Hi, Can anyone give me a prima facae opinion on the following two cases as I am having trouble deciding between the two.
Case One: 2 bedroom apartment off plan in Clayton near Monash Uni. $260K being flipped from buyer who purchased it Jan 2002 for $220K. Size is 70 sq/m, Rental would apppear to be secure being located next to Monash Uni and rental estimated at arund $220 per week.. Location for capital growth not huge. To be completeed Dec 2004
Case Two:
Serviced studio apartment (Tenant: Quest) also off plan to be completed June 2005, Located in Richmond. 30sq/m for $210K. 10 year lease at 5.5% with 4 x 5 year options thereafter and 4% increases in rent every year. Ony outlays are around $2000 per year.Your opinion although only based on this info would be useful to me as I try to weigh up which one to go for.
My gut feel is Richmond, for its location, capital growth (although serviced apartments dont grow as well) and secure rental.Hi Traceytd,
To me the choice between the two properties is very clear and easy.
Go for the one at Clayton, purely because of its size.
A property of 30 sq. metres is very difficult to obtain finance for.
If you had asked whether either one appears a good buy
I would say : ‘Absolutely not. You indicate as much yourself by the words you are using : “Location for capital growth not huge.” (Clayton) and “(although serviced apartments dont grow as well” (Richmond).Pisces
(However, I have been known to be wrong sometimes [
]I am not familiar with the locations, however, as a general rule I would recommend the larger of the two without question – if tenancy is not an issue and they are of a comparable standard/quality.
Often the capital gain with a serviced “studio” apartment is minimal at most – i.e. 1-5 year holding period.
But there is a “red flag” – the delay in completing the Clayton development. If the apartment was purchased OTP in January 2002 then this project is likely to have commenced Q2 2001.
It is not often a developer will sustain debt for 3.5 years, let alone wait 3.5 years to realize a profit [assuming this is a standard size apartment complex i.e. < 200 units].
This could indicate that the developer has had difficulty meeting the sales target [for financing purposes], or planning/other finance issues have delayed the project.
If construction has not yet started, I would be asking a lot of questions – including why the buyer is selling the property.
In terms of the asking price [$260,000], if you have not already done so:
1. request the original purchase agreement [between original buyer and developer]
2. find out what studio apartments at this development have recently sold for/or listed.
3. contact a local registered valuer.
Because of the apparent delay you may find others are willing to sell for less than a ~20 percent appreciated value.
— Michael
Originally posted by Pisces:Hi Traceytd,
To me the choice between the two properties is very clear and easy.
Go for the one at Clayton, purely because of its size.
A property of 30 sq. metres is very difficult to obtain finance for.
If you had asked whether either one appears a good buy
I would say : ‘Absolutely not. You indicate as much yourself by the words you are using : “Location for capital growth not huge.” (Clayton) and “(although serviced apartments dont grow as well” (Richmond).Pisces
(However, I have been known to be wrong sometimes []I would do neither.
For about $250k to $260k you can buy a 2 bed unit in Mentone, that is walking distance to beach, shops and station that will rent for about $200 a week.
One in my block sold for $250k a few months ago and I get $205 a week for a unit in the same block.
In the 7 years I have had the unit, I have never had any rental problems and not lost any rent except for the week or so between tenants.
In my view its worth a look before Clayton and a serviced apartment in Richmond.
I owuld never go for a serviced apartment, especially one of that size. Finance is difficult and resale is very difficult and this will affect capital gains.
The one near the uni sounds alright, but just check the sunset clause. The developer may be able to just cancell the contract by a certian date if the construction is not complete. Some unscrupulous developers do this when there are been growth on the property so they can sell them at higher prices.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Traceytd,
In priciple, the Clayton property is the one to choose for all the reasons previously mentioned. However, if the Clayton apartment is 70sqm, that means just under $4000 per sqm. Now for outer Melbourne area, that is somewhat pricy, I think.What are the quality of the finishes? Builder? Architect/designer? Floor plan, car parking facilities. As a rule of thumb, the further out of the city you go, the larger sized property you should buy, due to lifestyle, tenant and/or future purchase preferences. 70sqm isn’t large for 2br for suburbs greater than approx, 15 kms out of Melbourne.
Negotiate a bit harder (which I am suer you will do). Would be worthwhile to spend a few hunderd dollars on a sworn valuation.
James
As other have said, stay away from properties less than 50 sqm. They are specialised properties that are hard to re-sell.
Cheers,
Carlover.
Originally posted by Michael R:
But there is a “red flag” – the delay in completing the Clayton development. If the apartment was purchased OTP in January 2002 then this project is likely to have commenced Q2 2001.Michael, why do you say this? I have purchased 15 OTP apartments in the last few years, and not one of them had been started before I signed my contract. In fact, due to skyrocketed building costs since our bushfires in January, some of them will not commence until late this year or perhaps next year.
Or when you say ‘project’, are you talking about the planning stages, and the acquisition of the land to build on?
Also, the developer that I mention above has at least 4 projects currently being built that I know of, so he’s obviously not in a hurry – he’s also charging carparking money on his land while he waits[
] as it was a government owned carpark previously.Cheers
Mel“I have purchased 15 OTP apartments in the last few years, and not one of them had been started before I signed my contract.”
I am not questioning the stage the development is at when the apartment is purchased.
My point was.. “It is not often a developer will sustain debt for 3.5 years, let alone wait 3.5 years to realize a profit”
Being a developer who sells OTP, it is not “cost effective” or [most importantly] “risk adverse” to extend a development for 3 + years – assuming small to mid size [< 200 units].
For example, the development timeline we aim for – in terms of an apartment project, is 18-24 months from concept to completion, no matter what size the development. And we offer a very high-end product in locations that are often difficult to secure planning approval.
If you have purchased 15 apartments OTP then you should understand the “red flag” that exists when a development is taking 3 + years to complete – aside from the opportunity cost, in some cases the buyers deposit is at risk.
“Four” concurrent developments does not necessarily signify the development company is in a secure position – especially in today’s market.
— Michael
Why is the buyer’s deposit at risk? It isn’t here, as it is lodged in the Real Estate trust account. If the development goes past sunset clause, or doesn’t finish for whatever reason, the buyer’s can get their deposit back.
Four concurrent developments in Canberra is about 3 more than most other developers have on the go at any one time.
I feel either I have missed something in your response, or you missed something in mine, but I can’t quite put my finger on what that is. No matter….
Cheers
Mel“Why is the buyer’s deposit at risk? It isn’t here, as it is lodged in the Real Estate trust account.”
My response was “in some cases”.. the buyers deposit is at risk”.
Not every purchase agreement allows the buyer to recover 100 percent of the deposit.
The feedback I have provided is not specific – I do not know the development, the developer or the location. I have simply outlined general considerations using the original question and my experience as the benchmark.
“Four concurrent developments in Canberra is about 3 more than most other developers have on the go at any one time.”
My point being, the developers debt ratio could also be 3 x [or was it 4] that of any other developer, which “may” be the reason the development in question has a scheduled completion date end of 2004 – which is not a typical timeline.
“I have missed something in your response”
It would certainly appear so.
— Michael
One good enough reason for a developer to delay commencement of the construction is because he hasn’t made sufficient of the plan sales and is therefore unable to obtain construction finance.
Another may be that he may want to sell most of them on completion and he may judge that the timing isn’t right.
Pisces
“One good enough reason for a developer to delay commencement of the construction is because he hasn’t made sufficient of the plan sales and is therefore unable to obtain construction finance.”
This was a possibility mentioned in my initial response that should be answered before proceeding.
In many cases the inability to meet the minimum sales target within a reasonable period i.e. 6-12 months, is an indication the project will not enter the construction phase.
“Another may be that he may want to sell most of them on completion and he may judge that the timing isn’t right.”
This is also a possibility, but as noted it is not often a developer will sustain the debt/opportunity cost for a period exceeding 3 years, aside from other factors, there is no guarantee the costs will be recovered.
— Michael
Originally posted by Pisces:
One good enough reason for a developer to delay commencement of the construction is because he hasn’t made sufficient of the plan sales and is therefore unable to obtain construction finance.Pisces, very true, but in the case I have mentioned not relevant. There are about 300 units, and almost all (approx 280) were sold within first month – behemoth agency down here who went to investor clients first generally – did a ‘ballot’ pre release to the public.
Cheers
Mel
]
] as it was a government owned carpark previously.You must be logged in to reply to this topic. If you don't have an account, you can register here.
