Hi,
Once again – welcome to the forum.
Before I left to go to England a few weeks ago I signed three contracts to purchase properties. Two were residential properties and one was a commercial warehouse (my first commercial deal!).
Anyway… I thought I’d get the discussion started by including the text from the Internet site where I first sourced the property and then be here to answer any questions that you might have (ie. play the role of the agent).
My aim in doing so is to help you to role play the likely issues that you’ll come across when buying property. The only question I won’t answer is ‘where is the property’. Just assume that it is in a regional Victorian town with a population for more than 20,000 people.
Here’s the ad:
Put these figures through your calculator – 4 bedroom home rented at $120 per week. This home includes washing machine, dryer and fridge. A great set-up for a first time investor. Speak with one of our consultants to see how your $7,000 first home buyers grant can help you.
OK – does anyone have any questions or ideas about what to do next?
Post away!
Regards
Steve McKnight
P.S. To see a photo of the property
https://www.propertyinvesting.com/files/images/photo1.jpgEdited by – [email protected] on 24/05/2002 02:57:08 AM
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve,
My first questions would be (never having bought a property before)How much is the asking price? Land size (m^2) & what’s nearby? Am I on the right track so far?
ps. am I the first person to put a post on the board apart from yourself?
Best Regards,
Mark Latal
Hi Mark,
Congrats. You are the first one to the forum.
This will be a good exercise for you since you haven’t purchased property before and I think you are on the right track.
To answer your questions…
Asking Price
$50,000
It is currently tenanted on a month to month basis at $120 per week. Tenants have good references, but there is no formal lease in place as they are friends of the vendor.
Size
I don’t have a title, but having been through the property I can say that there isn’t much street frontage, but the property runs very deep. There are two bedrooms at the front, two down the passage, and then a living room that runs into the kitchen with a bathroom / laundry out the back. The place has off street parking and a small to medium back yard.
What’s nearby?
House is on the fringe of a light industrial area. Some car workshops around, but residential area runs down the street away from the light industrial area.
Generally a good location that would appeal to tenants aged 20 – 40, not a great family home though. More of a communal living type of place.
Any other questions?
Bye
Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
hmmm “light industrial” I found an absolute bargain on the net once, I emailed the agent a couple of times and then finally before I made the journey to inspect asked an open ended “Is there anything else pertinent to the property that I should know?” … He replied that there wasn’t so I went to inspect…
The residential house was completely surrounded by factories and 3 “houses” away from a freight railway line – it was the middle of the day in the middle of the week when I did my inspection and I couldn’t hear myself think – it was the noisiest property I’ve ever been near.
Just thought I’d drop a word of caution for anyone else considering properties over the internet that are described as “light industrial” … they could be surrounded by industrial-strength noise!
Shaz
As cashflow is king, I guess if it was a straight purchase you’d be looking at the rental demand in the area and reaching a view about this particular property’s suitability for tenants.
In the wrap context though I suppose the issue is more – would somebody be prepared to buy this place for say 60-70K on the basis that they would eventually own it. Looking at your repayments and the spread thereon, would their likely repayments be higher or lower than the rent they’re paying now?
The current tenants may be settled enought that they might want to buy?
Another issue may be your bank’s willingness to lend on a regional property and the LVR they will allow.
Why is the owner selling? Is there some circumstance eg urgency which you can help them with (for a price!)
where’s the win win win (seller, buyer and wrapee?)
By the back of the envelope test it should be cashflow positive up to $60K and they only want $50K so I’d certainly investigate further.
Cheers
N.Okay. This is a positive geared property. $50K loan runs to approx $355 p/m, so that puts you about $130 p/m ahead.
Questions:
a) Why would someone want to pay that sort of rent rather than buy?
b) What is the employment like in the area (regional Victoria doesn’t exactly abound with job opportunities)
c) What is the anticipated capital growth of the area or is the property being bought purely for cash flow?These would be my starters.
Thanks for the forum,
Mike.
Gday Steve,
Site looks good, it’s getting tuff
to keep up with all these new forums…Hopefully lots of good wrap info to come…
Is the property for a wrap or buy and hold?
Cheers
watto
Melb FreestylerMmmmm, interesting property.
My guess is that for a property to be this positively geared there must be a pretty good rental market – if it is also tenanted at that price then that is also a good sign. Perhaps its rented by those working on the industrial site – roll out of bed and into work!!??
My personal opinon is that it wouldn’t make a typical good wrap property for a family as its too industrialised, too close to the road, too small etc etc. However, with some lateral thinking it could still be wrapped.
(Note: I take it you don’t want to continue to rent it as you don’t want tenant/maintenance hassles?)
In which case I suggest: –
1) Wrap it to someone outside the normal criteria – older divorcee, disabled person, young couple or single looking for first step on the ladder.
For example; I know someone at the moment who has asked me too look for exactly this type of property – he is 42, disabled and knows the banks won’t touch him despite getting a hefty amount of benefits each month which he will get for life. He wants a single storey home with room for him and his dog and is prepared to take properties others won’t as there’s just him so this sort of locale wouldn’t bother him.
2) Wrap it to an investor!
You could find a newbie investor who wants to try his hand at renting but is unsure of how to manage a rental property. This would be a good half way house – you carry the original mortgage so they have less costs and issues to worry about. But they manage the rental so you still have a hassle free wrap. Would be good for someone you are considering mentoring perhaps? You couldn’t use the FHOG I guess but may still work.
3) Wrap it to the existing tenants, as is, for less than or same weekly as their current rent – win/win.
4) Sandwich lease option/wrap for seller and just take a fee!
5) Knock it down and build something else more fitting with area.
6) Convert it to something else more fitting and profitable to area – offices, creche for local workers, cafe, pub, shop, take away, combination.
Regards, Lisa.
Steve,
What is the rental availability like in the area.
Are tenants keen to stay?
Is the rent appropriate or over/under-valued ?
What is the state of the property ?
What is the area like ?
What infrastructure is in place for the town ?
What plans do the loacl council have for the town ?
What are the Rates and other costs relative to the property ?
These will do for a start as others have said though it seems good on face value.
Andrew DSteve
First I’d try to find out what similar properties in the area are renting for, ie market rent. They may be letting it to their friends at a lower than market price.
Then as $50,000 is just the asking price so I’d then be asking what is the lowest you can accept! Then try to drap them down a bit further – if all other things stack up.
Terry
Edited by – [email protected] on 24/05/2002 07:33:26 AM
Good morning,
WOW! This forum is only a day old and already there is plenty of great information. Thanks to everyone who is already contributing.
As far as the role play for this first post goes, here are the answers to some of the questions that have been asked so far:
Light Industrial?
When I inspected the property in the early afternoon the noise was not particularly noticeable outdoors and certainly quiet indoors. It’s a great tip though to inspect a property near an industrial zone in the middle of a working day though and not on a weekend [
]Finance
Bank has approved an open chequebook based on 80% finance. Wraps are OK in this postcode.
Vendor
Vendor is moderatley motivated to sell and has priced it at $50,000 to get out quickly if possible. Property has only been on the market a few weeks and inquries are starting to pick up. No offers have yet been made.
Exit Strategy
My exit strategy for this property is either:
1. Wrap
Sell it for $70k with a $7k deposit at +2% to my interest rate. Rough figures have the nett cashflow at $55 per week and a cash on cash return of around 47%.
2. Rent It
Rent it at $120 per week would see me derive positive cashflow – but it would not be as profitable as if I wrapped it.
3. Worst Case Scenario
I look that so long as I can cover my mortgage at $65 per week, plus ownership costs of about $35 a week, then I am covered. This means that I could offer the property for rent at a discount of 16% to it’s current amount and still break even.
Tenants
Tenants are friends of the vendor and are happy to sign a six month lease at $120 per week. There is no lease in place at the moment.
Condition
I would call the property ‘tired’ but still in reasonable condition. There are some maintenance issues that I observed during my inspection, but nothing too big as to cause a big problem.
I have been quoted $350 for a building inspection… should I spend the money?
Economy
Unemployment is about 8%, but in reality anyone really looking for a job can find it.
Local infrastructure is good and forecast capital gains in the current market is about 3% per annum.
Similar Properties
Other 4 bedroom properties are prices at $60,000+ and rent for $140+ per week. This places this property in the cheap range, partly due to the proximity to the industrial area.
A 3 Br property two doors up and across the road just sold for $55,000.
Next move?
The bottom line is that the property is priced at $50,000 because of its proximity to the light industrial area and also because the owner would like to sell quickly.
No offers have been made yet… what do you think my next move should be?
In reality I have purchased this property already, but as a case study I’m interested to see what the community thinks… It’s an excellent learning tool
Keep posting!
Regards,
Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve
Thanks for the site.
This is my first post ever to any forum.I would offer $49500.00 and get on with wrapping it.
My first choice would be to wrap it to the existing tenants.
If this is not possible advertise and screen for suitable people to wrap it to.best regards
jim
Hi Steve & others,
Good ‘food for thought’ in this thread!
The main thing that I liked to see in your answers
Steve was your exit strategies & the fact that you had more than one. I agree this is very important to consider before taking action.As a yet-to-start property investor, my feeling is that as this property has some potentially -ve aspects, & also that an offer has not been made, an offer of 15-20% below asking price may be a next move.
As for a building inspection, with my limited experience I would get one, although is $350 the going rate? I thought they were less than this.
Cheers
Chris Bedford
Hi steve
All answers are interesting, I think you need to look at what you are trying to achieve. There will be little capital growth, although if you bought 4 of these you could live on the incomwSteve,
Firstly GREAT site. VERY pleased you are inputting honest, truthful and accurate case studies. PLEASE keep it up! Now your property. I would have bought several of them if I could, and used them as buy and holds, which kills wrapping return anyday (very capital intensive business) provided you keep 2 years plus. I would also like to know why UK – if you were as me, I doubt it was just a pleasure trip! Those lovely pounds! I wrapped your tapes to a friend of mine there a few years ago……..Edited by – [email protected] on 25/05/2002 8:56:44 PM
Steve
Three other things I would check to see if they would add value and flexibility to a strategy:
1. What is the zoning? In light of the industrial area nearby, is anything permitted on the site other than residential use?
2. In light of the industrial area nearby, is the site well-positioned for advertising and is the council flexible regarding such?
3. Redevelopment possibilities in future?
4. How imposing is the industrial estate on the property?Other matters:
5. transport e.g. train or bus?
6. nearest schools?
7. nearby shopping?
8. any environmental pollution from nearby industrial site(s)?
9. major industrial developments planned nearby which would change present ‘ambience’?Next step get a building inspection and check for any easements.
Andrew
The close proximity of the house to the industrial area you should be and extremely valuable negotiating tool, for whatever purpose you purchase it for.
I would prior to making any offers have done my due diligence and applied to the local council to ascertained that you could have the property re-zoned light industrial. It seems to me that given it’s current location that it would be and ideal way of increasing the value and attractability of the property.
My next due diligence step could also be to investigate with the adjoining industrial properties to see if they require more land area and if they wanted to use the house as an office or perhaps storage etc..
Just a new angle.
Cheers
DeeI would just offer $40,000 for this place, wrap it or just rent it out and keep it for income plus the captial growth. No sense in wasting so much time on such a cheap property.
TW
Hi again,
OK – following on from advice put forward in this post it seems that I should go ahead with the building report, which I have done.
The report concludes that there is a problem with the roof in that some of the old sheet iron at a cost of about $2,000.
Other than that there are some other minor repairs, but the property is in otherwise good condition.
Following on the the advice above I’ve submitted the offer to the agent at $40,000, but he’s not at all pleased and has pretty much dismissed it out of hand. “It needs to have a 5 at the front”, he said.
Also, other investors have appeared now and are showing interest. I feel that I need to act quick or miss out.
Can the community offer suggestions on how to phrase the offer or what other creative strategies are available if I can’t get 80% finance at $50,000?
This is an important if not critical part of the buying procedure and again I encourage your participation by posting your thoughts.
Regards,
Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Is the current tennant interested in purchasing the property in wrap deal?
If so, perhaps the real estate agent could be avoided altogether with us providing the ‘finance’ for the tennant to do this. This would give us a negotiating point on the value of the agents commission.
Regardless of the above, we should negotiate a reduction on the purchase price to account for the building report findings.
If we are relying on 80% finance and are not sure that we will get it, then I would make any offer ‘subject to finance agreeable to purchaser’.
Cheers,
Andrew
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