Property Investment No.1
I’m doing an exercise to learn how to calculate the figures. It is a real life house that is up for sale as of 11/Dec/2003. The house can be seen here.http://www.jaffasoft.com/property/invest_prop_no1.html The situation is, i have not inspected this house! I cannot comment on the due diligence needed to further see the potential of this deal as far as building and the area it’s in is concerned! I have done this for the math due diligence side of it!! Though I have included any thoughts about it in the upside / downside that I could gather just by having a look at the photograph, that’s as far as I’ve gone. I do not know what this house would be expected to rent at, I am guessing $100. I am primarily doing this as an exercise to sum up the figures in a real life ‘house for sale now’ situation. And to present it for analytic purposes. Just because I have laid this out with all these figures does not mean I have got it right. I have done this with the FHOG because my first home will be with the First Home Owners Grant, until I can rent it out. The intention is for you to be as critical as you can about it and find any faults as you can or suggestions and your thoughts about the deal ( just rip it apart basically). It will jus be a learning exercise. Some of the land tax etc I guestimated so im not sure if they are right!!
Location – Victoria, Country, Population – around 500
Found – Thru an Internet search.
Strategy – Buy, Hold, Rent for positive cash flow investment.11 Second Solution (rent X vacancy %age X 1000)
Rent = $100
Vacancy (4 weeks 92.31%) = $92.31
Solution = $46,155
House Price = $35,000Purchase and Closing Costs etc.
Deposit = $5,600
Legal Fees = $1,000
Stamp Duty = $860
Morg Application Fees = $485
Other Borrowing Costs = $200
Building Inspection Costs = $300
TOTAL PURCHASE COSTS = $8,445Loan P&I(Principal & Interest) 20% of house cost, take out FHOG(First Home Owners Grant) –7000.
Principal = 22,400
Interest Rate = 7.05%
Term = 25 Years
Weekly repayment = $39.76Total Annual Cash Expenses
Rental Management Fees 7% of rent = $336.01
Advertising = $100
Council Rates and Fees = $600
Insurance = $350
Misc Costs = $100
Landtax = $300
Annual Maintenance 7% of rent = $336.01
TOTAL ANNUAL EXPENCES = $2122.02Summary (annual rent – annual morg repayment – annual expenses)
Annual Rent = $4800.12
Annual Morg Repayment = $1908.36
Annual Expenses = $2122.02
TOTAL ANNUAL CASHFLOW = $769.74
TOTAL FUNDED COST = $8,445.00
CASH ON CASH RETURN = 9.1%
RISK FREE RETURN = $337.80
Weekly Positive Cashflow = $14.80First Outcome with 2 weeks vacancy and 5% annaul repairs (weekly positive cashflow) $20.03 COCR 12.3%
Second Outcome with 4 weeks vacancy and 7% annual repairs and maintenance was (weekly positive cashflow) $14.80 COCR 9.1% Works out to be 10.4% COCR with 30 Year Loan Term.
Downside – Area of possible termites 1/3 houses in this area have termite damage.Not mutch capital gain that I know of? Electric stove. House a bit drab. Lane access, so may be ppl thru the nite ect so who knows what or who would go thru there? Rural town small population. Gum tree mite need to be removed or trimed. Wood windows. Extra termite control costs if needed 3-6 monthly? Would not be feasible without the FHOG to make it CF+. No capital gains and hard to sell come the time when you may want to roll it over.
Upside – If rented 48 weeks of the year reasonable cashflow(not good)? Appears to need not mutch renovation (if any at all). Looks to have an aluminium shed down the back. Air conditioning (it is a fairly hot area). Fence appears to be ok on one side is all I can see in the photo. The galvanised iron roof looks to be in good condition (gal doesn’t rust in a long time). Could possibly plant a garden.
Property description that was in the web site the property was found in!!
2 bedroom brick clad home. Both bedrooms double in size master with ceiling fan. Lounge has reverse cycle air conditioning.Kitchen/dining area with electric stove.Bathroom; vanity, separate shower and bath.Laundry with auto taps and wash trough.Single garage. Set on a large block with lane access.
How do you intend to get the (First Home Owners Grant) –7000 deduction if you are buying it to rent out ?
Hypothetically the house would be rented for 25 years or more it would only be one year that I would live in it before I could rent it. I have based my calculations on renting it after I have moved out.
Aye Mate,
So are you saying you are happy to move out to an area where +geared IP’s can be found (ie country area) and live there for a year. Or are you telling us porky pies.
Hmmm, sounds dodgy
Mick INC
I live in the country why do you find it so dodgy that someone would move into a house in the country? If it’s a investment property near the Murray River all the better , i would like to move there because i will be putting my houseboat on the Murray sometime in the next two years.
For the right situation i would live in a first home. It’s just an exercise in the due diligence!! I wont be buying a house for two years probably unless circumstances change.
Once i found a house that seemed an ok one to do a due diligence on i showed it to the forum to show that positive cashflow houses exist evan though its not a real good one. A lot of posts i have noticed say there is none about.Have you got something to say about the deal that i mite be able to learn something from??
Have you had any experience? Can you say anything about the deal. I think its a lemmon. What do you think?Hey Jaffasoft,
Well from what i can see you have done a reasonable amount of due diligence on this property. With COCR of 12.3%, that is a above the prefered 10.4%, which is good. Rurual areas like this town with only a population of around 500, imho is risky business. A thread was started about rural towns, use the search tool to find that for more info. Planning on having only 2 weeks vacancy seems me like it would not be enough, but i don’t know what the area is like.Hope this helps, your’ve done a good job.
Matt“If you do what you have always done, you will get what you have always had.”
“Isn’t it time for a change?”
Well from what i can see you have done a reasonable amount of due diligence on this property. With COCR of 12.3%.
Thanks Matt
That’s want i wanted to know, if i got the numbers right? Now i consider that i have learnt one component of property investing.I have read the post about investing in rural, i read it with interest. I’m in two minds about that. Though since im from the country i tend to back it a bit. Though one mind is open to invest in larger towns (10-20 thousand) Though i take your piont and i think there right. I don’t know what the town is like iether perhaps putting the vacancy down a few weeks would be a better way of calculating these country towns anything.
Harder to get 80% loan in rural towns.
I think this house would break ya rather then make ya. On the other hand i know i havent done any research about the location or the condition of the house.
Thanks for posting this Jaffasoft. I’m going through the same exercise and doing a lot of playing with my own spreadsheet (bless you My Palm) before looking at any others, because I can’t think of a better way to get all this firmly into my head. I guess I’ll post something for constructive criticism too one day, but not quite yet.
Three questions:
1. What is Bor?
2. I know it’s 5% of rent and I know that’s a common guideline, but is $250 a realistic figure for R&M. Seems to me that could disappear in one good hot water emergency and would make painting the house a 20-year project. I’ve been assuming $500 minimum for R&M and worrying that it might not be high enough. Am I over-conservative?
3. From years of freelance and contract work, I have an ingrained habit of running all budgets on 45 paying weeks a year. For IPs I treat that as a worst case, and run the numbers on 50 weeks as well (for long-lease IPs I try 52 just in case nothing goes wrong, but I don’t believe it). In such a small town I’d be inclined to treat 48 as a best case unless you know otherwise.
We were at Echuca for a few days early in October. Hope your houseboat is as much fun as the paddlesteamers [
]Ghoti
Bless you too.
That’s the way to go to do a few exercises you’ve got the right idea. Each day i calculate a new scenario to get familiar with it. And calculate it with different figures, it’s amazing how the figures change as far as the outcome you get at the end.
Qu 1). Bor – I’ve edited the post above to change that. Is for Other Borrowing Costs!
Qu 2). Yes well that’s right it is a guideline, i don’t think your being to conservative. And probably a good measure if one is going to invest in a small town. It’s hard to tell when you (i) haven’t physically inspected the house (that’s the next exercise I’m gunna do).
Qu 3).I’m in favour of thinking your right and will calculate and edit the post sometime with it at 48 estimated weeks rent. And we’ll see what the outcome is.
The Houseboat should be a lot of fun compared to what im doing now. I’ve never been to the Murray, well i remember travelling over it once or twiss. I’m going to Echuca for couple of weeks soon to check out a few things at the river. Will checkout and go thru a few houses while im there.
Jaffasoft,
That would be a very good idea to calculate it for 48 weeks. Make sure that if it is a rural town especially that you check out the rental demand. Have fun with your house boat. []Matt
“If you do what you have always done, you will get what you have always had.”
“Isn’t it time for a change?”
Jaffasoft well done on your due diligence you seem to have it under control, the only thing i would like to add is , because theres such a low population ,there is basically no capital gains and hard to sell prperties . So you would stand a good chance of not being able to sell the property when you want to roll it over and chances are its valued less than you paid for it as it would be getting in more need of repairs?
Ive just finished looking into one in a small town for 25000 rented at 130 pw ,good pos gearing but would take the chance of not being able to sell or re rent possibly if the tennents left.Risky,
I would imagine this would have the potential for good cashflow. Are you planning to go forward with this or not due to the reasons you just stated????
cheers
blowieMoney is an elastic resource, it can be created. Time is not.
HI Blowie, although on paper it looks good , ive decided not to as i dont want to be stuck with a house that i cant sell. I actually lived in the town for 2 years and i could have brought the same house for nearly the same amount 20 years ago , so id be relying on the tennants to much = to much risk for me [
]Jaffasoft,
I believe that Risky has a very important point for you to consider…
cheers
blowieMoney is an elastic resource, it can be created. Time is not.
I believe that Risky has a very important point for you to consider.Absolutely..i aggree…a very important piont!! For the record i will edit that into the first post in the downside.
Risky, How mutch rent do you think this house would get in that area?
It was advertised at 130 pw or 120 pw not sure which one as i was looking at hundreds of properties that piticuliar day.
“risky”
25 000 people seems to be a fair size town to me considering others on this forum have invested in towns from 9 000 to even 3 500 !
Granted the Growth is not going to be there, but do you want Growth ? income ? or low risk ? pick any 2.
Smaller towns are risky, but consider all the variables such as what is rental demand like in the town, population growth, industry etc.. you may not get huge growth but get reasonable income stream as for selling..Do some value-adding to the property and the ‘forumites’ are always looking for + geared IPs [
]REDWING
Great post here,some interesting thoughts.
Jaffasoft, I went thru the same execises re rural investing as you are now a year ago.
I travelled around a lot with the family mixing holidays with research.I have now 4 properties in rural areas.
What i ended up concentrating on was properties within 15 minutes driving from largish centres. IE: Portland ,Warnanbool,Ararat.I found a small but definate trend of locals moving out of these centres to surrounding areas to recapture the rural living, along with cheaper rents,and commuting into town for work.When looking, if a particular town or property interested us we would stay for a few days,talk to agents every day,eat at the local eateries and pub ,visit the tourist attractions and get a real feel for the place.This helped us buy the right sort of property for the sort of tenant that we could expect in that area.
From an investment point of view all properties have been a succsess. In all cases the local agents are managing our props and the service and help has been fantastic.
If done right I reckon there is still value for the investor in regional centres.Some will be a lot better than others, so keep doing your research.Any investment has to stack up financially, but property has so many other variables that are equally as important but you seem to be on the right track.
Good luck!Hi Guys,
Whats your opinion say if the town had a population of 8500 people and this has been the same for the last few years. This town is just like every other small town.
But… the town has its own centrelink office…
What would you say the risk on the town is now? Would it be best to say, that the risk is lowered, also one other thing the centrelink has been there for about 15 years im sure.
What do you think the risk could be, in investing in this town?
cheers
s.i.sSave on a regular basis
“People forget that by saving just $3 per day and investing it sensibly over a working life, you’ll end up with around $1 million.”
http://www.theenlightenedway.com/tools/mil_calc.shtmlI would say that yes there is a lowered risk. But there would be low CG.
Thats just a personal opinion.
Matt
“If you do what you have always done, you will get what you have always had.”
“Isn’t it time for a change?”
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