Forum Replies Created
Your figures seem a bit skinny
eg pay $430, plus stamp duty etc on purchase, loss between rent and expenses while holding, commission & expenses on sale
if you know you can achieve $505 it can work, but what if the sale takes longer or the ‘bank’s value’ is optimistic
I had a commercial property in a country town – about 3000 people. Had two tenants in it for about 3 years. One tenant with gov’t funding lost its contract. Six months later the second lost a major contract. The returns were good. I spent the next year doing some renovations and was able to sell the property with a tenant about to move in and occupy the whole property to another investor. I also had an inquiry from someone else at the same time to rent part in a few months when they would have to move out from other premises
The property had pros & cons :
pros – plenty of offstreet parking
cons – not on main streetLook at what standard properties need to be eg if potential market government, ngos might need diabled access & toilets, air conditioning, some security. Or if you can provide these things and the other landlords don’t you’ve got a USP (unique selling position) to potential tenants.
Commercial’s higher risk because of risk of vacancies. How long’s the lease your existing tenant is on? How likely are they to move? Are there other businesses that you could attract eg lawyers often like to be close to courthouse.
Also a potential tenant might be tied in to an existing lease.
The scope’s there with commercial to add value by solving the problem of vacancies, particularly if you can buy at a good price that reflects current income rather than potential income
The bargain of the century is a very common occurrence. Talk to some of the other agents in the town who manage property and get their opinion on likely rent and difficulty in renting.
Last year I was looking at a similar type property. Selling agent estimated rent would have given me a 7.5% gross return. I asked my managing agent to give me an estimate. Estimated rent 20% lower than selling agent, so the gross return would be about 6%. Agent also estimated delays in renting when vacancies occurred.
If the house you are looking at is currently an IP ask the agent to provide you with a schedule of the leases and occupancy for the past three years.
If the business is a sole trader or partnership do a business names search with the state authority. I think in NSW it’s the Department of Fair Trading
If it’s an incorporated company do a search with ASIC.
You may be able to get information from the Land Titles Office as to what properties are held in the name of the idividual or company
If you have done those steps then your legal means are to issue a summons, once you get judgment you can get them examined as to assets, tax returns etc.
How long are the reserves likely to last? Do some research in the local paper and company reports.
What’s likely to happen if the cost of mining the copper increases? (presumably they’re mining the most profitable sites first)
What’s going to happen if the Australian dollar rises?
If one or more mines close what will be the impact on the community population, jobs, economy?
Investment in mining areas needs a bit more due diligence than some other places as often if the mining stops or is put on hold, the population plummets.
Cloncurry might be an excellent investment, but you will need to base your information on more than the cost of housing and current rents.
Also look at your expenses of ownership – rates and insurance. Also if at some stage you need to sell your investment, it might take longer to find a buyer at your price.
In a commercial property the tenant may be responsible for paymnet of some or all of the outgoings eg rates, insurance, etc etc if the lease provides for this. If the lease is silent, then the tenant is only responsible for rent.
If you are buying an existing premises that is currently tenanted then you will need to see the lease to see what the tenant pays for. Note particularly the length of time left on the lease. Remember that an option is simply that, it is an option for the tenant to continue the lease for an additional period or periods. So if you’re buying a property with a 3 x 3 lease which is 2 years into the first three years, you only have a guaranteed tenant for 12 months until the tenant exercises the option to renew.
Therefore, is the building going to be easy to let if the tenant shifts out. Can it be used by different kinds of businesses.
You should also note that sometimes when negotiating with a tenant, particularly if there is competition, a contribution by the landlord to fitout and/or a rent free period might be part of the negotiations.
Some states might have laws about some kinds of commercial property eg NSW has or had something on Retail Tenancies.
Commercial property can be good but one of the reasons you get a higher return is because it can be riskier than residential
If you’re buying a new residential property the developer will hvae to include GST in the price (but will have been able to claim Input Tax Credits on the GST paid for materials, contractors etc)
As it is residential the purchaser will not be able to claim any GST back irrespective of whether they are going to live in it or rent it out as a residence) so it is irrelevant whether the purchaser is or is not registered for GST.
crj
I’d support Rod. Speak to an Australian accountant who is experienced in this particular field. While there might not have been a great deal of difference betweeen Australian and New Zealand tax laws 30 years ago, there will be usbstantial ones now.
I always think that a little knowledge is a dangerous thing with tax.
Alternatively you can hope your NZ accountant has given the advice in writing and that if things blow up his professional indemnity insurer will be around to meet your claim and that there is no cap on liability.
While I’m no expert on L/O, it would seem from some of the American books I’ve read that your vendor needs to be motivated (desperate).
From your Vendor’s point of view and looking at opportunity cost if he thinks prices are going up 20% in 5 years, then on the figures you gave he needs to make about $50,000 on the option money you ae paying to be in front.
You also say he has 14 other properties. Hard to see much motivation for selling.
With 14 other properties, it doesn’t seem like he has any need to know about other alternatives, particularly as his strategy is buy and hold. L/O or wraps might work for some people, other people might prefer adding value to their property by renovation or increasing rents or both.
crj
The 11 second rule is a guide to find cash flow positive property. If a property rents at $100 p.w, and sells for $50,000 the gross rent is 10.4% of the purchase price, allow say 1/3rd for expenses rates, insurance and repairs and you’ll probably meet the mortgage payments with the other 2/3rds.
The 11 second rule is a quick way to make a calculation without needing a calculator.
If you are unable to find a property that is giving a postive cash on cash return, then possibly a property with depreciation benefits might help. Margaret Lomas is an advocate of those and ahd some articles in API some time ago
No except if your IPs were held say in a trust or company and that trust/company paid you for bookkeeping. Of course then you as an individual taxpayer would have to include this income in your tax return.
crj
Misty,
In Victoria the occupational boundary ie the fences can become the ‘legal boundary’ once a certain period of time has elapsed, notwithstanding that the boundary on the title is different.
Your post says 10-15 years. I think if 15 years has elapsed then the title goes on the fences. If less than 15 years a correction might still be possible.
You will need to see a lawyer who is experienced in this area of law.
The kind of things that will need to be considered are:
1. exact time fence was constructed and any circumstances eg agreement between the property owners.
2. did the fence replace an earlier fence(s) and if so when and where was that fence(s)
3. history of ownership of both properties, including was there any time when both properties were in the same ownership as that might affect the period or it might mean that something has occurred so that even if within the limitation period you might be estopped because of the action of a predecessor in title to youYou need expert Victorian legal advice.
(as an aside the differences in the law in this respect is one reason why in NSW conveyancing surveys are done very commonly and in Victoria why they are rare).
crj
YC,
In many country towns people go there for a short period eg 3 years because of work. Normally the cost of buying and selling means that except in exceptional times like the past couple of years capital growth would not be enough to cover the entry and exit costs. Therefore, these people are in the market as renters.
From an investment point of view, an investor is interested in total return that is the income as one component and the change in capital value. In many areas eg Sydney, the capital growth alone has given people a high return on their investment. However, in the country towns as other members have pointed out capital growth may be questionable (meaning you need a higher income return to get a total return that is comparabloe to other investments) and there is greater risk because of illiquidity – may take a substantial time taken to find a buyer; demographic risk – population decline.
Small reductions in jobs in small towns have great effects. A report commissioned by the Federal Member for Calare showed the effect the loss of 200 jobs in Orange will have:
‘I told you so’
By Nick Redmond
Thursday, 22 July 2004JOB losses at the Electrolux plant in Orange will have close to double the impact on this region than staff cuts at Mitsubishi will have on Adelaide, a study has found.
And according to Member for Calare Peter Andren, the Federal Government must develop a rescue package for the Central West.
When 1000 jobs were cut from two Mitsubishi plants in Adelaide in May 2003, Prime Minister John Howard responded with a $50 million bail out.
The study commissioned by Mr Andren was carried out by the Western Research Institute.
It found that the 200 Electrolux job losses announced in April this year account for 0.56 per cent of employment in the Central West compared to 1000 job losses at Mitsubishi accounting for just 0.29 per cent of South Australian employment.
“The findings back up my request for special re-employment assistance for displaced Orange workers and contradict the Prime Minister’s written comments to me which suggest that Orange and the Calare electorate are comparatively well off compared with Adelaide,” Mr Andren said.
The WRI study conceded that Orange appeared to have a stronger employment market than South Adelaide, where Mitsubishi is located.
However, the 1030 Electrolux employees represent 6.7 per cent of the Orange workforce compared with the 3300 Mitsubishi employees accounting for only 2.3 per cent of the South Adelaide workforce.
Mr Andren commissioned the study after receiving a letter from Prime Minister John Howard about job losses at the Orange plant.
In the letter Mr Howard said the unemployment rate in Orange had fallen from 7.0 per cent in March 1996 to 4.8 per cent in December 2003.
The Prime Minister was responding to a question asked by Andren in parliament in June.
Mr Andren argued the $50 million Mitsubishi deal ($10 million for employment and training and $40 million to encourage investment) should be replicated in the Central West.
In a return letter, Mr Howard listed off more than $160 million in assistance grants and packages spent in the Calare electorate since 1996.
“While I very much regret the decision by Electrolux to refocus its operations at the Orange plant, it is at least pleasing that Electrolux has attempted to minimise the impact on Orange by its decision to undertake substantial new investment in the plant to help maintain its global competitiveness,” the Prime Minister wrote.
Mr Howard said the $50 million assistance package announced in May after the Mitsubishi jobs were cut was “primarily to promote employment and investment opportunities across South Australia.”
“[It] is not limited to a single town or electorate,” he said.
The study also found that the skills of Electrolux workers were a problem in finding new jobs.
“A key finding is that most of the Electrolux workers possess highly specialised skills that are not easily transferable to other jobs. About half the workforce are also middle-aged workers many of whom have worked at the plant for decades and will have more difficulty in finding a new job,” Mr Andren said.
“At the very least these people should be helped by a restructuring package, and I urge the government to rethink its stance.”
The study said there would be a flow-on effect from Electrolux cutbacks with up to a further 200 more jobs lost in the engineering, retail and business services sector of the local economy.
“Electrolux accounts for 1.1 per cent of the employment in the Central West while Mitsubishi accounts for just 0.5 per cent of employment in South Australia,” Mr Andren said.
“I am sending the report to the Prime Minister with a further request that Orange be considered for special employment assistance to minimise the impact of the Electrolux cutbacks.”
Look at local history books, if there was a flood there will likely be something in the book, maybe even pictures giving an idea of height of that particular flood.
As has been stated check with the local council. Different councils will have different amounts of information.
Talk to some of the older locals.
Visit the town. Maitland Railway station had markers of where the different flood levels had reached. Dubbo has markers on some buildings in Talbragar street. Other towns have photos eg in the pubs or clubs or banks.
Bear in mind that flood mitigation works might have changed the likelihood of flooding both favourably and unfavourably. I think in some floods on the north coast of NSW at the beginning of 2001 or 2002 some locals said areas that hadn’t flooded before were flooding because levee banks etc had stopped water flowing to where it had gone inearlier floods.
crj
Misty,
From the NSW perspective if the land has separate titles you can sell a one separately. This applies eg on the older deeds which might include several lots or portions. No subdivision fees.
However, just because it can be sold separately might not mean it has a building entitlement or even if it has a building entitlement that it can be built on without meeting council requirements for access etc.
Patrick
If you want to minimise the potential for a hiccough in your finances you need to look at your risk management.
Your risks on the property are centred on expenses and income. (As an aside have you insured your income. If not that might be worth considering as it is probably your largest asset)
a. expenses. Fixed interest rates and an interest only loan will help on the expense side. But what are you going to do if you have an unexpected major expenditure for repairs. You need to keep some money available to cover these or so you can meet the mortgage payment if there are vacancies or a delay in the agent transferring the rent to you.
b. income. Do some what if scenarios eg what if the house is vacant for varying lengths of time. Unless the property is being sold with a tenant and you have seen the lease don’t take the selling agent’s word for the rent potential. I was looking at a place last year. Selling agent reckoned would rent at $180 pw. I asked my managing agent (different firm) to have a look – they reckoned $140.
You may want to pay some more off your PPOR and have a bigger cushion in your redraw facility.
Flips will normally only work in a rising market or where you have purchased something well below market value. You’ve got to take into account that your costs of buying and selling are likely to be at least 5% each way with stamp duty and agent’s commissions so you’re going to need a minimum of 10% profit just to break even.
I know many people on this site are strong proponents of wraps. However, I would suggest that in that case you’re actually running a business which is going to be more time consuming at least initially than a simple purchase with the intent to rent out.
Just think each extra dollar you pay off your PPOR is less interest payable giving you an after tax return of whatver your mortgage interest rate is, so probably around the equivalent of 10% per annum pre-tax.crj
http://www.abs.gov.au/Ausstats/[email protected]/0/773b0f602286084cca256bbf0000529b?OpenDocument
ABS has a 2001 Census profile for Broken Hill showing some basic information.
Kay, Pasminco sold its mine in Broken Hill to Perilya a couple of years ago while Pasminco was in administration. CBH (used to be called Consolidated Broken Hill) is also operating in B. Hill and purchased Pasminco’s Cobar mine last year.
This news item was on the ABC web site. While it relates to the whole state of NSW,Western NSW would produce the bulk
Lead, zinc production falls
There has been a drop in production of Broken Hill’s major resources, lead and zinc, in the three months up to March.Export earnings for zinc are also down.
The findings compiled by the Australian Bureau of Agriculture and Resource Economics show in New South Wales lead and ore concentrate production has gradually slipped from 30 kilotonnes during the March period last year to 22 kilotonnes in the same period this year.
The state also produced 21 tonnes of silver, down from 25 in last year’s March quarter and 47 kilotonnes of zinc, down from 70.
Export earnings for zinc were down $84 million to $257 million.
Most of the zinc exported was to Japan.
Meanwhile, Australian opals, mined in places such as White Cliffs, had a total value of $12 million in the March quarter.
Look at the population trends. Population has been declining for many years. Not sure of age make-up of community but have heard a number of older people are returning to the Hill to retire because of the lower housing prices.
Misty
You might find the ATO would consider this as 2 separate assets – the land as one and the new building as another. Also if you’re developing to sell they might look at that as ordinary income and not capital gain
crj
Redwing,
With these charges I’d think the PM thinks they’ve got equity in the property, they certainly stand a better chance of making more out of it than you do
crj
