Technical hitch

Hi Patricia,

Thanks for your post. Interesting problem you have there and it underlines the importance of due diligence in a potential acquisition.

Based on the numbers you have provided, I’d walk away. You have used some words in your post that I would think very carefully about.

That is:

quote:

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This is a gamble, but homes on the canals are rising almost weekly.

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It sounds to me like your ‘reasonable’ head is telling you that it’s a risk, maybe a big risk – while your greed gland is secreting wildly and tellling you to go for it so you don’t miss out.

Only hindsight will tell us if you would have been better of in or our of this deal.

However, here’s some financial blurb about your chances of making money.

Let’s say you buy for $330,000 on a 80% loan. Closing costs are $11603.50 plus legals and loan fees, so let’s call it an even $13,000.

Cash in you need is therefore:

Deposit: $66,000
Closing costs: $13,000
Total: $79,000

I accept that you may choose to use equity in other properties to fund your deposit, or alternatively you may borrow >80% and pay mortgage insurance. But I need to start somewhere…

Anyway, you mention that you’ll also have to tip in $700 per month. OK… and let’s say that you CAN find a tenant the second it’s finished (say the beginning of April).

Your loss until the end of the year will be 9 months * $700 = $6,300

OK – now let’s imagine that you sell after nine months. The first question I ask is why would someone buy a used apartment off you when they could probably buy a new apartment assuming they are continuing to be built.

Pushing that issue to one side, let’s assume you CAN sell for $380,000. Deducted from this needs to be agents costs, let’s assume 3% – which comes to $11,400, plus let’s say another $2,000 in solicitors fees, mortgage discharge etc.

Your numbers now look like this:

Total acquisition costs: $343,000
Add Negative cashflow: $6,300
Less sales price: ($380,000)
Add sales costs: $13,400
Profit: $17,300

Now, don’t forget the tax implications of the profit. Because you have held the property for <12 months there is no CGT discount, so up to 50% of it will be lost. Best case scenario is you’ll probably lose say 1/3rd, so your bottom line BEST CASE SCENARIO is you are betting $79,000 to make a possible $5,709.

I can see why you said this was a gamble!

To me there is far too much risk given that your key assumptions are:

1. Property continues to rise in value at current rates
2. You can find a tenant
3. The property is completed on time
4. You have access to capital and can afford the loss each month
5. Your likely gain is small compared with the risk.

Perhaps the investing Universe is telling you something by providing you with a way out of this deal.

Maybe it’s your chance to build a relationship with an agent by doing them a favour and moving on from this deal to pick up a more profitable deal later.

Finally, whatever you do, if you are making a $330,000 investing decision without a proper analysis of the numbers, such as that outlined in Financial Analysis Template in Buyer Beware, then you’re asking for trouble.

Best of luck,

Steve McKnight

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Remember that success comes from doing things differently.
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Hi Patricia

Positive cashflow puts money in your pocket from day 1. That is, nothing is left to chance. Do you think this will help or hinder you when you eventually retire in a few years from now?

Just a thought

David U