many others make money with renos and flips etc and I think they earn every cent.
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 11:04 pm
Hey Jaxon, I’m interested in the math process you undertake to work out your deals?
I personally always, in the first step, work out the math using $0 deposit (so 100% financed). I do this because that is what an investment is costing me, 100% the agreed price.
If I use 10% or 20% deposit it really doesn’t matter, because I have to obtain that money from somewhere right? Be it equity, cash savings whatever, it costs me to use that money (opportunity cost).
So, if I buy a house for say $130,000, and I get a rent of $235 a week and my expenses are $2,200 or so (excluding mortgage) and a loan at 4.5% on $130K has P&I payments of $659/month my cash flow is going to be around $1776 a year ($34 a week).
That’s the first hurdle all my investment have to reach – positive before deposits.
Now, if I throw 20% at this investment, my loan goes down to $526/month and my cash flow is now $3,368 ($64 a week).
But really, I can’t use that $20K again (until I refinance and gain access to equity etc).
So, I was wondering, how do you determine positive cash flow mate? Before deposit or after?
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 10:20 pm
In the end, I try to be objective and not fall in love with the deal (this one included).
I have invested in property previously that many other investors/buyers saw as too risky (the ‘bad’ neighbourhoods) and these have worked out to be good cash generators and increased in value over time, not to the same lofty values of other suburbs, but as I was getting a positive cash flow from day one and I had low buy in price the end result was increased wealth (hence the ability to buy opportunities such as these for cash).
I’ll keep researching and going on this journey and keep you updated on the progress.
Again, thanks to all for their comments and opinions, I value your insights and guidance.
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 10:10 pm
Hey Jaxon, you and Corey are 100% correct, capital growth potential is weakened due to the nature of the over 55’s for sure.
In regards to the math, total expenses are $10,432 and rental income $11,440, so a net positive cash flow of $1007 before tax offsets, which goes up to around $1,736 after offsets. It is around $33 income a week.
Not as good as your $121K deal, but not a bad return.
I have completed positive cash flow deals with residential properties, and this is the first time I have looked into a over 55’s complex. Hence the questions and I really appreciate the comments/feedback/opinion from other forum members.
While I have a signed contract I have included a 3 week clause to complete due diligence so I am looking into all the options and modelling a few possibilities (i.e. increase body corp etc) to see if this opportunity has a place in my portfolio.
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 8:46 pm
I have received advice today from my mortgage broker that Westpac are happy to provide a loan, secured against the unit with 20% deposit. It all seems to be stacking up so far, even finance is coming from one of the big 4 banks.
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 15, 2017 - 1:39 pm
I found this opinion from http://www.homeloanexperts.com.au/property-types/over-55s-village/
Why are the banks so conservative?
The banks are concerned that it may be more difficult to sell these properties if the need arises.
As a result, most lenders won’t lend for them at all while others will restrict the amount you can borrow so that their risk is reduced.
For the most part, these concerns are unfounded. The majority of complexes have few restrictions and are in high demand due to their excellent rent returns, which are often linked to increases in the Consumer Price Index (CPI) or pension rates.
As Australia shifts towards an aged population, it’s difficult to see how these properties won’t be in high demand for the foreseeable future.
Maybe entering the market at the low point (rent in covers expenses out) at a positive cash flow position is an acceptable level of risk.
Have other forum members invested in over 55’s complexes? What was your experience with this vehicle?
Tom
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Tom
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@tommyt
Join Date: 2017
Post Count: 35
August 14, 2017 - 7:13 pm
Interesting insights Corey. I can’t help thinking that the fact that lenders won’t lend to investors for these units is actually an opportunity. There are tenants who cannot look after maintenance of yards etc and who need residence’s purpose built for impaired mobility who can’t afford to buy their own unit. This unit had 7 applications to rent at the renter open day. Also these units are bought and sold on the open market, no onsite manager or other structure in place who owners have to sell back too.
One of the risks is certainly that body corp costs increase etc, but the majority of the complex is owner occupier so body corporate fees are somewhat set/impacted by a group vote (50 units), so I expect body corporate fees likely to remain in the ball park of where they are now.
My understanding of markets (rental or any other) is that market price of the asset is set very much by the expected cash flows, and on that measure this unit seems to be at good value presently. In the same town a 3 bedroom house is selling for $250,000 and rents for $270, the unit looks way better value than a house in that market.
Tom
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