How to analyse a deal is, well, a big deal!
No doubt there are as many methodologies as there as investors. I will outline the process I undertake on a property that is on the market now (July 2019). (Listed at https://www.realestate.com.au/property-house-qld-dinmore-131286374)
This house is a solid brick, 3 bedroom, 1 bath, 1 carport on 550sqm of land, located at Dinmore which is relatively close the boarder of Brisbane City Council and Ipswich City Council, in QLD, Australia.
The listed price is $205,000.
First consideration, is it a good price? The median price in Ipswich (as at July 2019) is $360,000, so it is 43% below the median Ipswich price. Dinmore’s median is $235,000, so the house is listed at a 13% discount to the suburb of Dinmore.
However, just because a house is listed below the median doesn’t make it a good deal, it’s just interesting information and suggests if the price is reasonable.
Now the first look at the math. I have a spreadsheet which is formatted to make an analysis quick. I started a new spreadsheet in March this year, and it now has 53 properties that I have analysed in it (in about 4 months), so I am constantly looking for investments… it’s a business not a hobby.
A quick side note, of those 53 analysed properties I have inspected around 10 and purchased 3. I made offers on 5 or so others which I didn’t purchase, the Dinmore house we are analysing is one of the ones I had a contract on which I didn’t purchase. Why did I let this one go? You’ll have to keep reading to find out.
So back to the numbers.
The listed price is $205,000. I decided the maximum I would pay is $200,000. With a 20% deposit the finance would require $40,000 for a deposit, with $160,000 loan. At an interest rate of 4.06% (this is around 0.5% higher than the best rates at the time of writing, so I have a little wriggle room if rates increase) the repayments would be $9,264 per year.
I will outline the math below:
Purchase costs
$205,000 asking price
$200,000 max purchase price
$40,000 20% deposit
$160,000 loan
$1,500 legals
$1,200 pest and building inspections
$5,500 stamp duty (approx)$48,200 outlay
Holding costs
$1,100 insurance
$1,800 council rates
$500 maintenance
$1,120 utilities
$0.00 property management (we do this ourselves – its a business not a hobby)$13,784 total holding costs
$280 Rent per week
$14,560 Rent per year$776 cash flow per year (14,560 income – 13,784 costs – a positive geared investment)
As I only invest in positive geared investments, this investment warranted an inspection.
I met with the agent and found out the following:
– The house is an ex-housing QLD (Government Housing) property
– The department do not negotiate on price very much
– The property has no floor coverings and some holes in the wall (only small) and will require an interior repaintI updated my spread sheet with $5,000 costs for floor coverings and paint etc, and added this to my loan value. So my loan is now $165,000, the impact on the math is below:
$165,000 loan with extra $5,000 for repairs
$9,552 annual repayments
$14,072 annual holding costs with extra for maintenance
$14,560 annual rent$488 cash flow per year
So I made the offer, $200,000.
I received a contract from the Department of Housing and it noted that the house has had mold and dampness issues. The removal of the floor coverings is starting to make sense.
I visited the property again and noticed that the Department had installed drainage in both sides of the house, attempting to removed the dampness from the slab (it is a concrete slab on on the ground).
I asked for further details regarding the nature and severity of the dampness and mold issues. The Department advised that the floor coverings had been removed and the slab treated with a dampness inhibitor. I got the name of the product used and researched how it works and how effective it would likely be. I also spoke with a floor coverings provider to see what products they offered for dampness.
In the end I decided that the dampness issue was enough of a reason to move on and look for another opportunity.
So there you go, a step by step analysis, based on both the math and actual property location and construction.
Tom
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Thanks Tom this a great read I enjoyed seeing how other investors follow a process through.
Thanks for the great write up Tom! Very Helpful
Very interesting. Totally makes a zero knowledge into 100 percent well learned analyst. It gives me tips on how to deal perfectly. Thank you.
Hi Tom.
How much weight do you give to location when analyzing a property?
Ian
Hey Ian, that’s an interesting question.
Firstly I have determined weights for my investing portfolio of 50% real estate/50% shares. My cash/bonds component can be as high as 50% depending on what is going on with my life (maybe I just bought a new home I live in, so I want to reduce non-tax deductible debt and sit a bunch of cash in an off-set to pay off the loan quickly), maybe I just made an investment decisions (I just sold an asset for example) or in my assessment/judgement a market (shares or property) is over valued and I sell to take my cash profits (before a possible bear market).
I personally think making informed decisions about asset allocation is the most important question. This is what a real Financial Planner does (real as in one not employed by a bank or commission based boutique firm, those people are just sales people with a fancy title!).
When it comes to investing in real estate I am a conservative investor, so I invest in property that I can drive to, so with 50km or so of where I live (I live on the West side of Brisbane QLD).
I invest this way for a few reasons:
1. We manage the tenancy ourselves . We use an agent to find tenants, show the property, assess the applications and make recommendations to us, but once they move in we take over. I have worked as a tenancy officer in public housing so I have a good understanding of tenancy management.2. I do all maintenance inspections and organise repairs. I am a licenced electrician and worked as a Maintenance Coordinator etc for many years, so I am really good at these skills too.
When it comes to buying I find that buying from interstate investors makes for the best pickings, as the properties have cosmetic issues (neglected property maintenance due to “out of sight, out of mind” I think) and also interstate investors don’t seem to have a good understanding of the local market, which means they have often bought at a high price (in local market terms). My last four purchases have been for less than the previous buyers has paid, collectively I have paid $76,000 less then the 4 previous owners had paid (that’s real negative equity for the sellers, not just paper loss). Three of the four previous owners of the properties I bought were interstate investors.
In the end I have never been an empire builder. I admire people who do invest in large numbers, Steve McKnight’s story of purchasing hundreds of properties over a relative short period is awesome. Investors who achieve that kind of result will make way more money then I ever do. I doubt I could buy 100 properties in 3 years using my method, but that’s cool, as I said, I am a conservative investor.
Having said that, I analyse my local market, looking for insights into demographic trends, where businesses and councils are making investments, where industries are closing down etc (I am an Economist as well). This analysis has influenced my investment decisions and giving me confidence to invest in assets that others consider risky (such as the over 55’s units).
So in my humble opinion the question of location comes after you’ve got your asset allocation in order, and then it’s going to be depending on where you live too. I live in a place where I can find opportunities to buy within my investing model. If I lived elsewhere and I had to invest interstate then I would need to think about how that model could work.
Tom
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