Please only read if you have the time, long winded so apologies in advance.
Hi guys, I have been wracking my brain all night on this one & then had a moment this morning where I thought – why not throw it to the forum. Why on earth did I not think of that earlier!!
Ok so our usual strategy for purchasing property is to by in a large rural city, ensuring the following criteria are met.
• decent returns to make us around about cashflow neutral
• the property relatively new so that the depreciation benefits push us into cashflow positive territory
• the place is already tenanted to save hassle.
We have been really happy with our purchases like this to date – we have bought 4 properties like this. However have had pretty much nil capital growth since we began investing in 2009. Whereas our PPR has increased by around $150k during this time.
We decided that we would try and find something a bit closer to us with the thoughts of adding some value to it and renting it out and hopefully get a decent return and a bit of capital growth. We found a great unit, which is owned by the catholic church. It is really good structurely, needs a big clean up (just general washing etc), and could ideally do with a coat of paint (but sugar soaping would still do wonders). The property is currently vacant.
Husband is freaking out as he like to have tenants in property before we take possession. We originally went in at $265k (was listed at 295 then 279k), they came back with 270k. We should be able to rent it out at $280 per week. I convinced hubby to go in at $267,500, with a license agreement for early access. He is freaking about the work to be done along with the time it will take to get a tenant. They have come back and said price is fine but no early access.
We are now at a standstill in our court. I need a solution as husband is all freaked out, about it all (he tends to be a bit OCD as well, so thinks it needs to be as beautiful as the house we live in. hence why I haven’t let him inspect 3 of the other 4 properties )
Any creative suggestions for a contract that will keep both the powers at be happy… the Catholic Church and my Hubby?
Or should I just let it go and continue on our old cashflow and low growth train??
Thanks in advance for your creative suggestions!
Michelle
Ask them why they won’t allow early access? If setup right its legal. Tell them It’s a sin to say no!
Hold your position, you're almost over the line.
Ask them , like Joe says above "Why they won't allow early access"
Explain to them, that is your best offer and can only work for you if you have early access to complete the work need doing and get a tenant, otherwise it will cost you more money in lost time
The best ones are worth the persistence
Cheers
Hi Michelle,
Are you intending to borrow the lot, inclusive of deposit and purchasing costs?
If so I was just looking at the numbers of your proposed purchase and they seem to be contradictory to your stated aim of having "decent returns to make us around about cashflow neutral"
Note I have assumed full borrowings and no cash deposit here.
Total loan/s = $278K (excludes any money for renovation, even cosmetic ones will cost a few bucks)
Interest costs @6% = $16.7K
Ongoing costs @1% of purchase price = $2.6K
Management fees @8% = $1.2K
Rental income 52 X $280/wk = $14.6K (note this assumes full occupancy)
Net cashflow position – $6K (negative)
If you are using cash for the deposit and purchasing costs the figures change as follows:
Total loan – $214K (excludes any renovation costs & assumes 80% LVR)
Interest costs @6% = $13.9K
Ongoing costs @ 1% = $2.6K
PM fees @8% = $1.2K
Rental income = $280/week = $14.6K
Net cashflow position = -$3.1K (negative)
Maybe hubby has done some cashflow calculations and come up with similar numbes to mine. If your other properties have similar cashflow results it is possible your overall 'bottom line' is not that flash.
I would recommend before going any further with this deal – you take some time and revist all of your numbers before deciding whether or not to continue negotiations on this property.
Ultimately your property portfolio (exc PPOR) is going to have to provide both growth and income. If all of your IPs are not growing then you'll find your portfolio is being supported, from an equity point of view, only by your PPOR. In some respects you may be building a house of cards.
Hope this helps.
Ha! I love it Joe! But yeah I can't see what the issue is if it is all done through the solicitors.
Thanks Rob, that is exactly where we are coming from to get it cleaned up before we can even show tenants is going to cost us money – not their problem I know, but we have to take it into the equation with the purchase price.
Hi Derek, sorry I mustn't have explained that properly. I meant all our other 4 investments are pretty good returns (well we are happy with them anyway
they aren't like mining town returns) our last one was a 5 year old house, tenanted at $270 pwk paid $207k for it so around 6.8% and depreciation should help too. So the ones we have are all along those lines.the one we are looking at strays from our usual criteria, and as you say will cost us money and has minimal depreciation as about 20 years old. We were hoping a fresh coat of paint and a.bit of a tidy up would give it more capital growth and more rent.
but reading your post I am thinking straying away from properties that put money in our pocket (if only $20 per week), might be a silly move! Arghhh the crazy world of investing
thanks for your reply & have a great week
michelle
Hey Shell,
Good to see you are on the buy wagon and have moved through the paralysis part!
My 2 cents.
Are you definitely going to see see capital growth out of this property? If it's losing you 3k (I'll use Dereks figures) per year then every year you hold it the value really needs to go up 6k per year, so you cover the loss and have a profit. Could you make the 3k profit per year out of another cash flow + property?
You said your PPOR has gone up heaps – does this mean that the area is still seeing a good growth, or will this growth now slow?
Lastly if your onto a winner (buying cf+) and you are growing your portfolio, do you have to change what you are doing?
As far as the deal goes, I'd stick to my guns, having early access is a legit request especially through a licensing agreement, you're paying more, why should they care. Remember when you deal with something like a Church or other organization you are essentially dealing with a committee, it's always going to be a bit more painful.
Hope this deal works out for you in the best possible way
Cheers
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeThanks for the reply Dianna,
Yes we have been thinking about what both you & Derek said and have decided that we are on a good thing with the method we usually use & that is why we can always sleep at night & aren't scrounging for money to pay the repairs & general expenses that you get to enjoy with investment properties!! So we have officially let this one go (i think worrying about changing strategy was part of the cause of my analysis paralysis!)
Funny thing was that going back to our original method, last night I found another property (rural again) that fitted perfectly with our method & we are ready to move on from the house that will (probably ) have capital growth, but will definitely cost us money. to a property that will eventually have growth, but in the meantime will give us a little bit back in our pocket each week – and definitely not take it out!!
We signed up our fourth property last week (good cashflow type) and it gave us no doubts, worries or second thoughts, so that should have told me something.
As always, thanks so much for all your help guys – and i think you may have given me a good lesson of 'if it ain't broke, don't fix it'.!
Michelle
Thanks for taking the time for me Derek, i really appreciate it.
& yes helps heaps – between you & Dianna, you have both help me refocus and move forward.
Have a great day!
Hi Shell,
Don't ever forget the sleep at night factor when investing.
I'll challenge you a little on your comment, "ïf it ain't broke, don't fix it" and say to you keep your eyes open for opportunities that are out of your normal sphere.
I don't believe the change of strategy was the reason this deal did not work out – I think it was the choice of property. As I tried to point out in my earlier post my maths had a disconnect between the answers I got and your desire for cashflow. Cashflow neutral it wasn't.
Hope this helps.
Good call Derek on the sleep at night thing….!
Shell, it's really my pleasure to chat to people such as yourself, you really take the knowledge you get and run with it! So many others would get advice and never do anything with it.
It's great to see you traveling on your property adventure. I'm sure you'll begin to tackle things outside your comfort zone and adding more to your already winning portfolio, but it's a matter of working up to it.
And congrats on picking up another cash cow!
Cheers
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeTry to convince the church to let you have an early access. Also, sit down with your husband and make your calculations On the possible return. Once your husband sees that positive cash flow will come his way, he might stop freaking out.
they aren't like mining town returns) our last one was a 5 year old house, tenanted at $270 pwk paid $207k for it so around 6.8% and depreciation should help too. So the ones we have are all along those lines.
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