All Topics / Help Needed! / First Investment – Old or New?

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  • Profile photo of sampson_701sampson_701
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    @sampson_701
    Join Date: 2013
    Post Count: 20

    Hi again and thanks for all the help so far…

    my mother and myself are going 50/50 on an investment property and plan to use the rooms to rent to students from the college I work at. Just wondering your opinions and ideas on the best way to do this and what you think would be a better house, my strategy longer term is to use this student rental to fund further property investments.

    first house is 90 years old weatherboard home closer to university, fully renovated inside with 3 bedrooms. I would also be turning the garage into a 2 bedroom granny flat. It has a pool, on a main road and get noise from the free way. Would cost a total of $350k after granny flat conversion.

    Second is a brick home 20 years old, already has 2 bedroom granny flat and 3 rooms in the house, renovated kitchen, just off the main road and a little further from uni (5 min extra) needs a little work and repairing. Would get the house and improvements done for $430k

    both homes same suburb and similar size block. Would get approx $600 weekly rent from each.

    any ideas would be truly appreciated as I think I'm becoming attached to one of thm but not sure it's the right one.

    cheers.

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
    Join Date: 2012
    Post Count: 1,271

    What's the actual question?

    TheFinanceShop | Elite Property Finance
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    Residential and Commercial Brokerage

    Profile photo of sampson_701sampson_701
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    @sampson_701
    Join Date: 2013
    Post Count: 20

    Sorry, just trying to get some advice on what people think would be the better of the two for an investment property…a friend told me to stay away from older homes and pay extra for the brick home…other have said get the cheaper one as its just for students , but I still have to look at resell value….just trying to get some opinions from people with experience really.

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
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    Hi Sampson,

      Just a few thoughts that may help you choose…..

      I feel the older home has a few advantages over the brick home :-

         1.  Closer to the university (question – will students pay an extra $5 to $10 a week to save a bit of time?)

         2.  "Recently renovated" (read – could be some useful Depreciation $$ just waiting to be picked up)

         3.  Gross rental return ~8.5% (compare with ~7% for brick home)

      Of course, this is predicated on the 90 year old house being structurally sound.   Is it?   A building inspection would be mandatory methinks …..    What about the garage?  Is it "built under house" or "free-standing"?   Lots of DD required here too.   Is it legal height already?  Is Council happy to allow "dual tenancy" in this area?   And the big one (applies to BOTH properties:-

       I have heard that SOME Banks either won't lend for student rental, OR they lend at a lower LVR.  (read – do be sure you have finance approvals sewn up well before you go to contract on either one). 

      There are usually higher maintenance costs on an older home, but the "recent full reno" would have sorted out a bunch of the usual maintenance issues – do you know if the reno included rewiring the place?   How sure are you that the final figure of $350k will be accurate?   e.g. bringing a garage up to habitable standard will require considerable work.   What will you do with the pool?   Will you fill it in, or use it as a drawcard?  (Pools can be a very expensive cost to landlords….)    Maybe students will pay slightly more to have a pool too……

      Hmm……..    Which one were you feeling "attached to"???   smiley    Good luck with it,

    Benny

    Profile photo of sampson_701sampson_701
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    @sampson_701
    Join Date: 2013
    Post Count: 20

    Hi Benny, thanks heaps for your thoughts. Really appreciate it.

    The old house appears structurally sound but will defiantly get building report. The current garage is free standing and I don’t believe dual occupancy will be a problem for the area.

    Sorry the renovation isn’t really a “full reno” I guess. It included kitchen, floorboards, lighting in living areas and very minor bathroom improvements. Electrical has not been done.

    At this stage I’m looking at keeping the pool but I know it will cost more. Not sure if people would be willing to pay more for it or not.

    I was liking this house better because of the 8.5% as you mentioned but my mother thinks the brick one for location and thinks the newer house will go up in value a lot more than the older one. What do you think about this? The newer house is bigger too…will a 90 year old house still go up in value compared to the newer Brick home?

    Profile photo of god_of_moneygod_of_money
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    @god_of_money
    Join Date: 2008
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    it will cost you at least A$80 – 150k to build /convert to a granny flat. It is not cheap as so much Building regulation that need to comply

    Renting to students has pros and cons. You can google it or search in this forum

    I will stay away from renting each room to students. You also need to account for electricity (killer during winter) and water usage, high turnover, difficult to manage, wear and tear issue /higher maintenance, insurance, council issues etc

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
    Post Count: 2,539

    A few other issues with renting by the room are things like this:

    Someone damages the kitchen or bathroom (the expensive rooms).  You cannot prove who it was, so you cannot really deduct it from anyone's bond.  It will come out of insurance or your pocket.

    Someone leaves large items of junk in the backyard, and a big piles of old care tyres too.  You are, after all, running a free garbage collection service, are you not?  Once again, you cannot prove who left it there so you are stuck with the removal and disposal fees (entry to the tip is not cheap these days).

    Someone damages the fence.  Again, can't prove who it was.  The same problem will apply to any shared area inside or outside the dwelling.

    It is surprising how quickly a high gross yield will get eroded with things like this (and some of the things already highlighted in the post above by god_of_money).

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of sampson_701sampson_701
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    @sampson_701
    Join Date: 2013
    Post Count: 20

    Thanks God of money and JacM appreciate your thoughts,

    I have read a little into student rentals and a lot of it lines up pretty closely with what you have both said – that it’s usually more drama than profit. I think I can overcome some of the problems as it is not a large uni but a smaller college, and becsuse I work there I am regularly asked by students about a room to rent meaning I can be a bit more selective in the character of students I rent a room to. Also I will know most the students personally (which may be bad. They say don’t do busines with friends) but hopefully they will have more respect because of that. I’m keen to try it on a 6 month basis and if problems arise I will just use the house as a standard family rental.

    Do you have any thoughts as to which property you think would be a better long term investment?

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,376

    Hi Sampson,

    Quote:
    my mother thinks the brick one for location and thinks the newer house will go up in value a lot more than the older one. What do you think about this? The newer house is bigger too…will a 90 year old house still go up in value compared to the newer Brick home?

      Typically, buildings devalue while land appreciates – at some point, both houses will be knocked over and replaced (could be MANY years away however….)   

        A lot depends on the area and the Council.  e.g. if the older house is in an area with many other old homes, a Council "might" want to keep the heritage look of the area, and will be less keen to have anyone knock it down.  In Brisbane, this is called a Demolition Control Precinct, and it leads to much difficulty with getting approval to demolish if the area is of heritage significance.  We own one in East Brisbane that is under this Control.  

       Depending on the area you are in, there could be several possibilities :-

    1.  The older house (if part of such a precinct) could even grow faster in value if neighbouring homes are having $$ spent to "gentrify" the area.  Of course, the 20yr old house could also be in a nice area where similar pride is displayed and the 90 yr old might be in a street where "nobody cares"…..   In that latter case, Mum may well be right. 

    In short, in BOTH cases, are the houses you are looking at "the worst house in the street, the best, or somewhere in the middle?"

    2.  Older homes tend to have larger bedrooms and smaller living areas – the larger bedrooms might suit the student market where they can spend time in the peace and quiet of their own room without going stir-crazy.  

    3.  When reselling later, many buyers might "think like your Mum" – like, "Oh, we wouldn't want to buy that old place – it will cost too much to maintain!"  That could be why the current price is lower than the 20 year old…..   Can you get it for an even lower price perhaps?

    4.  Re location, is the newer house perhaps closer to – shops, transport, schools,etc.   If so, this could also make the 20 yr old home more desirable, even to students.  They won't want to carry their groceries too far…..  

    5.  Developers (including you, a few years on?) would want to get demolition approval as easily as possible.  What are each of the surrounding areas doing in that way?  Maybe they are not yet knocking down 20 yr old buildings, but does its location lend itself to more apartments (shops, transport, schools, etc) meaning that development into the future may well be easier.   Not too many Councils are concerned about "20 year old" districts (little heritage value) – but then, the 20 year old "might" be in an area with other 90 year old homes….    (gasp!!)   Is it?

      Sorry Sampson, no quick answers – just more food for thought, things to check, research to be done…..  

      Keep it up though – this is called due diligence (finding answers to questions that you may not have otherwise considered).   Go for it,

    Benny

    Profile photo of sampson_701sampson_701
    Participant
    @sampson_701
    Join Date: 2013
    Post Count: 20

    Thanks very much Benny. Like you said, now I am finding questions to answers I haven't even thought about yet. It sounds like you have had a bit of experience and I appreciate you sharing it with me. 

    The home are about 5 minutes away from each other so no one is really closer to shops more than the other. Very similar. The old one is in an area with a mix of other older homes and some slightly newer brick homes. The 20 year old is surrounded by houses similar to it. 

    Hmmm, it's a tough one but I think for a first investment the old home would be better so we can pay it off quicker. Then we could perhaps use equity from that to get us to the next IP.  I am very keen to get started towards reaching my goals.

    would appreciate any other input, even if not related specifically to my question, if anyone else reads this. 

    Cheers and happy new year…

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