Im looking at investing in a property for the first time. It has a decent gross rental return (14,040 pa. and asking price of 235k) but has been on the market for 6 months and has not risen in value over the last 5 yrs (as stated by the real estate agent!!!). It is close to the town centre of a growing town, and has a very steep driveway, which may be a deterrant, but not enough in my opinion to warrant the price not increasing over 5 years. It is 10 years old. I intend to get a soil inspection to ensure the ground is ok, as the house is on a high. Should I make an offer, say 5% less than the asking price? Why wouldnt the property increase in value when all other properties in the area have?
The current tenants have been in there for 5 years and are happy to stay longer. It is through a commercial realtor. I probably wont use a property manager as it is low maintenance and there are existing tenants. It is a quiet street, which isnâ€™t a far walk from town centre. I will get a building inspection also.
Firtly, welcome to the forum.
Before making any offers you need to consider a number of things:
1. Based on the numbers you provided, the gross rental yield is 5.95%. I wouldn’t really call this decent gross yield.
2. The fact that the property has been on the market for 6 months and has not sold means there are not too many people keen to buy it. As you said it could be the steep driveway or is there something else? I wouldn’t worry too much about getting a soil test but would definitely consider building, pest and independent valuation.
Based on the above, if I were to make an offer, I will do so at 15-20% below asking. Remember you can easily increase your offer price but can’t drop it.
You should also check if the rent is at market value. Usually with long term tenants the rents are below market value.
Unless you live in the same town, I suggest use a property manager.
â€œThere is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.â€ – Nelson Mandela
I would offer 15-20% less and take a risk, but only after I have checked rental returns in the area and asked a few other agents in the area about that property. They may have had it on their books prior and know what the problem is.
In terms of whether this is a good investment, it’s a bit hard to tell. If you bought at the list price and you only get 6% return from rent, and if you take out a mortgage at say 8%, then 2% is going to come out of your own pocket. That might be OK if you can afford to do this, but that would be based on you achieving some good capital growth (but you say it hasn’t gone up in value, whereas other properties have?)
No harm in offering a low price first off, but think also about what you’re comeback offer/response is if it gets rejected. You want to maintain credibility in the negotiation, so think about how you will respond. I wonder if it has been on the market for 6 months, whether a low offer has already been tried. Anyway, doesn’t mean you can’t try again together with some terms/conditions.
Is this somewhere in SA (where you live?), as i think there are a few experienced investors on this forum from SA who might be able to comment on the ‘town’, or you might want to PM them if you’re worried about revealing the location.
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I thought 6% was decent. It is from SA, and most properties (houses) close to Adelaide offer 5% or less, but I guess you get the capital growth with that. I will ask other agents, good idea!!! Im sure there must have been capital growth, I think the agent must be wrong about that. Is there anyway I can see what the property last sold for? I know it is public record, and you have to pay, but is there anyway I can get it for free? Or do I get this info from the agent?
I agree with Marc,
either offer a very low price or walk away and start looking again.
A steep driveway could deter future tenants. I have one and its a bugger to move furniture.
Maybe thats why the current tenants are still there!
1) The yield 6% or 5.5% is good, higher than what’s normal for Adelaide.
2) For country towns, there’re other factors to consider. $235K is replacement value for houses, anywhere in SA. If there’s no potential for capital growth, then the rent is all there’d be.
3) Port Pirie for instance, isn’t likely to achieve the same median price as Adelaide. But the cost of a new house is not going to be very different, only the land value difference. Port Augusta, Goolwa, or other biggish centres ditto, inclusive of Hahndorf & the hills towns. The hills centres have high median prices because people are fairly well off.
4) For $235K, you can still buy a house in outer metropolitan Adelaide.
Adelaide & environs has 1.5M people. Country towns may have 5000 only.
I leave you to work out the implications yourself.
Did the broker tell you that all other properties in the area have risen in value or that is your impression based on some information you have seen or heard? If this is what the broker told you then it definitely sounds strange. If other properties in the neighborhood of the property you are looking have appreciated, the steep slope of driveway does not explain the value staying stagnant for five years. It should rise but perhaps at a somewhat slower rate because of this "disadvantage". You should ask the broker if the seller can provide an appraisal or otherwise maybe you should get one yourself. If there is another serious reason because of which it did not rise in value it will be mentioned in the appraisal report.
On the other hand if the assessment that values of all other properties in the area have risen is based on some other information source than the broker make sure that this information refers to the neighborhood of the property in question and to the same type of housing unit in terms of quality and amenities.