Hi All
We are looking at purchasing a non-stratered 5x2b’r block of units for $418,000. The current rent per unit is $120pw. Outgoings around $9500pa (I am hoping I have over-estimated this figure).
We have spoken extensively to the property manager and looked at other comparable units in the area. The block is in a good area, low vacancy rate, and in relatively good condition. We were told that if we ‘freshened’ them up ie new kitchen doors/bench, flooring and a slap of paint, we could rent them out for around $140pw. We were also told that if we stratered them, we could sell at ‘todays’ prices for around $110,000ea, compared to $84,000ea non-stratered(and after looking at other units in the area, this seemed a reasonable figure).
Now my question …. what would you do? All creative ideas welcome [biggrin]
I would strata them immediately. You could then deal with each unit seperately. It would open the way to many lenders.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
I’ve got a small block of flats and from my experience about one-third of gross rent or slightly under seems about right for expenses – managing agents, rates, insurance, repairs, lawnmowing. But you should be able to check most of this.
In relation to strataing the flats a couple of things to look for are:
a. does the building meet current fire standards. Older blocks might not if the roof space between the units is not separated.
b. council requirements eg are there going to be any extra contributions for water, sewerage etc. I came across a situation a number of years ago in a regional city where if an existing block of flats was strataed, the contribution the council wanted for services depended on when the block was originally built. I can’t remember the cutoff date that council used but it did add a fair bit. In NSW there would also be survey fees so you should get a quote for those.
You indicate there’s a fair difference between prices per flat for non strata and strata blocks. It seems to me that after your estimated expenses the flats are being sold on a 5% net yield. If you are able to do the flats up relatively cheaply and increase the return by $20.00 per week, then on your initial purchsase price your net return after expenses is going to be about 6.4%.
When I had my flats valued last year the valuer looked at net return. It might be worth speaking to a local valuer to see how they would look at valuing flats. If net return is important then if 5% net would still apply that could give a value of around $535,000 or $107,000 without the expenses of strataing.
If you’re intending to strata to build up extra equity that might be worthwhile, but your council rates at least in NSW will increase each year.
I’d be a bit concerned that the profit margin might be too small for the risk if something extra comes up. Even a 5-10% drop in prices might eat up most of the profit.
Purchase price $418,000 $83,600 p.unit
Purchase Costs
Renovation costs
Strataing costs
Selling Costs
TotalSale Price $550,000 $110,000 p.unit
crj, my comments are from a financing point of view to keep growing. Lenders look at saleability in their valuations. Rental return is only looked at for serviceability with them. They consider blocks like this as commercial and less saleable than if they were strata units.
There is definately a lot to consider.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
I agree there’s a lot to consider. Obviously increased borrowing capacity is one and no doubt the possibility of being able to free one flat from a mortgage so you can use another lender when making further investments. My comments are looking at the things to be considered in whether the strata title is feasible. There might even be a better profit to be made if a more extensive renovation could lift the flats to a higher level and the work done is simmply to get all the approvals for a strata development and then onsell to a developer
Originally posted by crj:I agree there’s a lot to consider. Obviously increased borrowing capacity is one and no doubt the possibility of being able to free one flat from a mortgage so you can use another lender when making further investments. My comments are looking at the things to be considered in whether the strata title is feasible. There might even be a better profit to be made if a more extensive renovation could lift the flats to a higher level and the work done is simmply to get all the approvals for a strata development and then onsell to a developer
Thanks for your responses. There is a lot to consider about stratering and we have actually spoken to a council rep. We were told that there would be quite a large rise in rates if we were to strata and that has held us back. Do you know if you can get the development application approved, but not take it to the next step, ie actually stratering, until ready to do so (which may not be for a year or 2)?
CRJ – I wonder if you can go into more detail in relation to your above quote on ‘lifting the flats to a higher level …… then onsell to a developer’.
Again, thanks for your help.
I think crj means renovate to increase your rental income but sell to someone who is happy to develop the block – ie strata the units if you don’t want to.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Hi Snowgum.
If you are using 20% cash deposit (are you?). Then you are using $83,600 + $20,900(closing costs).
total $104,500 CASH IN.
So at say 70% vacancies, you are looking at an income of:
70% * $120 * 5 * 52 = $21840 p.a.
Expenses of:
$9500 + $21736($334400loan @ 6.5% IO) = $31236pa$9396pa loss per annum. Before tax refund
True loss at 48.5% tax bracket = $4885.92pa….I hope it IS a good area like you say.*******YOU WOULD BE MAKING A 4.67% REAL ANNUAL CASH LOSS ON $104500**********
So if you did say an extra cash injection of say $7500 per unit for renos, you would get a return of $20pw = $1040p.a on this. Allowing for 70% vacancies, you get about $728 pa per unit 9.7% return on the money injected for renos is pretty good.
total cash in = $104500 + ($7500*5) = $142000
annual cash flow loss = $9396 -($728 * 5)= $5756pa
After tax loss(48.5%) = $2993.12********YOU WOULD THEN BE MAKING A 2.1%pa LOSS ON $142000***************
(fingers crossed for capital gains again!)OR IF you can strata and sell in 12 months. (no renos)..you could sell the lot for $550000.
Profit of $550000 – ($418000 + $20900)= $111100profit – (strata process costs {$10000?} and holding costs for 12 months{$4885.92? actually this would not be included in CGT calc, rather it would be offset against income. Neither here nor there really} and selling costs{$30000?})
At cap gains (discounted) of 25%, you make $49660.56 on $104500.
*******YOU MAKE ABOUT 47.5% after tax profit on your $104500******.
No renos, I would go for the strata baby.
NOTE: I havent allowed for depreciation in my calcs.
Live, Learn and GrowLifexperience
What I meant was that it strikes me that in the regional cities I follow there are a few sub-markets for strata units eg say $120,000, then $150-$160,000 then say $195,000.
Depending on the location, building etc, if these sub-markets exist where Snowgum is looking a more extensive renovation might increase the price. If that kind of market exists, then it might be possible to do the work to show a strata subdivision is possible and has been approved and then sell to a developer.
LifeX, unless there is something odd in these flats 70% occupancy would be very low. I work on 4 weeks vacancy (about 7% vacancy as realistic) and budget my worst case on 6 weeks vacancy (11.5%). Even when I’ve had longer vacancies for a particular flat, the others have stayed rented. A longer vacancy might occur when you’re lifting the rent to a higher level than was traditional in that area. Snowgum should be able to get a rental history and a bit of investigation would show how likely $140.00 per week is
A 30% vacancy rate is very commonly used by lenders in their servicing calculation.
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
Hi,
I have posted this in another topic but our local council doesn’t require fire rating or anything when strata-ing existing units. We are on our 3rd set.
Have you spoken to your council?
cheers
Karen
Snowgum,
in my area(southern NSW)you can get your DA approved and you have 5 years act on it. I would say this would be fairly standard across the country but check it with your local council.
cheers[cap]
I luv this forum!! There are so many interesting and diverse ideas out there!! Thanks for taking the time to respond to my questions.
My partner and I have discussed all the options put forward. We were very interested to hear that by strata-ing we have ‘instant equity’. At this stage, tho, we will speak to a valuer to determine prices etc and to get any ideas of the best way to go about renovating for maximum benefit (ie further equity/rent). We have the rental history of the units, and are very happy. We also believe that there is room to move with the rent after seeing what is currently available.
In relation to crj’s suggestion re sub-markets, that is something we will definitely look into, along with a more extensive renovation.
Thanks again
Snowgum
Instant Equity PLUS access to more lenders!!!
Robert Bou-Hamdan
Mortgage AdviserM: 0414 347 771
E: [email protected]
W: http://www.mortgagepackaging.com.auFREE Finance-Related Newsletter: See – http://www.mortgagepackaging.com.au/index_files/newsletter.htm
Comments made are of a general nature and should not be construed as individual advice.
© 2004 Mortgage Packaging Pty Ltd
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