Hi everyone,
I’ve been reading the forums for a while now but this is my first post, hopefully someone here will be able to provide me with some guidance. I am extremely keen to get into the property market and am especially interested in renovating/developing property. I’m quite young but I have a good job and have saved a large deposit. I’ve been reading and researching for over a year and feel I’m ready to buy but just need a little bit more advice.
The property I’d like some advice about is a block of 3 x 2 bed, 1 bath units set on the back of a 1012 sqm block. Currently the owner has constructed a wall between the kitchen and the living room turning each unit into 3 bedrooms. He is renting each room in the unit out for approx 700/week/unit on a short term basis. If the wall was removed the units would rent for approx 280-300/week each (2 bed, 1 bath). It is located opposite one of the cities best private schools, 2 minutes to a state high school, 5 minutes to the city centre, and 5 minutes to a popular beach with restaurants and cafes nearby. The owner (a property developer) wants mid to high 900k for it.
He has had a professional valuation done on the property 7 months ago and provided me with a copy, the valuation puts the property at 850k as it is in it’s current state. The valuation adds that if the property was strata titled and a further 4 units built on the front of the property then it would be valued at 1.4 million. The owner has also given me a copy of the architects drawings for the property for the 4 units which he submitted to council. He states that the DA was only knocked back because the turning circles for cars weren’t big enough.
The questions that I hope the kind people here can help me with are;
1. Should I pay above 850K for the property? (I’m thinking not but not sure if it’s viable to pay for future value)
2. If I was to purchase the property would it be wise to keep it as short term rental or turn it back into 2 bed units and rent them by the unit?
3. Should I renovate the properties at all? The kitchen and bathrooms are quite old and I would most likely be holding onto the property for 5+ years before doing any major development.
4. Is there any way I can find out from the council the reason the DA was rejected to see if the owner is telling the truth?Thank you all for any help you can provide.
Regards,
Nathan
Dear Nathan,
It is hard to give “advice” not knowing what the property is like and where it is. What you do after you buy it will depend on two things: abilities and capital.
We can want to do many things but it will, in the end, be up to your skills either as a handyman or a negotiator, to make them happen. Perhaps, it is best to take baby steps. Start with something small and easy. Gain experience and confidence. Everyone gets it wrong some of the time. I’ve got it wrong, too and I have plenty of experience. Anyone who says they’ve never made a mistake investing is lying. Just read the news about developers who’ve gone under and they’re SUPPOSED to know whet they’re doing.
I can only share my own experiences; and I’m sure, others will, too. My first multi-unit is in Cammeray (sorry to mention this again). Before this, it was all cookie cutter, mum and dad deals.
The property was advertised with potential to make $85,000 a year. My business partner had a look at it. When I saw it, I $95,000 income easy.
The seller had so much vacant studios. And when they were between tenants, the vacancy period was way too long. She had a mentally impaired person living there, a messy unkempt young man and other low income earners.
I said to myself, this is gold mine if I have ever seen one. We bought it and began to improved each studio cosmetically as they become vacant. Nothing structural. Got only professionals to move in.
It looks old outside, after all she’s an 80 year old lady sitting on sandstone! But inside, each unit oozes with charm. Decorative fireplaces, iron-pressed 11″ ceiling, self-contained, bright. Potential tenants often say to me, “It remainds me of this little place I rented in Europe.” Within 6 months, we were making my projected income.
It is now making $105,000 gross per year with another 10% upward move viable. All tenants are long-term, secured with leases, and rents are always paid on time. Vacancy rate over six years is 0.05%.
I knew I couldn’t do a development. It’s not me. But I could do simple, cost-effective renovations.
You should base your decision on what you can do best. This is why Cammeray property is on the market. II have taken it as far as my abilities will let me. Someone else will have to take it to the next level.
This is also why the owner of this house is selling, he has other things he can do better. Are you the person to take it to the next level?
I am glad you’re looking to invest in property. Just be careful you don’t bite more than you can chew. Choking is not a pleasant experience. Should you decide to go in, make sure your exit strategy is in place.
I wouldn’t dare tell a young person not to do it, it’s the surest way to make them do it.
But I can tell a young person that if you do things with thoughtfulness, we will turn out ok in the end.
Take care.
Angel
Hi Nathan,
Your question and my answer – don’t take my word for it though. I’m not a licensed adviser so you can’t sue me.
1. Should I pay above 850K for the property? (I’m thinking not but not sure if it’s viable to pay for future value)
No, in fact, you should cost your renovation plan and take this to the seller. Say to him, it will cost me this much just to bring it to a pleasant standard, I believe I should purchase it only for $xxxx. To be fair though, you can’t ask a discount for the whole cost of the renovation, it would simply be too unfair for the seller.
2. If I was to purchase the property would it be wise to keep it as short term rental or turn it back into 2 bed units and rent them by the unit?
Short term rental is NOT the way forward. It is too tiddly. Too much work, too much stress. Long-term tenants are more responsible and you don’t have to deal with huge fluctuations in income. A steady income, with minimal vacancy period is the way to go. But that’s just a preference of mine. Not Biblical. Also, easier to get a bank loan as you only need to bring a letter of rental appraisal from an agent.
3. Should I renovate the properties at all? The kitchen and bathrooms are quite old and I would most likely be holding onto the property for 5+ years before doing any major development.
If it will increase the rental income, you have got to do the kitchens and bathrooms up. Do it well, even if cheaply. It does not have to be costly to look nice. Get a good handyman who will not charge the earth, and if possible, learn from him. You have got to be hands on. the minute you drop the ball, it will run away from you. and the chances of getting run-over is indeed high.
4. Is there any way I can find out from the council the reason the DA was rejected to see if the owner is telling the truth?
Yes, I believe there is but don’t know how. I reckon there is more to it than what he is telling you. People don’t give up on projects with just one issue, they normally take it back to their architect or drafts person to re-draw. Or, he could be telling the truth and he’s just got no energy for it. I know, I don’t!!! Goodness, it would be like asking for an early death for me if I were to do a development.
Take care.
Angel
Thank you very much for all of that advice and information Angel. A bit of additional info that I forgot to mention is that thanks to RPData I found out the owner paid $790k for the property in 07 and there hasn’t been much growth in units here. Especially in that suburb due to a Hedley project that has only recently been completed nearby due to them going bust. That has resulted in a slight oversupply of units in the area as many of them are yet to be sold.
I spoke to the agent again today and told him I wouldn’t be offering any more than 850k unless the owner puts the DA back into council and gets it approved. He is putting that proposal to the owner so we’ll see how that goes. Still have a lot of due dilligence to do before my mum and I sign a contract or even if we sign it.
Thanks again for your time and information.
Regards,
Nathan
3 x 2 on a single Title believe it or not may not be treated as a residential deal with a lot of lenders (Many cap the loan at 2 units on a single Title).
Variance in funding costs and set up fees will have an effect on the bottow line so make sure your Broker is experienced in dealing with multi unit dwellings.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Richard, what do you mean by a residential deal sorry? It’s not a term I’ve come across yet?
Regards,
Nathan
When you purchase a multi unit dwelling some lenders will want to charge you Commercial rates of interest and set up costs because they do not deem the loan as a residential loan.
For many lenders a maximum of 2 units on the same Title is the max they will accept wheareas for other they will go upto 8.
There is a big difference if you can save 0.25-0.5% difference in interest on the total loan amount.
Also remember if you do construct on the front of the block this will increase the number of units on the Title so need to factor that in. If you have equity elsewhere you maybe ok otherwise you may have an issue going forward.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Dear Nathan,
All these information can be a little daunting and overwhelming. There are to many twists and turns, each time you make a turn, there is a twist.
Don’t worry, there are plenty here to hold your hand. Don’t be daunted by it.
In a sense, it is almost a necessity to start small. This is not to say that if a big opportunity comes along you shouldn’t take it.
It makes me go down memory lane … I was so scared I choose a defense housing investment for my first. It is NOT the high earning asset, in both capital growth and income, but it gave me peace of mind. I was so peaceful, I could have been asleep. I’m not saying this is the way forward for you.
You’re so much more cluey than you think. Back then, I just wanted to make sure I have a good tenant and a regular rent coming in. Young people these days are braver. You can conquer the world.
Take care.
Angel
Thanks for that info Richard, I spoke to my broker and he told me that I can have up to 4 units on 1 title before it will be classed as commercial. Unfortunately the owner didn’t accept my offer so I’m back on the hunt. All part of the fun i guess.
Thank you for the kind words Angel, you’re quite right it is quite a daunting task but exciting at the same time. Hopefully I’ll be able to find the right property to start off my portfolio.
Kind regards,
Nathan
There is a deal of a life time every week Nathan
keep looking and am sure you’ll find a diamond investment to sink your teeth into
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