Hi there,
I am considering buying a property in country NSW. It is currently rented at $180 per week and is on sale for $85,000. It is being sold fully furnished, TV, washer, fridge, sofa, everything. And is currently let. The tenant is a long standing tenant and would like to stay.
It seems to good to be true .. regarding positive gearing.
Could any one help me make a decision
Cheers
Numbers don't lie but be careful with furnished properties. Is it already tenanted? I would worry about people been able to pay their rent if they can't even afford a tv or a bed. Furnished apartments only seem to work for the elderly or Uni students.Is it close to a university? Has the tenant been in there long?
Tony Fleming | Triumphant Property Group
http://www.triumphantpropertygroup.com.au
Email MeNSW Buyer's Agent specialising in Western Sydney-Blue Mountains-Orange-Albury
Thank you for responding
The property is in a very rural place and the nearest town with harvey normans etc is 4 hours away. The property is owned by a girlfriend of mine who is wanting to release teh equity. In the town there is a the basic shops, a school, a hospital, lawyers etc. The property is being used for doctors and health care staff who are on their years rural placement etc so hence the fully furnished draw card for the hospital staff. Medicare local actually pay the rent. There is a hospital dietician in there at the moment. The contract expires August but she wants to stay there much longer. Once she goes, mediare local will put someone else in.
What are your thoughts
With a gross rent return of 9.1% sounds like this will be a 'cash flow' only type of buy.
If your girlfriend has to sell to release equity it suggest the banks are not overly comfortable with the area, or the property's value has not increased, or there are underlying problems with the town/property. You'll need to investigate further.
How are you buying this property? Full borrowings or cash + borrowings? If you can provide this information I can run some numbers for you.
From a cash flow perspective (assuming 80% borrowings of $68K)
Annual Interest @6% = $4,000
Ongoing costs = $1,500
Management Fees @10% = $950
2 weeks vacancy = $360
Outgoings (exc repairs – you'll be able to estimate this better than I given you know more about the property) = $6,810
Gross income @100% = $9,360
Before tax profit (est) = $2550
To be successful as a property investor you will need cash flow and growth. Either, by themselves, will not do it.
I am not convinced this property is a great buy.
Thank you Derek for a great response.
I was going to put 20K down and borrow the rest.
The agent fees are $10 a week.
There is growth but yes, its very slow. The good thing (i think) i may be wrong is that there are no rental properties available in this town at all, and the list is very long.
My girlfriend has finished renovating the property and so has a complete new bathroom and kitchen, and carpets.
I look forward to your repsonse
jo660 wrote:I was going to put 20K down and borrow the rest.There is growth but yes, its very slow. The good thing (i think) i may be wrong is that there are no rental properties available in this town at all, and the list is very long.
My girlfriend has finished renovating the property and so has a complete new bathroom and kitchen, and carpets.
Hi Jo,
Thanks for the new information.
My numbers were reasonably close so you'll largely be able to run with those to help with your deliberations. They wont be 100% accurate as they are estimations only.
It is difficult to make more learned/informed comment about this property as we don't know enough about you.
Now that may sound a little invasive and silly but for a small group of people this property may be perfect, whereas for others, far from ideal. This is one of the issues property investors need to consider as we are all different in so many ways. For example some questions I have are;
Why are you buying this property? Have you other property/ies? Can you afford more? Have you looked at other options? How much research have you done beyond listening to your girlfriend? and so on. If, without giving away secrets, you tell us more about yourself then the forum will be in a better position to add comment.
Your comment about 'limited growth' is the clincher for me and this outweighs any perceived shortage of rental accommodation in the area. As I said earlier you will need growth and cashflow. Even with 10% growth you will only increase your equity position by $8.5K and your posts suggest 10% is well and truly out of reach.
Have you spoken to a broker? Smaller towns/remote locations often present major issues with some lenders and you may well find you own a property that not many banks will respect moving forward from here.
I assume you are considering buying this property directly from your girlfriend without an agent. If this is the correct some banks get a little nervous if there is isn't an arms length transaction (read agent) involved. Another question for your broker.
Thank you,
Its a tricky one, yes l have a rental property in the UK that was not a great investment as l bought it as a renovation, but kept hold of, and the market crashed. The good news is, so did the interest rates. I'm well and truly out of the tie in with the bank rates and so make an income, although after listening to your advice, the agent fees, Non resident Landlord insurance at a whopping 120 pounds a month and repairs etc, its probably not a great deal, but gives me an income of about $500 a month before tax.
I like the idea of two or three positively geared properties as l work part time and it will supplement my income.
I have about 300k to play with for investment properties and l thought this one might be the way to go.
oh also, l can only work wth the NAB or the commonwealth bank in the town as no other bank will be willing to lend because of the remoteness. I'm going to ring the real estate agent to chat about the growth of property in the area and see what they say
If the big banks are not willing to lend on the property then I would definitely not touch it.
What happens if the tenant decides to move out? If there are no houses to rent in this town, then there is probably not much demand for rental accommodation and you will be left with a house that is worth essentially nothing. If the only selling point of this house is rental yield, and you are in a position in a few years where you cant find a tenant to rent it, what would the house be worth?
Cheers,
Luke
Jo this classifies as a grade B investment and for your initial purchase thats not where you want to be.
A grade A investment is one which is treated by the financial institutions (not just banks) as collateral, produces a CONSISTANT (not necessarily high) return and is easily saleable in almost any market.
A grade B investment is one which is harder for the banks to take as collateral, produces a variable return (it may be substantially higher as a result) and takes a lot longer to sell on a tougher market or more selective market.
A grade C investment is one which the banks WONT lend on .. produces an intermittant return (again most likely higher), and as a result of the bank lending criteria is near impossible to resell in any market. In other words its not treated as real estate by any lending institution. Student and Hotel unit, Aged Care and Holiday accomodation meet this criteria.
A grade B investment is a higher risk level and may take more than one broker to produce finance on it. However they are good returns and as long as this can be maintained for a consistant period they can be a way of increasing your fortune rapidly.
With a grade B investment check your bodycorp, your tenancy quality, your chances of vacancy and REPLACEMENT of tenancy.
And always be suspect when the property is already fully furnished. It means the property has been pushed to its absolute limit to achieve the current rental returns, and there may not be any room for further value adding.
Historically I like stocking up on solid Grade A investment grade properties .. then using the equity held in that to purchase grade B or C property as an offset. Banks have the grade A investment to lend on, and I end up with grade B or C properties which are better at paying themselves off quickly.
Try to aim for Grade A to start with, as it gives you a reasonable financial state with the lenders. Then as you achieve a little equity or flexibility .. head out to some of the more risky propositions.
The one thing to take into account with Grade B properties is that they are harder to achieve lending on, and as a result may stop you from progressing in your endeavours as you may want to.
Dear xDrew,
Thank yo so much for offering your advice, l really had no idea that properties were ranked that way.
All the advice that l've been receiving is pointing in the direction of maybe l should look elsewhere. I just thought, l have enough equity to purchase a grade A, later and this B has come up first.
Its so confusing….arrghhh
jo660 wrote:oh also, l can only work wth the NAB or the commonwealth bank in the town as no other bank will be willing to lend because of the remotenessThis statement is enough for me – walk away.
As Luke said – if all of the Big 4 don't like the property then potential resale later is somewhat problematic and as a property investor you always need a 'bail out' option.
XDrew's 3 grade of property is probably something he has developed. Having said that I find it hard to argue the logic behind the three tiers of property and you could do a lot worse than use the system as explained.
Given you are working part-time have you spoken to a broker to determine what you can do from a point of view?
You may find finding an A grade property and throwing a bigger deposit at it may give you an overall better result.
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