I am looking at purchasing a 6 pak of flats. Some reading ahead so put on your thinking caps.[biggrin]
These flats are set up to be strata titled at some stage if necessary.
They are 4 years old only. Situated well, near shops, schools , bus stops etc in my regional city of 90,000.
These flats are leased out to a chappie who manages them as holiday units.I need some help with expected income as against future cap gains.
This is the deal.
Property 900k
5 yr lease at 55k and lessee PAYS ALL OUTGOINGS.
So I get a percentage return of 6.11% plus the benefit of paying nil outgoings.
The normal outgoings for a 6 pak would I suppose be rates, ins, property mngement and repairs.Probably about 10k I would say, at least.
Then there is deprec and tax deductions for any interest paid out.The lease is for the buildings only and the lessee then furnishes them, pays all power, phone, rates, repairs ins, etc.
After the 5 years I can re assess the market/ rental market and rent to normal tennants if desired – or perhaps do another lease. We haven’t got to that yet. Normal res tennants return about 45k p.a.
Based on the proposed lease these are the CG gains expected over the next 3 years. A 3% increase in renrt each year.
Year 1 55k income 900k value
Year 2 56,500 926k
Year 3 58,300 954k
The above figure ssume a consistant return of 6.11% each year.This means that I can keep up with a 3 % inflation rate as far as interest payments go each year.
But is the CG enough?? I need to allow probably 12k to repaint the units inside at the end of 5 years. Or maybe put that into the lease.??This deal has not been negotiated on yet.
I am looking for a bitta help from all you more experienced investors….[goatee]Any comments re the price as compared with the return; taking into account any risks you can see.
Thank you in advance. [cowboy2]Giddo
http://www.standrewsplace.com.auKNOWLEDGE IS POWER
Hey there giddo,
I would say for me this deal sounds like too high a risk for the return.
Unless you are confident of high capitol growth and could get more cashflow from them somehow.
Possibly manage them yrself to holidayers
or
give one unit to someone rent free in exchange for managing the other 5 to holiday makers for premium rents.
I would suggest maybe spread the risk over a few smaller investments till you grow in investing confidence and knowledge.
At 6.1% (net)return that possibly wont cover the costs even after tax depreciationDematio
We’ve got 70 yrs on planet earth,Lets make the most of every day!
Luke Taylor | Hope Property Investing
http://hopepropertyinvesting.com
Email MeProperty Support,Strategist and Buyers Agent
Another thought giddo,
you were saying these units can be strata titled.
If this is true you may be able to make good money from splitting them and selling off individually.
But be shore of it before purchasing .Check what other similar strata units are selling for in the area
We’ve got 70 yrs on planet earth,Lets make the most of every day!
Luke Taylor | Hope Property Investing
http://hopepropertyinvesting.com
Email MeProperty Support,Strategist and Buyers Agent
You’ll definitely get a fair bit of depreciation back – maybe up to 2% worth in yield but whats the outgoings? The council rates will be fairly high and are the tenants contributing to the admin or sinking fun? You need maintain garden, paint building, fences and all you need is one big problem like electrical through building or burst pipe..etc.. and the landlord will have to wear the whole cost cos you own the strata. 6.1% is not much when you could probably only get 7% loan at best on 60-70% LVR hence ur cash on cash return is pretty poor unless you can do no money down like vendor financing or something. Good luck!
Thanks ASDF and WORLDCHANGER,
By the way worldchanger, I saw the news last nite and I don’t like the way you are changing the world! At least I know whose fault it is now.[blink][biggrin]
The flats are currently on two titles i.e. 2 lots of 3.
So while rates are about $4k per annum, it is not as bad as if they were strata titled. They are able tobe strata titled easily when req.The return of 6.1 % is nett because the lessee pays all the outgoings i.e. rates,insurance, etc. There are no property managers fees of course.
It adds up to about 10 thousand or so, that I do NOT have to pay that a normal investor would need to pay.
This means that if it was a normal everyday investment prop, I would be getting 7.2% and then paying the outgoings.So it would be 7.2% gross I guess.
This together with deprec benefits ($7k last year) means that it is then pos geared I reckon.So the question is for me; if I can hold 900k worth of property for nothing for 5 years is that a good idea??
My cash contribution would be $180k. So I estimate that if the property increases in value by 25% (5% pa) over the 5 years, I would earn I think around $45k per annum in equity, giving me a return of 25% pa on my money. I think this is pretty good leverage.
My question is I suppose; is it worth the risk that it may go the other way?[crying]
If I am holding the property for nothing, surely I cannot go far wrong.
I would fix the int rate I think just to be safer.By the way it is v well located. I wouldn’t expect anyone on the forum to able to give specific advice re property which is v near to my own house. I will research the likely local market here in great detail.
I am in the v early negotiating part right now so I would appreciate any thoughts.
Thanks for your input so far.
Giddo
http://www.standrewsplace.com.auKNOWLEDGE IS POWER
Hi Giddo,
Just a quick thought, and you would need to check it out further to be sure, but I have attended several of the Masterclass sessions and have heard a number of time s a warning about factoring depreciation into your profit equation.
Because, if you claim a depreciation deduction and then sell at some future time and make a profit – which I figure is what you are aiming for, then the property has not in fact depreciated it has appreciated and therefore the loss you have previously claimed will have to be repaid.
I may have over simplified things and you should definately check with your accountant but I think this is the gist of things.
Cheers, Jo-anne
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