A friend of mine approached me the other day with a deal that she was quite excited about. It was a lot bigger than she has ever contemplated and wanted some re-assurance. My experience in this area was lacking so I’ll put it to the forum and ask the more experienced folks what they think.
The property is a duplex on it’s own green title block of land in a reasonable suburb of Perth which cannot be sub-divided. One half is tenanted and the other half is empty. The Owners have had it on the market for over 16 months that she knows of with no takers so far ??? The Owners are willing to ‘guarantee’ a rent on the empty half for the first year only after the sale.
Here’s the numbers of the deal ;
Asking price = 189K
Rent from tenanted half = $ 205 p.w.
Rent guarantee from second empty half = $ 157 p.w. (one year only)The block of land is worth only about 50K, but both sides of the duplex are pretty swisho and have just been fully renovated. No work and no expense there apparently.
The absolute best finance deal she can get will cost her $ 265 p.w. in interest. She doesn’t have to pay any other costs to own the property.
The first tenant is a nice old man called “little Johnny†who looks after the place very well – indeed does everything and pays for everything, including PM fees – and has signed up to be there at least 6 years. In year 6 he’ll be paying $ 252 p.w.
She doesn’t know how difficult it’ll be to get new tenants in the other half, but I figured with a year to look she would have a good chance.
I suggested, given the length of time on the market, the Owners would be keen for any offer. I mentioned maybe an offer of 170K, with the guarantee extending for 2 years at $ 180 p.w., cancellable when new tenants were signed up or the two years were up, whichever came first.
Growth of the property is a bit wishy washy apparently.
My friend could benefit from any opinions you may wish to offer.
Interesting, This sounds like a great deal! surely she must be able to rent the other half for a similiar return?
Im sensing there must be some difficulty getting tennants in this area. Why the emphasis on the rental guarantee?
Why not offer 170k or lower with no rental agreemant, $157 a week is $8164 annually. Take it off the purchase price!Purchase price = 170,000
deposit 20% = 34,000 + 5% for closing (8500)
loan repayments on $136,000
weekly =$212.90
annually =$11070
Other outgoings ( new tenants may not be willing to pay rates etc)
management = $1500
other = $1500
Assuming she has both rented for $205
annual return = 21320$21320 minus outgoings of $14070
$7250 dollars positive a year
or $140 dollars a week!
Also COCR = 7250/42500
%17 returnProvided you can solve the tennancy problem Why wouldnt she buy it? The figures appear to stack up. Even if purchased at asking price.
My question would be why has it not sold in 16 months? And to be looking closer at the property and suburb.just my 2 cents…
By the way thank you for posting this, I look forward to hearing what happens!
-Thomas
“More Time To Snowboard”
Commercial, Industrial or Residential Dazzling?
Sounds like a reasonable deal either way..can’t believe your experience was lacking?
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorI know this is irrelevant & the topic of font has come up elsewhere but if Steve happens to read this please consider going with the font that Dazzling just posted with as my poor old eyes are struggling with the new look font.
Sparky
Well, it sounds interesting, but what is the liklihood of getting a tenant? If it’s good and it’s cashflow she’s after then it sounds good. If the liklihood of getting a tenant are poor then she’s not going to have the cashflow she’s looking for. Can she ring the local PM’s and find out what the going rent and vacancy rates are like?
Also, it doesn’t appear growth she’s after, but if she does need to sell it in the future will she be able to in a reasonable timeframe? What’s the reason it took so long to sell this time? Is it overpriced or is it that houses in the area always take that long and therefore she would need to allow the same time to sell if required further along?
You’ve indicated that it’s in a reasonable suburb of Perth so I’m really surprised as to why a rental guaratee should be needed as vacancy rates on the whole are low. If it seems most likely that she should be able to get a tenant, then I’d ask for the rental guarantee off the price as nazzysmith suggested.
Perhaps she should be looking at doublechecks in the contract ie: building reports and pest inspections? Perhaps there’s reason it’s not sold before now that’s not obvious. Is the price definitely for both halves of the duplex and not that much each?
I guess my advice would be to go for it, but with caution?
Let’s us know how it goes.
Yes, I am bit surprise that Dazzling is not as dicisive as normally he is on more complicated situation?
I am not sure why to rent the other half become so concerned that need a gurantee. Judging the duplex is in Perth, and one of the duplex has produced $205/week, a guarantee of a year should be ok to me.
Are the two duplex in the same conditions? Is the subrub really ok? Those are the questions need answers.
Cheers,
$50k land/site value sounds suss, contaminated site? lead? subsidence area? old fuel station?
cheers
brahms
Purveyor of Fine Finances
aka Mortgage Broker BrisbaneThanks for the replies guys. It sounded a bit squirrelly the post I know, but I didn’t want to cloud your input.
I wanted to glean your opinions on the property, which is the latest deal our group is looking at, but wound back to a normal residential level. The ratios are all the same (PP / rents etc) as discussed.
The reason I’m a bit indecisive as I haven’t seen the property as yet, and need to check out the demand for tenants etc.
The above scenario is what we shall be presenting to our Bank to bring it back to his normal residential thinking and lending patterns. We did this in the past for our previous deal and it worked really well. Numbers with zero’s hanging off them cloud your judgement somewhat.
The building is actually a very swisho 2 level commercial building (our first proper office we’ve tackled…which makes me nervous). The entire building was specifically built for and occupied by the Federal Govt, who have subsequently retracted back to just the lower floor. They are still the anchor tenant and will be for the foreseeable future. The big job would be to market and find a substantial tenant for the top floor. If we can crack that, job done. I think that’s a whole different ball of wax compared with finding either a family or shed men, like we have in the past.
My only assumption is that it can’t be too easy, otherwise the current Owners would have stitched it up and probably not put the property on the market.
It hasn’t moved for 16 months because of the scale of the deal it looks like. I think carparking may also be an issue.
Anyway, I didn’t want to put up the real numbers as most people probably wouldn’t of offered their opinion or commented. I apologise if I misled anyone.
I’m working on the assumption if the above deal was OK, then a multiple of it would also be OK. This will be by far, our group’s largest acquisition…and basically I don’t want to stuff it up.
We’re chewing madly…if you know what I mean. But the purchase, if handled correctly and top floor tenanted, will seriously unshackle me from paid employment and start to bring me home to Australia.
I reckon having John and Peter as tenants might be a good thing, getting back some of those public funds.
Any other comments are most welcome.
dazzling, just off topic… you said bring you back to australia, do you not live in perth??
Also, hearing the sort of deals you’ve moved onto i’d love to know your first deal and how it went… has this been asked of the experienced[grad] on a previous thread or should i start another?
thanks
If you do what everyone else does, you’ll get what everyone else has..
What Branch of the Fed Gov “activity” is carried out in the building? If its “clients” are Centre Link services( or whatever is the term for taxpayer funded ) recipients you would have trouble finding a tenant such as a swish Marketing, accountancy or whomever might be attracted to the swish standard of the building. Frankly,such a tenant would not want their clients meeting the Gov’s clients in the foyer. Don’t blast me- that is just the way it is.
Excellent observation and insight magellan.
In answer to your question – I have no idea, I just know it’s a Solicitor’s General lease. Haven’t seen the lease and haven’t seen the prop. Much to do hey…
Flying back to Oz today so I might nip around there on say Thursday and take a squizz at the “clients” as you say…
Dazzling what a creative way of presenting to get unbiased input. I loved it. Why not insert that good old clause whereby you can search for and sign up clients for the top storey before you actually take possession. I would be immediately emailing the property depts of all govt/type depts offering the top floor and get feedback before you even offer on the property. Maybe laterally thinking -the local hospital has run out of room for a particular dept. A few suggestions as to why it has been hard to rent. Check if the top floor has its own entrance. If not is there a central foyer with doors off into the ground floor tenancy or would top floor clients have to walk through bottom flr clients space. If so what costs involved in creating entrance foyer and isolating off staircase. Maybe space too big for one client. If so what about turning it into smaller offices or serviced offices. Start thinking creatively for that top space. I would be thinking installing a little cafe somewhere and renting that out to someone to run down the line too – (obviously dependant on how far to shops etc. It sounds totally exciting Dazzling how wonderful to be playing at that level. We are all in awe
Fern
Dazzling,
How abouts throwing up the real figures for us to look at?-Thomas
“More Time To Snowboard”
Hi Tom,
As I said previously, the real numbers are simply a multiple of the numbers presented. The ratios of the numbers are identical to the ones presented. The ratio is in the region of 20 or so.
The wife and I had a meeting with our Banker yesterday and pretty much landed with the conclusion that the “rental guarantee” for a year was a crock and didn’t fit their criteria for a loan. They’d lend upon the Fed. Govt lease but not the guarantee. The deal doesn’t fly on the lower floor lease alone. So, probably rightly so, back to our old strategy of buying cashflow positive IP’s where the land component is higher than 85% of the value of the property. This deal was a bit low – circa 30 to 35% land.
We presented the deal as per the residential breakdown, and the bank saw the comparison, but couldn’t go past the lack of a formal lease.
This deal has come to an end given the Banks attitude and it’s back to the drawing board…plenty more fish in the sea.
Thanks for all of your encouragement and comments on the subject. I posted a similar query on another forum and the differing response has been most enlightening. The level of real substance on this forum is amazing. You guys really attack the issue and crunch the numbers and think about the individual property tasks that need to be overcome to make a deal fly. It’s a pleasure associating with a calibre of people like that.
I count myself lucky to be part of a community like PI.com so focussed on the actual issue.
Cheers everyone.
P.S. Being home in Australia is simply brilliant. We are so lucky to be living here in Oz.
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