Hi all,
I have recently bought an 2 bedroom investment property in Ringwood East, Victoria. The builders inspection is good and the settlemet date is forecast to be around mid February 2008. The proeprty is currently tenanted for $190 per week but the market rent is in the vicinity of $230 per week. The reason for the under rent is because it is a long term tenant. I have flagged with the vendor regarding increasing the rent to $230 for the existing tenant but the lesses is not keen, hence I shall settle the property on vacant possession. My initial inspection of the property is that if I can paint the interior and do up the garden cost circa $5,000, I can probably get around $250 per week. My dilemma is the following:
1) My initial discussion with builders is that none of them is available until Feb 08,
2) Should I pay the existing tenant an incentive (say $100) for him to leave the property and then settle the property. Then, I sign a new tenant for $230 per week for six months, after which I get a builder to paint the house and fix up the garden. Then, I increase the rent to $250 per week, if not more?
3) I do nothing now until February 08 settlement date and then worry about it then? This is the lease preferred option cos I hate an under-utilized property!
Any suggestions?
Cheers
JohnHi John,
Even if you increase the rent amount to $230, I am guessing your property in Ringwood will be negatively geared. If yes, why would you want to start the negative cashflow on your property sooner. I think you have done well to negotiate a longish settlement in Ringwood East. The market is moving nicely in that area. Feb 08 is still 3 months away and by the time you settle, the market should have moved up by around 3-4% (based on recent performance). This is where you make the money because you have not settled on the loan and therefore have not started making any repayments. Feb 08 fits in perfectly with the availability of painter/landscaper as well and therefore you don't have to worry about any vacancy. You will do well to negotiate with the vendor to allow early access so that the painting and landscpaing can be done just before settlement. This obviously means the tenant needs to vacate the property 1-2 weeks before settlement (which should not be a big issue).
I know this is not your preferred option but this is what I will do.John
A possible point of fact is that until settlement you have no loan balance thus no interest payments. See if you can get permission for builders, painters , ect to have access to the property before settlement for the purpose of doing quotes so that the workmen can start as soon as settlement occurs (why after settlement – risk factor of providing a free renovation to vender if the deal falls through) . You might add a clause to the contract for this access requirement. As property power says you may gain capital while waiting for settlement. And the house is occupied so you have no worry about vandals or squatters moving into the house. If you have not done it already get the property insured before settlement.I agree with the comments above,… unless the property is positve geared why would you want to settle early so you can start losing $50/ week earlier.
I would want to delay settlement
Any work that you do to the property before you have leased it out for the first time must be capitalised ie added to your purchase cost base – this work is then depreciated not an instant tax deduction. Take the do nothing scenario, lease it out at the higher value for 6 months and if the new tenant decided to vacate carry out works at that time (not sooner).
there could be a reason for the early settlement if you are planning to fix the current interest rate. I know with some non-bank lenders they won't lock in your interest rates until settlement . If settlement is like 3 months away, the fix rate is probably higher with more increases expected.
Dream3r wrote:there could be a reason for the early settlement if you are planning to fix the current interest rate. I know with some non-bank lenders they won't lock in your interest rates until settlement . If settlement is like 3 months away, the fix rate is probably higher with more increases expected.I agree in the current climate this could be a valid reason for early settlement,
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