3 Bedroom House for $140K

No, this is a current post (2009). About a current ad.





It even looks like a nice enough house.

http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=105720096&f=0&p=10&t=res&ty=&fmt=&header=&cc=&c=44871936&s=nsw&snf=rbs&tm=1241255251

What's the catch? Well, it is fibro. So there may be some draw backs there. Not that we didn't all live in those sorts of houses for decades and decades. But, they are unpopular (for good reasons) these days.

Maybe you aren't allowed to live in it. Maybe you aren't allowed to rent it? Maybe it costs a fortune to bulldoze. Lots of "maybes" but no facts. One'd need to check the local council regs.

If its $140K at say 6% interest with 20% cash in (plus 5% for stamp duty and legals) you are looking at $35K to buy it, then (6% * (140K - 20% of $140K = 112K) = $6720/yr for an interest only loan (about $550/mo or about $135/wk). It's got to be cheaper than renting?

The median rent in the area is $210pw.

IF you got the median rent and IF vacancy isn't an issue in the town (ask an agent for starters) you'd make $75pw ($3750 pa) on a $35K investment. The Cash-on-Cash-Return is 3,750/35,000, about 11%. You don't get that return from the bank. Especially not at the moment.

The catch in the above figuring is that you also need to deduct other ongoing expenses (rates, insurance, water, management fees).

The yield (rent/cost) is 10,500 pa / 140,000 = 7% which is above the current interest rate (6% ish) so you get a CoCR benefit from reducing your contribution. In days of old, not so long ago, you could get a bank loan for 100% or 105% of the property value. Using 100% (as 105% is free money for nothing) the figures are:

Rent (210pw) = $10,500
Cash In = 5% (stamp duty etc) = $7,500
Interest (6% of $140K loan) = $8,400
CoCR = (10,500 - 8,400 = 2,100) / 7,500 or about 30%

30% is pretty good when the stock market is going down.

Again, it WON'T LOOK QUITE AS GOOD after you deduct rates etc.
How much are rates? Ring the Real Estate Agent and ask. It may be wrong, it may be a guess, but its a start. You could also ring the council and ask them.

Risks? Do termites eat fibro? Are people leaving the town? Is it condemmed? Is it in bad repair? Does the roof leak? All the usual things to check. And the ramifications, if any, of fibro.

NOTE. READ MY DISCLAIMER:
- I DIDN'T TELL YOU TO BUY IT, I DIDN'T PROMISE NOTHING WOULD BE WRONG WITH IT.
- YOU NEED TO MAKE YOUR OWN DECISIONS IN LIFE. THIS IS ONE OF THOSE MANY TIMES.




Note. Figures in this article may be (but are not) of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.

Managed Apartments

Managed apartments are simpler to own. You don't have to worry about a tenant. The manager will find one for you or, if they don't, they will pay you rent anyway. You don't have to worry about maintenance. They sort all that out. It is an easy investment.

The body corporate fees for a managed apartment are considerably higher than for a normal one. The rental guarantee has to come from somewhere. The manager's salary has to come from somewhere.

The danger with such a simple investment is that you have handed over control to the manager. If he does a good job, great. If he doesn't, there is very little you can do about it. Rental guarantees only last for a specific time. After that, you're often on your own.

Again, if the deal works, then it is worth doing. But you do need to consider the long term, and assess the risks. You don't want it to be a bad deal in 5 years' time. What's more, you don't want it to be so bad a deal in 5 years' time that you can't sell it off to anyone.


Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.

Buying Units Off the Plan

Some developers will sell apartment units before they're actually built. This gives them money to build them. Often their sales team will tell investors how wonderful the units are going to be, and what good returns they will get. If no units of this type already exist in the area, then their returns are pure fiction. There is no way that they can come up with a valid rental price for them. If there are none of this type in the area, there may be no demand for this type in the area. For example, 1,000 1-bedroom units in a suburb with 99% of the population being married with 2 kids under 5 is unlikely to be a good buy. And the rent for 1,000 of these empty units is likely to be zero.

If there are others in the area, then you need to look at what these are renting for. Sure, the new ones may be bigger, brighter, better and so forth; but the dollar amount of these benefits is not market tested. All you know is that the current ones are renting for $x. It is likely that newer ones will rent for more, but how much more is still unknown. All you can rely on is $x.

If the demand for units in the area is 1,000 places, and there are currently 1,000 old places, building 1,000 new ones is likely to result in half the total units being empty. The newer units may attract more occupants, but if they are more expensive they may not too.

If an off-the-plan unit makes sense after due diligence, then you should buy it. You need to be very sure of what it will rent for, based on comparable rents in the same area. You need to be very sure that the current population will support the new units. And you need to be very sure what the costs will be. It would be wise to compare costs suggested by the developer to actual costs for similar constructions elsewhere that have already been completed. Often features such as swimming pools and electric security gates on car parks, cost a lot to maintain. They can result in frequent and expensive repairs, which push the costs up.

Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.

Due Diligence

Due diligence is a process of determining the facts about a deal. You need to know what it WILL cost and what it WILL return. If an agent says he thinks the rates are $500 per annum, you had better find out what they really are. If an agent says it will rent for $250 per week, you had better find some proof that backs this up. Agents sometimes omit the words "I think", and at other times have a very optimistic view of returns.

Whether the water heater will break down in the next six months or not, is an opinion. How old it is, is a fact. How long they last for on average, is another fact. The statistical likelihood of you needing to replace the water heater, can be determined from these sorts of facts. Whether there are termites in the building, is a fact that can be determined. The value of a building with termites, is different to the value of a building without termites. Whether there are termites on the property, but not in the building, is another fact. If there are termites on the property, you may need to pay to keep them out of the house. This is an extra cost. Due diligence involves finding out all of the costs and the real return. Only with the facts, can you make a sensible investment decision.

Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.