Reading the paper this morning (looking for my first investment property), I found a block of 8 x 2brm units on one title on sale for asking price of $950K. We are in Adelaide. Half are currently rented for $135/wk, the other half $140. Rates are $4530 per year. According to the agent, there is room for minor renovations. He states the rent should be $155. I believe it is in a good location and finding renters should not be a problem. I would need to borrow most of the money (including settling costs) from the bank.
So my question is: If everything was as above, and I was a seasoned investor, how much would I offer for the property?
Just want to see how people go about crunching numbers… (I’m waiting for BuyerBeware to come in the mail, I believe it does this kind of stuff). Thanks.
What would they be worth individually?
This is a guideline as they are not individually strata’d and it would cost more to do so. Be careful he isn’t pricing them for sale like this.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Good afternoon luan,
My experience has been that a ‘normal’ transaction (where a reasonable unfussed vendor meets a reasonable unfussed buyer) usually crosses the line…i.e final agreed purchase price at about 94% of the asking price. I have no hard data other than my own personal transactions to back this up. Stats orientated people will have a field day here….
Anyway, I see your potential deal looking something like this ;
Capital
Purchase price = 0.94 * 950K = 893K
Stamp Duty ~ 36K
All other purchase costs ~ 12K
Loan applied for (100% + costs) = 941K
Interest at 7.20% (comm. loan) = 68 K p.a.Income
Gross rent = 57 K p.a.
Costs
Holding Cost = 68.0 K
Shire Rates = 4.5 K
Water Rates = 2.0 K
Land Tax = 6.0 K
Insurances = 1.5 K
Prop Man Fees = 4.8 K
Maintenance / repairs = 3.0 K
Total cost to own = 90 K p.a.Cashflow of prop = 57 – 90 = -33 K p.a.
Tax deduct. @ 40% = 13 K p.a.
Depreciation….who knows….
You must chip in after tax about 20 K p.a. ($ 380 p.w.).
Your breakeven point is 20/893 = 2.2%.
That is, your potential capital growth must be greater than 2.2% for your gains to offset your definite cashflow losses.
On reflection, the deal looks pretty bog standard for most residential deals. Nothing special, but not that bad either.
You state you believe it is in a good location…is that what the REA told you, or is that what your independent verifiable research has uncovered ??
Biggest issue I see is managing that many tenants and being forced to delve and swim in amongst their personal and trivial affairs. It affects your returns enormously….yuk. Not for me.
Probably your biggest upside would be to tart the prop up and apply to have it strata’d. You’d have to make sure this “potential” hasn;t already been built into the asking price…otherwise you are handing most of the profit to the vendor…and poor ol’ muggins has to do all the hard work. Fall back on research as usual.
None of the above is advice. Do your own checks.
Cheers,
Darryl Moore
“No point having a cake if you can’t eat it.”
Great Post Dazzling..
I enjoyed the read.
REDWING
“Money is a currency, like electricity and it requires momentum to make it Effective”
Count The Currency With This Online Positive Cashflow CalculatorThis is the kind of stuff I need to learn! I guess it’s not that hard, but I will need to ask more people more questions.
I had a suspicion that it wasn’t a very good deal… I wanted to see in a practical way how one goes about doing the numbers.
They state that they are thinking that each individual unit is $120K, so to answer your questions, yes I think they are factoring in dividing the properties and selling each off individually.
“In a good location” is from my knowledge of the area – it is near a busy intersection with local shops, schools, uni, transport etc and the area has lots low income workers who rent more often than buy.
When you say that with so many units, you have to delve into their personal matters, isn’t that why you pay for management fees? I always thought that owning the whole place would be easier than owning units individually….
So I guess this is where being “creative” and negotiation comes in right?
Thanks for the comments.
Your idea of a good location sounds correct from a vacancy perspective. Howewer for growth you should consider more middle class areas with a high proportion of home owners. These suburbs are desireable and people pay to get into them.
You are learning every day that you do something.
Cheers,
Simon Macks
Residential and Commercial Finance Broker
***NODOC @ 7.15% to 70% LVR***
[email protected]
0425 228 985Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
Just a quick caution – in Adelaide, check the land tax implications. Could be scary, especially when you own other properties in the same name (not POPR). Try http://www.revenuesa.sa.gov.au.[cap]
Hi All,
Thanks for the informative posts. I too have been looking at a block of flats, but in NSW. As a newbie, I found Dazzling’s post of enormous help (thanks). I used your ‘template’ and came up with similar results (2.2% break even but not quite as -cf as luan’s property).
I too am considering buying and then selling off strata units but I have absolutely no knowledge in this area. Apparently, the units are already “in the process” of becomeing strata tilted but the RE is useless and isn’t sure where it is up to (I don’t think he understands it either [blink]). Can anyone tell me how units become strata titled and what types of costs I should factor in?Kind Regards,
JenThankyou Dazzling for the number crunching details. Very helpful as always.
Regards
TriLike your style Dazzling. Always very informative, very to the point and very interesting.
Thanks.
If you really reckon that they are a good set and that you can make them work ok/ ie.potential for improvement etc. why not make an embarrasingly low offer of say $820K and see how you go?
They can only say no.
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