Long time lurker here with my first post.
Basically i’ll give a brief description of my situation and am curious as to what you guys/gals would do in the same situation?
My wife and I own an apartment in the CBD of Townsville (paidk 220 12 months ago, revalued at 300k last week) and we have recently purchased a house which will be our PPoR as we plan to rent out the apartment.
Basically with the apartment we have two available options that we are considering:
OPTION ONE: Rent the apartment out normally to a tenant through a PM and get around $320 per week which will make it negatively geared (by about 2-3k p.a. by my calculations). Or:
OPTION TWO: We can get the apartment fitted out by an interior designer which will cost us between 7-10k but we can then do some corporate letting. Apparently the occupancy rates for corporate letting in Townsville are very high and we should be able to get between 450-500 per week. The catch is that we won’t have garanteed rent on the corporate letting as we would have with a normal 12 month rental agreement.
We are both young (25) and earn decent money with no children. Do you think it’s worth the extra outlay and risk or would you stick to the less risky option?
Any help would be greatly appreicated. [biggrin]
Jonesy
Do you mean corporate rental or holiday rental?
With either, I’d check out the vacancy rates of comparable properties and make a calculated guess from there after doing a synopsis of what my bottom line is likely to be.
Either way, Cairns is currently getting good growth and, even with a residential lease, it’s only costing you a small amount to hold it and I’d imagine the good capital growth will continue.
Hope this helps
Regards
Megan
Jonesy,
Firstly, I would have to find out just how risky option two is. What I mean is, what is the average number of weeks it would rent out for at the higher rate. If on average this would still give a negative result, I personally would be looking to sell while it is still your PPoR avoiding the CGT.
I would then put the extra money into your new PPoR reducing your non deductible home loan & look for the next positively geared investment.
Kim
Courage is not acting without fear but acting despite your fear.
Kim and Megan
Thanks for the prompt (and great advice) as you both make very good points.
Kim: Finding out how risky option two is kind of hard to do. Apparently occupancy rates for rental property in Townsville are very high at the moment (i have been told 95% by two different PM’s but take that with a grain of salt). I guess in the back of mind is that if i can get 450 per week and only rent it for 40 weeks of the year (18000) i’m still better off than if i rent it for a full 12 months at $320 (16640). The property management fees are the same for either option and there is more depreciation to be claimed on the 450 option. There is more risk however because it could sit vacant in which case we may have spent more money for less return.
The other option you mentioned is tempting but the real estate agents have told us that things are slowing down a bit at the moment and we’d be more likely to get 275-280K for the apartment valued at 300K. I guess we’d prefer to hang onto it for the time being.
Megan: The type of rental i was talking about is corporate letting. From what i’m told basically large companies (such as the mines or accountancy firms) offer them as part of a package to attract people to join/stay with their organisation. There was a unit in our building (3bed,2bth) that was recently signed up for 12 months at $500 per week.Ours is 2bed,2bth so we may get a little less but the returns are their if it’s leased.
decisions, decisions. [blink]
I agree with JKM on this one, looking at your tax position is an important aspect when looking to maximise your real returns. Selling your apartment avoids CGT (a tax free $80k, not bad for sitting tight for 12 months) and use this money to reduce your non-deductible loan is probably the way to go.
If you own 2 properties, one PPOR and one IP, you want to ensure as much of the interest as possible applies to the deductible investment loan rather than the PPOR loan.
Rhys
Hi Rhys,
Thanks for the input. I guess the main reason why we didn’t want to sell the apartment is that we will probably have to move to Cairns in 2 years time so the PPoR we are purchasing will only be so for a short period of time. Our plan was to rent the house out then buy another house in Cairns when we move there Therefore owning two IP’s before we are 30).
I guess another options is to sell the apartment (sans CCG), move into the house for 2 years then sell that (once again with no CGT) then use those (hopefully decent) capital gains to buy a nice house in Cairns.
So many options.
Jonesy
Hi Jonesy08,
We struggled with the same issues as you are now going through. It was very tempting to sell one IP to upscale into the new PPoR and bunny hop your way around the place.
We chose not to do that, instead buying a smaller, less expensive PPoR on a decent chunk of land and hold onto the other IP’s and let them tick along. In the end, the compounding capital growth from the several properties working for us swamped the slight nett gains (after all fees and taxes) we would of realised if we had of cashed in our chips each time.
Bottom line for capital issues – keep your IP’s if they are in a good area and reasonable growth is still foreseeable.
In terms of renting, you seem to be struggling between the higher risk / higher return conundrum vs perceived lower risk / lower return. This is the eternal old struggle that everyone goes through. Being only 25, you’ve got time on your side and should IMO be dabbling in slightly higher risk ventures to attract the higher returns.
To me, the decision is easy…go the higher return option, and if it doesn’t meet your thoroughly researched expectations and targets, swing it over to a standard leasing arrangement. It doesn’t appear to be a one way track, where you can’t turn back if it all gets too hairy / scary.
One advantage of the short term corporate gig, is the whinging factor from the tenants should be far less. I don’t know about you – but I place alot of emphasis on this, as this impinges on your lifestyle which to me is counterintuitive…after all, these things are meant to look after you – right ?? Not the other way around.
If you can get the PM to do the short term thing for the same rate, extra bonus.
Have a crack at it.
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
Even though the % managment fee may be the same, make sure you take into account the once per lease fees such as the letting fee (sometimes 2 weeks rent). Short term rentals mean more one off PM fees. Also, depending on how short is short, say less than 6 months, you might also want to consider
1) including utilities (except phone) in the rent
2) including gardening
3) including cleaning
4) including internet accessObviously these services will take a sizable chunk from you gross rent and you would need to charge far more than the figures you are quoting.
The point is, research how long these kind of leases are and know exactly what cost increases are going to be driven by going down the short term furnished rental route.
Originally posted by Dazzling:Have a crack at it.
Hi Dazzling,
Thankyou for your great reply and the time it took to type it.
I’m definetly leaning towards the way you did things as opposed to the “bunny hop” approach. I can see the upside to both methods it’s just that i think the properties we have purchased (the unit with water views and right in the CBD and the house 5 mins from the University and only 2 years old) will provide decent capital gains in the future that are too good to pass up. The last thing i want to do is look back and see my unit selling for 700k and kicking myself for selling it.
The high risk/reward vs perceived lower risk/reward is the exact discussion i have been having with my beautiful wife. She is more conservative and wants to go the standard tenant route where as i’m leaning towards the corporate letting option. Adding 7k to the loan amount will mean diddly swat if we can get an extra 150 per week rent. The corporate rate does also cost an extra $30 per week to have the whole thing (linen included) cleaned professionally so that will also have to be taken into consideration.
I say we are young enough and don’t have any children to take a few risks now, it could pay off big time in the future. Try telling her that! [biggrin]
Shake: yeah thanks for that, there is definetly more information to consider. I too am curious how the standard (in QLD) real estate agency gets the first weeks rent rule applys with this type of property. If the property is being leased by a new tenant every 2-3 months then that would seriously eat into the returns. I’m meeting with the head of their corporate letting department at the unit on thursday so that’s one of the (many) questions i’ll be putting to her.
Hey guys and gals,
I thought i’d post a quick update on the decision my wife and I ended up making and the subsequent results.
Basically we decided to go down the corporate letting pathway which required for us to have our apartment fully furnished. We just got off the phone with the property manager and she has lined up a tenant who wants a 6 month lease with the option of a further 12 months after that and is willing to pay $500 per week for the privledge.
This also includes a weekly clean by a cleaning subcontractor to ensure the place remains in good condition. My wife and I are extremely happy with the result as it makes the apartment almost neutral (slight +ve but only just once all the costs are truely added not to mention the outlay for the furniture). But it’s a decent start and a hell of lot better than if we were doing a normal rental (ie $320 per week).
Thanks for the advice.[cap]
Excellent news…well done. [biggrin]
Cheers,
Dazzling
“No point having a cake if you can’t eat it.”
just a quick one dont use ross or gribbin realestate. unfortunetly ross property management has gone done the drain and gribbin was never any good to start with.
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Adrian Cahill | AdrianCahill.com Personal Development Expert
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That’s really good news Jonsey, good luck with it! We are looking at doing a similar thing in the Blue Mountains.
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