Hi everyone,
I am looking at a deal in Melbourne. Details as follows:
1. Property is called College Square in Carlton. It is an apartment for student accommodation ONLY. It is managed by YMCA. Living area ~35m2. Twin share.
2. Cash flows:
– Asking price: $140,000
– Closing costs @ 5% $7,000
– Rent: $13,780 p.a.
– Outgoings: Body Corporate ($3,612 p.a.)
Interest payment @ 8% interest only ($9,520 p.a.)
Council & Water Rates ($668 p.a.)
Assumes 80% loan
– Net cash inflow: $3,592
– Cash on cash return: 11%Judging by the cash flow, I think it’s a good deal (CF+). All the people that I have asked thinks that it is not since there is only minimal capital growth.
It would be good if I can get advice on the following:
1. Is there anything in the cash flow analysis that I have left out?2. Is the risk of zero capital growth a real one? Are there any other risks?
3. Would you take this deal if investing for CF+?
Thanks in advance,
TKHello TK
I’m a bit puzzled though it may have something to do with the fact that it’s the middle of the night where I am.
$13,780 – 3,612 – 9,520 – 668 = $ 3,592 ???
What am I missing? [blush2]
Also what about repairs and maintenance, management fees and vacancy periods.
Elka
Hi Elka,
You’re right. Cash flow should look like this:
– Asking price: $140,000
– Closing costs @ 5% $7,000
– Rent: $13,780 p.a.
– Outgoings: Body Corporate ($3,612 p.a.)
Interest payment @ 8% interest only ($8,960 p.a.)
Council & Water Rates ($668 p.a.)
Assumes 80% loan
– Net cash inflow: $540.00
– Cash on cash return: 2%Doesn’t look that good after all.
Thanks for your help,
TKI look at the yield first thing:
Rent / price
$13700/$140,000
= 9.8%This looks good at first sight, but the rent assumes 100% occupancy, and does not include the management fees which are often high in these sorts of places.
You would have to put up $35,000. But would get back $540.
Prospects for capital growth would possibly be low because of the general market at the momemnt, and that fact that Student accomodation is very hard to sell.
If you put this $35K in an ING account, you would get more, about 4 times more.
Terryw
Discover Home Loans
Parramatta
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Hi
Sometimes the CG issue can be less important to an entry level investor. Let’s look at this slightly differently, and think about CG being a phenomenon of the times.
Banks reluctant to lend because of the size, saturation of units, and there is very little CG. Because of the tight lending arrangements, there is less demand. Less demand leads to less competition driving the price. This in turn leads to little CG. Little CG means banks are reluctant to lend as they view it as higher risk on their books. But what if demographics with the Y-Gen in the future make these high in demand. if you think long term, the CG question might be less relevant.
I usually approach the question from how do you get from today to your gaols of wealth for tomorrow. The more basic question is how will this improve your serviceability position with the bank. $140K might be a good entry level position if it’s all you can afford at this stage. A more expensive CG investment at $350K or $400K might only be good if you can survive a few years paying lots more into the investment until the CG kicks in.
There are lots of these types of units around (and many are guaranteed 100% occupancy/rental). You should be able to negotiate something off the asking price.
Gary[aacool]
Author of “Property Millionaire: The Guidebook to Having Great Australian Dreams”
Creator of “Property Millionaire – The Boardgame”
http://www.888abundance.comOriginally posted by 888Abundance:Sometimes the CG issue can be less important to an entry level investor. Let’s look at this slightly differently, and think about CG being a phenomenon of the times.
[blink]Perhaps I misunderstand you.
Taking CG out of the euation, if TK were looking for cashflow surely there are many options with much higher returns with much less risk of losing capital? Shares with fully franked dividends of >6% for example? Even, as Terry pointed out, high interest savings accounts would give a higher COC return net of tax… and with interest rates on the up and up, such an option is only going to become more attractive over the next couple of years.My thoughts only – not intended to be viewed as financial advice.
Cheers, F.[cowboy2]
Hi Foundation
I was providing a perspective on an investment in the student accomodation property, as entry into the property market appears to be the aim here.
However, I agree there are many alternatives providing better CF (with different risks, etc.). Despite better returns, sometimes people feel more secure with bricks & mortar.
Gary[aacool]
Author of “Property Millionaire: The Guidebook to Having Great Australian Dreams”
Creator of “Property Millionaire – The Boardgame”
http://www.888abundance.com
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