I’ve noticed the level of detail where people learn has gone down somewhat of late in the forum. I’m of the opinion that articles about world property prices and general movements in the US and Australia are nie on useless to the averge punter out there looking at the property at # 6 Smallgrove Crescent Somewhere.
What counts are details…and what fills the knowledge gap of beginners are the details….not general pontifications about the Fed’s indicative retraction or expansion policies ?????
Thought I’d share with everyone some things our group went through purchasing our latest acquisition…on a more detailed financial level. It was the ‘top of the heap’ that we eventually pursued after sifting through 17 props that were on our research hitlist. The 17 were culled from an original list of over 400. Here we go ;
Capital
1. Purchase Price $ 2.270 MM
2. Acquistion Costs $ 0.12 MM (95% of this was stamp duty on title)
3. Loan Amount $ 2.390 MM
4. Bank Valuation $ 2.410 MM (that was a nice surprise – 20K equity on day one)
5. Land value $ 2.100 MM (this was the biggest attraction for us – 92.5% land)Income
1. Nett rent of $ 147 K p.a. & GST (going up to $ 158 K p.a. in Dec)
2. Outgoings of $ 35 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 182 K p.a. ($ 3,500 p.w. now, going to $ 3,700 p.w.)We initially had trouble convincing our Lender that we were good for the risk. Like many people on this forum, the Lender was only personally experienced with average residential properties and couldn’t see the potential of the property.
I decided to break the property down into something that was within his frame of reference. Below is pretty much what I wrote to him, after which the loan was approved by the supposedly more intelligent people over in Sydney who made the final decision.
“Consider the property as a street with 10 houses in it. Each house is worth $ 227 K, sitting on a block of land worth $ 210 K. The house itself is only worth $ 17 K, yet it is currently rented at $ 350 p.w., with a rent rise scheduled for each house to $ 370 p.w. in December.â€
The vendor was a 65 yr old business owner who had owned the property since 1964. He paid $ 16 K for it back in 1964. In comparison, I have no idea what a house was worth back then.
The whole property has averaged about 12.9% p.a. since 1964. On receipt of the sale proceeds, the vendor said this was his “fishing money†– I took that to mean his retirement fund.
We are hoping to hold the place for a similar amount of time, the numbers get a tad scary when you project them out…to about $ 349 MM. Obviously inflation eats into the buying power of this, but it’s still substantial. Who knows what will happen over that time frame.
The vendors real estate agent was 67 years old, and had actually sold the property to him back in 1964 !!! Talk about long business arrangements. Both men are reasonably comfortable – if you know what I mean.
The interesting bit for me was that both these gentlemen cannot drive a computer and hence the property was not marketed ‘online’. I found this a bit unusual, but realised not everyone is part of the computer age. These two gents obviously have no calling for it.
Instead, it was a little 2 line non-descript ad in the local rag. I noticed it one day and summarily dismissed it, but then chased it harder about a month later. I was pretty luke warm on the whole deal as I didn’t have all the details at the time, and frankly they were in no rush to give them to me – different time zone I reckon…I now know what it was like to do business in the 60’s !!
Anyway, another couple of months passed by and I chased it again, fully realising the potential of the place. The deal was done over the phone and fax between the vendor and myself over the course of 2 hours….but what a harrowing 2 hours.
Negotiating with these wily ol’ men is an experience everyone should go through for their own education – definitely not something that should be palmed off to a buyers agent – too valuable to pass up.
One of the nice side benefits of the deal was the vendor and I became close enough after the deal was done, that I felt comfortable enough to approach and ask him if he’d consider being my mentor for the next stage of growth of our group. I think he was a bit chuffed being asked – I’m about 10 years younger than his son. Being an ex-president of the Masters Builders Assoc., I have a lot to learn from him.
Anyway, that’s the story for number 11. Hopefully someone is able to glean something from it. I’d love to hear other people’s detailed stories of their property acquistions.
Roll on Number 12….after a little breather I think….might go get me some cruise ship pamphlets in the meantime. [biggrin]
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Wow! What an awesome post and great story (deal).
It’s is not only educational in the format that you presented, but also very inspiring. You should detail some of your other acquisitions like this, of course if you wanted to. Once again, great post, keep them coming! [thumbsupanim]
Hi Dazzling. Finally a post that might help me analyse as you would. I am struggling to grasp how people are analysing deals compared to myself. If I look at this one as you have posted it & assumed the loan you obtained of $2.39m is at 7%, the rent of $158K still leaves you as negative $9300. Am I missing something? Please don’t take this incorrectly as I am trying to learn as I go. Any help would be appreciated.
Hi all
It is always inspirational to read success stories that anyone could learn from. Here is my share of success story as unwinding.
After having completed conversion of our IP’s and PPOR into student accommodation and put it on autopilot (just watching the bank to see that the money is rolling in), I have gone into it a bit bigger – Joint venture with my boss (at work). We found 4 townhouses on the same block, one older and 3 brand new from round the corner of my other 2 IP’s. 2 new ones are still being built, one is completed and other is older one. Between the 4 houses we would make it into 19 room student accommodation.
Here are the figures:
Owner wanted $945K
Negotiated it to $880K to be settled on 1st Dec 05
Will get them ready for new student intake beginning from mid dec.
Gross yield on this property is 11.5%. I have every confidence after having done student accommodation, that it will be filled up within no time. We would become the major accommodation provider in town and I have excellent contacts in Uni.
We are in the process of setting up a unit trust with a corporate trustee.
The net yield before depreciation is taken into account is 1.8%, may not be a lot but for the 1st joint venture it is quite good I reckon. We are planning to expand our ventures into the future and do not see any problems ( as we all get along very well).
I am quite happy to having gone from 3 IP’s to 5IP’s or is it 7? within a year’s time and all returning around 11 to 12% and more on my other properties.
I do get a buzz reading all the posts. Thanks for allowing me to share our success in a small way.
Regards
Padma[biggrin]Well done Dazz and Padma,
It’s always more interesting and informative to learn about the possibilities and the nuts and bolts involved. Also Dazz, I liked the way you explained how you re educated the lender and learned something from the vendor too!
Cheers,
Gatsby!“Sometimes the hardest thing to do in life is often the best thing to do.”
Congratulations Dazz and Padma,
Great posts and interesting reading . This post was longer but Geez there be any point whatsoever in saying any more , so I wiped it before posting .. Good one Guys
LenOriginally posted by JKM:Hi Dazzling. Finally a post that might help me analyse as you would. I am struggling to grasp how people are analysing deals compared to myself. If I look at this one as you have posted it & assumed the loan you obtained of $2.39m is at 7%, the rent of $158K still leaves you as negative $9300. Am I missing something? Please don’t take this incorrectly as I am trying to learn as I go. Any help would be appreciated.
I had the very same thought. I think there might be a pack load of deductables somewhere tied up in the deal. But still, if you were to live off the income, you couldn’t because deducting from -$9300 is still negative and the last time I checked, you can’t eat bricks and mortar.
Later……….
All things are possible to the person who believes they are possible.
Whateve the mind of man can conceive and believe, the mind can achieve.
Napoleon HillDazzling and Padmaa, thanks for the insights and the details. I appreciated them. Hopefully more people will share like you – and hopefully I’ll be next![exhappy]
Great post Padmaa. Good luck with the students.
Surely people have interesting and educational stories about property purchases that they wish to share…good and bad ones.
How about one post each from Kay / Simon / Rob / Pickworth / Gatsby / Phil / Woodsman / Pelican / Minimogul and a few Sandgropers like Marisa and Redwing ??
Two out of the whole forum…surely we can do better than that. Or better still, how about some of the ‘silent readers’…maybe now is your chance to garner the courage up to post a rip snortner of a yarn. [biggrin]
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Sorry Dazzling- the last property I bought was about 14 months ago and I’m currently paying the debt down. I can, however, tell you some yarns about the office if you like [biggrin]
kay henry
Dazz,
I starting writing this reply when I saw your last reply but decided to just delete it, then after reading it and thinking about it I’ve decided to write it anyway because it still answers the question as everyone’s answer will be different. My brother in law, who started his own business when he was 18 and was like a brother to me was always at me to ‘buy a house.’ He was never into IP’s, only his business which he loved with a passion and with his passion could do no wrong. It was like a money tree due to his love for what he did for a living. Looking back, I guess he was trying to instill into me that passion. At the time, I had only just returned from a very lengthy period o/s and after paying off a s@#t load of debt, I had managed to put my head down and save an even bigger s%#t load. Although my brother in law had no personal interest in IP’s, he kept pushing the issue. Eventually after 6 months of looking around for a house to buy (with the knowledge of ‘2 virgins in the dark’) I was about to give up but somehow a property popped up. I eventually took the fearful step of ‘signing on the proverbial dotted line’, which in hindsight was one of the hardest, yet ultimately one of the easiest things I had ever done. That’s how it started for me and after realizing I would be financially better off (as my brother in law knew all along) I decided renting this house out (unknowingly) as my first investment property. I just went from there. Despite all the advice my brother in law gave (which was always sage), 3 weeks ago he took his own life. I’m still trying to come to terms with it, but it has put my strategy, if you will, into a much more deeper perspective. Despite all his wealth, he was never truly happy and I realize now why he kept pushing me to change my direction in life. Perhaps he wanted to trade places in some ways. I guess the reply I’m sending here is that, Dazzling you are spot on about ‘strategy’. Because if you lose sight of your strategy/ies in life, the goals can feel meaningless.
Gatsby.“Sometimes the hardest thing to do in life is often the best thing to do.”
Great topic but it`s been tried before, very few responded with examples, makes you wonder doesn`t it???, anyway heres some info I will give.
I`ve always paid market price or very close to it so I never bought a “bargain” so to speak.
But I have bought 5 properties in the last three years.
My most recent activity is renovating a house I bought in Bundy 18 months ago.
Cost $85,000, currently renovating at a full cost of $22,000 will rent for a minimum of $185 a week.
I have a few success stories where I made huge money but it was during the market boom.
I currently live on acreage in Brisbane which still seems to be climbing in price due to where it is located.
I have had a 2-3 yr plan which involved these five properties and is pretty much still on schedual despite the ups ad downs, many headaches and times of stress regarding contracts etc. [cap]
I definately follow the “slow and steady wins the race” type of investing thought and have always worked hard for what I have.Dazzling,
I am relatively new to the forum, but agree with your comments from what I have been reading.
Thanks for the insight. At this stage I have no property stories that anyone would be interested in (I am currently in the -ve cashflow stakes). however I am now reviewing the plan for the future and find some positive cashflow properties. I won’t be in the $2m league, but would be interested to know how you got together with your group of investors?Cheers
JulesHere’s some sketchy details of my deals:
1 $186K yield 13%
2 $196K yield 13% loan of $405K for the 2
3 $78K yield (15% now 23%) loan of $82K
4 $330K (valued by bank at $353K!) yield (8.6%) loan of $346KThe first 3 were regional WA the last was just purchased in Perth.
Later……….8
All things are possible to the person who believes they are possible.
Whateve the mind of man can conceive and believe, the mind can achieve.
Napoleon HillHere is a dragged out story about my first property purchase and my latest….nothing exciting but there is a small moral at the end of each.
I was living with my girlfriend (now wife) in the country city of Toowoomba Qld. Was there as an Army Officer on my first appointment. I found the place a little boring after hours and used to duck down to Brisbane to see my mates on weekends.
I was at the airport flying somewhere and on impulse bought the Noel Whittaker book – Making Money Made Simple. My epiphany. This was the only book of it’s kind around then amd like most guys my age (22) I thought property investing was for older rich guys. I read it cover to cover on that flight.
I immediately decided to buy a home in Toowoomba.
I had no deposit but a good income for my age. Iw as living to the most of my income!We looked at heaps of places and I think it was my fear of making the first step that made us hold out for a great deal. I met a REA who had served in Vietnam and he kinda took me under his wing – being a young Army Officer and upright citizen that I was [biggrin]
Finally he told me he knew of an old fella who tried to sell an IP a year or so ago but was holding out for $50K. A high price. By this time the market had moved and this was a good buy. We bought it for $52K and I reckon it was worth about $65K. It housed students and was a pigsty. The only redeeming feature was that it was behind our rented home so moving was a matter of passing stuff over the back fence!
I bought it with a borrowed $2K deposit. Things must have been different back then because there would be no way I would get that loan today. I was knocked back by the local Westpac Manager who told me to go to the new bank called Metway “Who will lend to anyone”. This was 4pm on the finance date and I turned up after closing time in boardshorts and did the deal with their young keen manager!
Two years later we sold the place for $86K. Not big numbers but a 65% profit to put it in perspective. I thought myself an expert but it was the boom of 1989 – 91 ish and a good buy that did the increase for me. (Theres a lesson there).
The lesson is that had I kept the place it would today be worth $200K+ with a loan of about $20K remaining on it.
My latest buy was a really really run down brick home by the Uni here that I picked up from an unmotivated REA (didn’t even have a sign) and an OS seller for $315K. It was so run down that the tenants had had no hot water for months. I worked a week clearing the garden and paid $300 to have the rubbish removed (cheapest quote I found!). I even discovered a low brick fence at the front hidden by grass.
We worked over a summer fixing it up. Cost $7K in materials with our labour. Got an appraisal from a REA to list for $399K aiming to get $390K. Not a valuation I know but made us feel like we achieved something. It now houses five medical students and returns $530 pw. We pay electricity and water so returns need to factor that in. Still a great earner and the tenants are wonderful kids who show a lot of respect to us and the home.
Lesson here is to find the problem that noone else wants and solve it (Thanks Steve).
We bought other places in between but these are the two most important to me.
What next? I am looking out for another problem property and watching this current phase of the market in order to pick my time (as best I can).
I think the two things to take away are pretty hackneyed sayings now but as valid as ever. “Find the problem” and “You make your money when you buy”.
In 18 months my wife finishes her latest degree and our income will rise accordingly – I wish to step up a notch then and try something commercial or a development. So much to learn…
Sorry about my boring stories but you asked for them…..
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Simon,
Not boring at all. I learnt two new things from your post, thanks.
Wow Hotrod – your yields are thru the roof – good luck with that.
Agreed Mark, most people look like they like absorbing the info, but aren’t prepared to contribute much, which is circular ‘cos they can only absorb what people write ?? Surely everyone has something to contribute, even if they don’t have any IP’s as yet. We all have been exposed to residential housing for many years – with probably many stories to tell.
Jules, most of have -ve CF properties – that doesn’t mean we aren’t interested…always something to learn. have a crack at it.
Gatsby, blew me away. That must of been difficult to write for you at this time. I feel for you pal. Chin up. Thanks for the PM.
Kay – c’mon mate…you can do better than that…
Thanks for responding guys, I’m having fun reading your stories. Might even go thru the 9th one if I find some time…it was scary for us.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Sitting in an airport lounge waiting for a flight back to Oz, so I’ll kill some time by detailing our first non-residential IP.
Like most people, we were having trouble finding +CF deals scurrying and fossiking (sp ??) around the residential stock. We were also pretty fed up with the constant whinging at the drop of a hat of our tenants over very minor details that took both time and money to rectify…to their satisfaction.
The penny eventually dropped that perhaps we were fossiking in the wrong chestnut pile, and our efforts may have be rewarded more by trying something new. We remembered receiving a “tip” from my wife’s uncle, who was heavily into CIP’s. His only brief comment was ‘Once you’ve finished mucking around with houses – have a look at commercial’.
We didn’t really think much of it at the time and dismissed it as ‘something somebody else does’, we’ll stick to what we know and feel comfortable with.
It took about 18 months of inaction before a combination of whinging tenants / massive negative cashflows from the RIP’s and that irking little voice of my wife’s uncle in my ear that finally pushed us over the edge and out of our ‘comfort zone’ – what a scary place that is – but so exhilirating.
We furiously starting researching deals that were +CF, but really we didn’t know where to start. These were some of the things we found ;
The financing was completely different
It was more expensive
The bank wouldn’t lend as much against it
The agents were different
Everything that was a negative feature in RIP’s was suddenly a sought after feature that you paid more for
Different terminology (NLA, nett rent, Lessor, 90 day bank bills etc)We were literally floundering as most of our techniques for RIP acquisitions didn’t work.
Despite all of the ‘Oh my gawd’s’, and ‘I don’t feel comfortable’ moments, we forged ahead regardless, expanding our comfort zone and narrowing our search down.
We eventually decided to have a crack at a place that unbeknowst to us, had been up for auction about 4 months previously and been passed in. We innocently rocked up and found the agent talking a different language. We were both trying to seem non-chalant as if this was perfectly normal, but he instantly cottoned on that we were newbies at this (the three little girls hovering around our knees sort of gave it away too).
The biggest thing that made us uncomfortable was that the vendor was one of Perth’s biggest developers…a real sharp cookie who always made buku money off his deals…we were on the other end so we knew we were the patsies being bled. It also had bugger all land component, which we knew was important for future CG, but we just wanted to forge ahead and get the first deal under the belt and cop all the lessons in one hit.
On the positive side, we were encouraged with the 10 year lease, which read like a dream. Coming from a residential background, we couldn’t believe tenants would actually agree to all of the onerous conditions placed upon them…and they had to fork out for absolutely everything. The developer had distilled down and cherry picked the best of all the leases he had ever come across in 30 years of investing into this one document. We saw a term that has remained with us ever since “At the Lessee’s sole cost and responsibility to the Lessor’s satisfaction.” What a fantastic term and what a breathe of fresh air compared with RIP’s.
We decided to go ahead and the deal looked something like this ;
Capital
1. Purchase Price $ 1.350 MM
2. Acquistion Costs $ 0.08 MM (95% of this was stamp duty on title)
3. Loan Amount $ 1.430 MM
4. Bank Valuation $ 1.350 MM
5. Land value – bugger allIncome
1. Nett rent of $ 120 K p.a. & GST (escalating $ 5 K p.a.)
2. Outgoings of $ 15 K p.a. (kindly paid by the tenants)
3. Gross effective rent of $ 135 K p.a.We were nearly duped on the deposit for this. The vendor’s agent wanted $ 30K. Upon offering $ 5K, he said it would have to be $ 30K, such that if we had any problems – the vendor could hire a top flight lawyer and sue us with our money…that didn’t go down too well…and we had to muster all our experience from previous deals to fend that one off. In the end he backed off with his ridiculous insistence.
There was some issues at settlement that were resolved eventually. They mainly centred around the tenant not getting on with the vendor. Once we took over, all problems seemed to disappear…I still find it amazing how a change of personality and “feelings” massively affects straight forward business transactions. I guess we are all humans who enjoy being treated with dignity.
It doesn’t set the world on fire by any stretch, but we cut our teeth on it, and it provided much learning in terms of setting us down a new path. We vowed never to go back to RIP’s after the purchase, and that philosophy has served us well.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Dazzling,
I am very interested in this sort of caper. Can you provide some more details about what sort of property it was, the type of business the tenant had and what the figures on it look like today?
Thanks mate,
Simon Macks
Finance Broker
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Hi all,
I just want to say BIG THANKS to all those generous enough to share the details of their deals. Not only are your experiences invaluable to novices like me, they are also very good reads.
Dazz, I will tell my story once I have one to tell.
Gatsby – thank you for telling your story. I am truly sorry to hear about your loss. Yes, we do need to know what we’re really chasing when we’re chasing those deals.
best wishes,
CarlinSimon,
To answer your questions, the place is a major part (45%) of a strata complex of 10 smaller unit developments built in ’97. i.e. buku depreciation write offs ($105K in the first year alone).
The tenant we have in there is a gym operator, which sounded pretty dodgy to us when we first saw it, as we all know that they typically go bust every other year. These guys have been there about 3 years at that location, but successfully been running their business for 28 years and moved in because their previous tenancy was just too small. We estimate their nett rent burden to be about 14% of their revenue per month, so we feel comfortable that even if they have a dip, their is enough fat in the system that we’ll still get paid.
The nett rent went up $ 100 p.w. on Friday, so that escalation clause in the lease is very valuable…crank it up I say !!! It’s very nice that we don’t have to argue and bitch and moan over a rent increase, with this knee knocking threat of the tenant pulling out. On July 1 we simply invoice them for the greater amount and they pay up…no questions asked.
As part of the purchase, all of the gym equipment also came with the actual building. They are literally buying the equipment off us (my wife really) at 10% per annum, so as part of the due and punctual execution of the lease terms, at the end of the lease they will own the equipment. It’s heavy duty hanging and banging kit which all of the huge guys in Perth use. It’s funny to think that my wife owns most of the premium heavy duty lifting kit in Perth…anyway.
We are very happy with the performance of both the lease, the tenant and the cap. growth of the building…although I’ve balanced it out with subsequent purchases being higher in land content, a bit of a mix is a good thing.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
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