Our family currently own a run down block of 8 2BR units circa 1970’s (non strata and no mortgage owing) in inner bayside Melbourne (Elwood) that are about 100m from the water.
For various reasons, we are all faced with only three options and are after some advice. Should we (In no favorable order);
1) Sell the block of 8 un-renovated to one buyer (offers are in the 2.5M bracket), walk away and re-invest the the money in multiple props elsewhere (and pay huge CGT)?
2) Do the full Reno (gutting all
and strata title them which will costs us approx. in the $700k range? And rent them all out for about $105k P/A. Using the rent to pay off the reno loan.3) Or Full Reno and strata the block at $700k and sell two units separately for an approx $350k each to pay off the Reno loan of 700k?
All the figures are approximate but based on our own solid research with several agents and builder/developers. I know these are large figures, but I do we apply the same principles of property investing.
We purchased the block of units in about 1991 for 900k in a family trust. Will we pay the full CGT rate or at the discounted rate?
The family have an open mind on these options and are meeting with our accountant and lawyer tomorrow night to discuss in-depth.
But I think this open forum is full of a lot great minds and ideas that I greatly value.
Any thoughts?
Thanks in advance.[biggrin]
I know the area well.
We have just completed a reno of 3 apartments there and have purchased many great properties for clients in the area -www.buyingmelbourne.com.auThere is a really simple answer. DON’T SELL WHATEVER YOU DO but if you do can I buy it off you. I’m desperately looking for another block of fats in Elwood – but so are hundreds of other developers.
Why? Because it is a great area. Residex predicts over 10% pa growth for the next 5 years. In other words your properties will increase in value by much more than the Melbourne average.
WHy sell when your property will go up by say $250K each year.
When you own a great asset like that, you have to think like a capitalist. It is capital – equity that makes you wealthy, not cashflow or a small profit on the sale
Michael Yardney
METROPOLE PROPERTIES
Author of Australia’s leading property e-magazine.
Join over 10,000 readers each month.
FREE subscription http://www.metropole.com.auHi Hutch,
Listen well to Michael’s comments.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958Hutch,
With an asset such as you describe, my recommendation would be to pay for sturdy and wise counsel from both a tax and legal professional, hopefully both who are personnally experienced in property deals. Obviously you get opinions on here for free, but will they influence the Trustee’s ultimate decision ??
I firmly agree on the don’t sell option.
Capital gain is where it’s at, and it seems to be ticking along OK, but not setting the world on fire, based on the figures provided. Compound growth rate of 7.6% p.a. for the past 14 years. For the asset to be effective you need that growth to continue.
However, the income side of the property is extremely poor. A 2.5MM asset, with the additional boost of a 0.7MM reno, and at the end of all that you expect gross rentals of only 105K ?? That’s 3.28% yield gross. Take all of the myriad of property costs the trust is up for out of that and you are probably down to about 85K – or 2.6% nett yield.
I’d rate your overall property performance as 7.6 + 2.6 = 10.2% p.a. I’d put this about the 65th percentile if you had to rank the property. However, looking after 8 residential tenants and all the headaches that involves has not been factored in….that non cash aspect would be very unattractive part of the deal for me.
Are you banking on the capital growth continuing to chug along, because the rental yield from the place is quite the worst I’ve come across for a long time.
Props at 3.2MM should be producing around the 300 to 350K p.a. nett….but then I don’t believe private residential renters in Elwood are going to pay you $ 840 p.w. clear rent for a 2 BR unit and also fork out all of your property costs.
Good luck with your decision.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Thanks dazz and mike,
Rental estimates from agents in the area for each unit once reno. are probably more like $300-350 p/w. Which still only takes us up to the 128-145k p/a (giving only 3.8-4.6% yield range).
So yes, we would definetley banking on strong CG in the area, which has always demonstrated well above Melb’s average gains.
I had a sneaking suspicion that all the numbers were not as sugar coated as it seemed on the surface.
That’s why I asked for this opinions because the heat is going to be on tonight when we all meet. And I want to present all the option scenarios to them clearly and without prejudice.
By the way currently the units un-renovated rent out for about $180 p/w per unit. Initial purchase price was 900k (current yield 8%). But are startingto spend more on repairs ever year.
So we will be going backwards in yield, but hope to make it back in CG (or selling a couple of units) and retaining a family asset for the next generation (kids) coming through.
Thanks again for your all your opinions.
PS for numbers sake, if we treat the full Reno as a complete new purchase.
The approx. numbers would be thus:
$700k reno (p/p)
$124k p/a rent
= 17% yield!??hi,
I do not know the area but it really depends on how many people are owning the property.If you want the quick result ,I guess selling would be the best option.But if money is not an issue for you guys,then keep the property.Regards,[gorgeous]
I’m with Michael and others…don’t sell.I remember when Elwood was like Richmond or Fitzroy,when nobody wanted to live there.But look at it now,and it still seems to be going up.You are perfectly positioned only 100m from the water,so I would be renovating,strata titling and holding them for a while yet.You would then have the flexibility of being able to sell one or two IF YOU REALLY HAD TO.Good luck
Tools
and strata title them which will costs us approx. in the $700k range? And rent them all out for about $105k P/A. Using the rent to pay off the reno loan.
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