Forums / Property Investing / General Property / Over 55's Complex – Deal or no deal

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  • Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    Hey guys, I have found a positive cash flow opportunity at an over 55’s complex. The units are around 10 years old. The contract price is $86,000. Rent $220, outgoings $5,786/Year (including body corp, rates, utilities, insurance etc).

    As noted elsewhere in the forums getting a loan is near impossible. However, I am able to purchase using cash.

    My plan is to purchase this unit, which will net me around $90 a week, and then invest in a traditional 3/4 bedroom home (say $350,000, rent $350/week) which will be negatively geared. The overall effect is that I have a loan of $350,000, income of $570/week (2 properties) and all the related tax offset etc.

    This seems to make sense to me. Am I missing something?

    Tom

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    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Basically no capital growth. You have to find out whats the rental growth if any – otherwise you might end up paying cash for an asset which will have increasing costs each year and stagnated rents – quickly reducing your cash flow from the investment to a low level.

    Personally I would rather not have a property which has a maximum potential net return of 5.4% per annum assuming nil, or potentially even negative capital growth.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    Interesting insights Corey. I can’t help thinking that the fact that lenders won’t lend to investors for these units is actually an opportunity. There are tenants who cannot look after maintenance of yards etc and who need residence’s purpose built for impaired mobility who can’t afford to buy their own unit. This unit had 7 applications to rent at the renter open day. Also these units are bought and sold on the open market, no onsite manager or other structure in place who owners have to sell back too.

    One of the risks is certainly that body corp costs increase etc, but the majority of the complex is owner occupier so body corporate fees are somewhat set/impacted by a group vote (50 units), so I expect body corporate fees likely to remain in the ball park of where they are now.

    My understanding of markets (rental or any other) is that market price of the asset is set very much by the expected cash flows, and on that measure this unit seems to be at good value presently. In the same town a 3 bedroom house is selling for $250,000 and rents for $270, the unit looks way better value than a house in that market.

    Tom

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    Profile photo of TomTom
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    @tommyt
    Join Date: 2017
    Post Count: 33

    I found this opinion from http://www.homeloanexperts.com.au/property-types/over-55s-village/

    Why are the banks so conservative?

    The banks are concerned that it may be more difficult to sell these properties if the need arises.

    As a result, most lenders won’t lend for them at all while others will restrict the amount you can borrow so that their risk is reduced.

    For the most part, these concerns are unfounded. The majority of complexes have few restrictions and are in high demand due to their excellent rent returns, which are often linked to increases in the Consumer Price Index (CPI) or pension rates.

    As Australia shifts towards an aged population, it’s difficult to see how these properties won’t be in high demand for the foreseeable future.

    Maybe entering the market at the low point (rent in covers expenses out) at a positive cash flow position is an acceptable level of risk.

    Have other forum members invested in over 55’s complexes? What was your experience with this vehicle?

    Tom

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    Profile photo of TomTom
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    @tommyt
    Join Date: 2017
    Post Count: 33

    I have received advice today from my mortgage broker that Westpac are happy to provide a loan, secured against the unit with 20% deposit. It all seems to be stacking up so far, even finance is coming from one of the big 4 banks.

    Tom

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    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    Tom I hope I am the middle voice because you really need to hear what Corey said (In my opinion) then once you understand everything he said and all the risk and points, its your choice to make.

    -There is very little captial growth in these styles of properties (but for 86k with a 220 rental return and a positive cash flow, does this matter really? if thats true)
    -Limited control due to bc and fees that may rise largely without you having control
    -loan rates will generally be slightly higher for this size loan
    -Insurance that covers you, also landlord insurance is a good idea I think

    So lets run the numbers

    Purchase; $86,000
    ROI; 220×52 / 86,000 = 13.3% return which is remarkable (but we have bc fees that are half of that)
    Weekly Return after expenses; $90 (220-9%-110-30= $60 per week is my guess after all expenses (+mortgage)
    Yearly Return after expenses; 90×52 =$4680 after expenses (not incl Mortgage)
    (my guess) Yearly Return after expenses; 60×52= $3120 after expenses (not incl Mortgage)

    Now your mortgage repayments are on a 70k loan around $90 a week

    So you will actually be loosing money mate. or barley breaking even, if the Body corp fees were lower it might be worth doing IMO but I wouldnt do it personally due to crap return after expenses, low capital growth and a niche market (compared to most places)

    I did a deal not long ago around this price bracket for $121,000 that earns me $72.30 a week after all expenses even a PandI loan (including everything) I would much prefer my deal than this one.

    But its your choice.

    Kind regards

    Jaxon Avery

    Profile photo of TomTom
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    @tommyt
    Join Date: 2017
    Post Count: 33

    Hey Jaxon, you and Corey are 100% correct, capital growth potential is weakened due to the nature of the over 55’s for sure.

    In regards to the math, total expenses are $10,432 and rental income $11,440, so a net positive cash flow of $1007 before tax offsets, which goes up to around $1,736 after offsets. It is around $33 income a week.

    Not as good as your $121K deal, but not a bad return.

    I have completed positive cash flow deals with residential properties, and this is the first time I have looked into a over 55’s complex. Hence the questions and I really appreciate the comments/feedback/opinion from other forum members.

    While I have a signed contract I have included a 3 week clause to complete due diligence so I am looking into all the options and modelling a few possibilities (i.e. increase body corp etc) to see if this opportunity has a place in my portfolio.

    Tom

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    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    In the end, I try to be objective and not fall in love with the deal (this one included).

    I have invested in property previously that many other investors/buyers saw as too risky (the ‘bad’ neighbourhoods) and these have worked out to be good cash generators and increased in value over time, not to the same lofty values of other suburbs, but as I was getting a positive cash flow from day one and I had low buy in price the end result was increased wealth (hence the ability to buy opportunities such as these for cash).

    I’ll keep researching and going on this journey and keep you updated on the progress.

    Again, thanks to all for their comments and opinions, I value your insights and guidance.

    Tom

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    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    Mate all you just said is fair, I prefer to look at my choices stacked against best case outcomes. for e.g.
    If I did a deal that made 100k over 6 months,
    but In recollection I could of made 150k over that time in same area, I would like to know I made a good choice but it could of been better. not to regret just to learn.

    Is this a bad deal, no not really, there are very few properties you can add for 86k, I mean the risk against reward is great. but in my opinion there are far better deals out there with far larger upsides.

    e.g. SA around the city there are steals that are positive from day one, West brisbane is amazing and cant really go much lower and has +cash flow deals, then not to mention every other deal inbetween and the steal deals I see go through in WA.
    If your happy with this deal and understand every aspect then go for it if your happy.

    Profile photo of TomTom
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    @tommyt
    Join Date: 2017
    Post Count: 33

    Hey Jaxon, I’m interested in the math process you undertake to work out your deals?

    I personally always, in the first step, work out the math using $0 deposit (so 100% financed). I do this because that is what an investment is costing me, 100% the agreed price.

    If I use 10% or 20% deposit it really doesn’t matter, because I have to obtain that money from somewhere right? Be it equity, cash savings whatever, it costs me to use that money (opportunity cost).

    So, if I buy a house for say $130,000, and I get a rent of $235 a week and my expenses are $2,200 or so (excluding mortgage) and a loan at 4.5% on $130K has P&I payments of $659/month my cash flow is going to be around $1776 a year ($34 a week).

    That’s the first hurdle all my investment have to reach – positive before deposits.

    Now, if I throw 20% at this investment, my loan goes down to $526/month and my cash flow is now $3,368 ($64 a week).

    But really, I can’t use that $20K again (until I refinance and gain access to equity etc).

    So, I was wondering, how do you determine positive cash flow mate? Before deposit or after?

    Tom

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    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    Good question,

    so easy answer is;

    I care about these numbers;
    -ROI (I wouldnt do another deal under 7% I cant imagine)
    -ROI of deposit verse positive cash flow, in my opinion this is the real ROI, so for e.g. the above deal was $29,000 for $3700 thats 12.75%, and also I dont add any tax or any other gains, just input verse output cash on first year.
    -If its a build or fix up or simular, I get quotes for the work, plus estimate time frame and the cost for that time, repayments etc and calculate purchase price + all expenses verse the estimated valuation and rental income, there is no formula as you have to recalculate and each deals going to sit differently but once you kind of understand how to simplify and do it, then really easy, also add 10% idiot costs as a worst case, I like calculating everything on 3 settings, worst case, best case, then what I think it will actually be.
    -I also calculate how much it would cost to rebuild, I find this such a useful process, If I am buying a 4b2b on 600m2 for $300,000 and to build a 4b2b cost $320,000 for the cheapest builder and it fits my other criteria I look on it differently (this is a really long part to explain but I hope this shows the build cost are important)
    -Study Rental market
    -Study recent sales for area
    -study the area
    -study local rates and fees
    -Insurance costs
    -Body corp numbers and issues with building that may cost owners big

    I am sure there is a lot more I look at depending on each specific deal but these are the ones that come to mind at 11.30pm at night.

    But bottom line the most important thing about any purchase is

    Risk/value

    I know that may seem simple and common knowledge but that is the most complex calculation, risk is such a broad and deep thing and the value is almost just as complex.

    If you can know all the risk and all the value, then that person would be the king of investing.

    Hope this helps? any questions to clarify I am more than happy to.

    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    Cool, I consider ROI as well, and I agree, 7% is good benchmark.

    I never buy houses requiring anymore then a cosmetic touch up or replacement (such as hot water etc).

    I always use the building inspection finding to negotiate the contract price down for known issues (i.e. if the hot water needs replacing I will knock my contract price down by the replacement cost of the hot water unit)

    I know many others make money with renos and flips etc and I think they earn every cent.

    Tom

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

    Hey Jaxon and Tom,
    I’m appreciating the discussion here – lots of numbers and shared thoughts to inspire others. So, thanks you two. I’m about to direct others to this thread for their edification. ;)

    Benny

    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    You are correct Benny, It’s a great discussion and pushing me to research the over 55’s opportunity. I am enjoying questioning the assumptions, a great learning experience.

    On the topic of questioning assumptions, I have obtained rental data from two agents who manage units in the complex. Over the past 5 years rental growth has been 1.6% per annual, for an 8% growth between 2011 to 2016/2017.

    This seems like reasonable rental growth.

    What type of growth do you (forum members/investors) factor in for residential houses?

    An interesting bit of information I obtained. A unit is advertised for 240/week and has been in the market for a ‘longtime’. The unit I am looking at has a lease at 220/week, and had 7 applicants at that price. Clear indication that the market is price sensitive. 240/week is too high a price based on pensions I expect.

    Next step – work out pensions for this age bracket and % of rent that 220 and 240 equate to.

    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.
    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.
    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.

    Tom

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    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    Some further ABS stats:

    25% of the population in the council area are 50 years or over (current/near term demand)
    39% of the population in the council area are 40 years or over (future demand)
    40% of residents rent (60% ownership)

    As a forecast, if only 3% of this population require an over 55’s unit that is 530 individuals.

    Next step: Quantify the number of over 55’s units in the council area to see if this demand is already met.

    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.

    Tom

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    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    On the question of rent as a % of pension.

    Aged Pension (over 65) – weekly pension rates
    Single $404
    Couple $609

    Rent set at $220/week
    Single – rent = 54% of pension (49% when rent assistance included)
    Couple – rent = 36% of pension

    Rent set at $240/week
    Single – rent = 59% of pension (54% when rent assistance included)
    Couple – rent = 39% of pension

    This is a real worry as an investor – when housing stress is widely accepted to be 30% of income spent on rent/mortgage.

    I think this is the biggest issue I’ve found so far. While the rents have been increasing by 1.2% a year for the past 5 years, there is not much wiggle room for increases beyond pension growth (As Corey commented at the start of this post).

    Next step: Determine pension growth over past 10 years and forecast growth for next 10 years.

    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.
    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.
    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom.

    Tom

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    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    The supply and demand for over 55’s in the region

    So, there are 14 retirement villages in the council area, ranging from high care to independent living.

    There are approximately 1100 dwellings across these 14 villages, of which around 300 dwellings are independent living (the type I am looking at).

    ABS stats showed that there are approximately 18,000 over 50 year old’s in the council area, but it’s a city with many smaller regional towns surrounding it, so the pool of over 50 year old’s will be quite a bit larger.

    In any case, for 1100 dwellings to be full then 6% of the target market (1100/18000 = 6%) would need to be living in them, and that’s if they all lived as singles (a lot of couples would be sharing).

    ABS stats suggested 40% of the region are renters (however no data on the ages of these renters)

    Looking at independent living, to fill 300 dwellings would require a 2% demand from the target market (300/18000 = 1.7%).

    Conclusion: While the rents are a high % of the target markets income, I think demand will be good as the demographics show that it would take less than 2% of the residents in the immediate council area to require independent living residences for the supply to be used up.

    I know for a fact that over 50% of these dwellings are owner occupier, so the pool of rental in this space is actually quite tiny, less than 150 dwellings. This surely suggests there will be a good demand.

    This assumption was supported by the fact that 7 rental applications were received for this unit alone.

    Next step: Meet with the broker tomorrow to see what the financing options are.

    Current gut feel: I think I will add this one to the portfolio, if the finance works.

    • This reply was modified 2 years, 3 months ago by Profile photo of Tom Tom. Reason: Fixed formatting
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    Tom

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    Profile photo of TomTom
    Participant
    @tommyt
    Join Date: 2017
    Post Count: 33

    I found this explanation of how pensions are indexed:

    Indexation
    Base pensions are indexed twice a year, in March and September, to reflect changes in pensioners’ cost of living and wages. The pension is increased to reflect growth in the Consumer Price Index and the Pensioner and Beneficiary Living Cost Index, whichever is higher. When wages grow more quickly than prices, the pension is increased to the wages benchmark. The wages benchmark sets the combined couple rate of pension at 41.76 per cent of Male Total Average Weekly Earnings. The single rate of pension is two thirds of the couple rate.

    Source – https://www.dss.gov.au/our-responsibilities/seniors/benefits-payments/pension-rates

    This explanation suggests that while pension incomes are low, they are pretty much guaranteed to increase, twice a year.

    This should allow for periodic rental increases, supported by the historical rental increases I was able to identify at 1.6% per annum over the past 5 years.

    Tom

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

    Hi Tom,
    You’ve uncovered a heap of good stats there. Good luck with the broker.

    Along the way, you asked this:-

    Over the past 5 years rental growth has been 1.6% per annual, for an 8% growth between 2011 to 2016/2017.
    This seems like reasonable rental growth. What type of growth do you (forum members/investors) factor in for residential houses?

    I would’ve said “CPI level” – which would usually be around 2 – 3% pa. Of course, that has not been the case for the last few years – more like 1 to 2%. So, yeah, 1.6% is probably “to be expected”. And of course, with pensioners, there is that one limitation that really puts the cap on their rents. Your research told you that pensions are locked to around 42% of Average Earnings. Thus go their rents perhaps?

    Where a family might pay $500 a week in rent, doesn’t this suggest a “soft limit” of 42% or $210 per week as being what a pensioner can pay based on THEIR earnings?

    Anyway, good work Tom. I’m interested to hear how it goes with the MB,

    Benny

    Profile photo of TomTom
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    @tommyt
    Join Date: 2017
    Post Count: 33

    I like the way you are thinking Benny. 42% the median rent for working families could be considered a soft limit.

    Next step: ascertain the median rent in the region.

    Tom

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