Facts:
Purchase Price = $315,000
House and Sleep out in Auckland
Income:
Rent – 50 weeks at $550 per week 27500
As a % of total house 8.73%
Less Expenses:
Accounting 1000
Bank fees 50
Body Corporate
Insurance 900
Interest – at 6.0% 18,900
Property Management at 6.5% plus GST 2,056
Rates 2,500
Repairs and Maintenance 1,500
Travel 100
Total Expenses 27,006
NET CASH SURPLUS 494
Even though the property is returning close to a 9% gross yield based on 50 weeks, the net cash surplus is only $494 per year. This cash return could easily be eaten up with extra expenses, and generally this return will never make a buyer extremely wealthy.
Major Points to consider
(1) Is the rental realistic? Often sellers and real estate agents exaggerate the rental achievable to attract landlord buyers. Some are even craftier and offer tenants incentives to sign a tenancy agreement at a higher weekly value. In this particular case the tenant was paying this rent, but if the tenant were to move out will the next tenant pay that much? I would always ask for an appraisal from an independent property manager and also ask how easy it would be to find tenants for that particular property.
(2) What type of tenant will you be attracting; are they the type of tenant you want to deal with and to live in your property?
3) Are you buying right? Often you can make some equity when you buy, which could improve the yield and also help your equity position for future purchases. It is very difficult to know exactly what a property is worth, and really the value is what a buyer is prepared to buy at. There are a few places you can look at:
a. Rates Valuation – bear in mind this is used for rates and is not a full internal valuation. It may be months or even years old, and may not include improvements or renovations. Rating information should be available for free.
b. Registered valuation – I would always use your own recognised valuer because if the seller has obtained a valuation it could be biased towards them. A valuation is based on historic information, so can be out of date and subjective. A valuation would cost around $500.
c. Opinions from other real estate agents – In my opinion this is often the best, as real estate agents are up-to-date with the market and what is happening in the area. These are usually free.
This property had a registered valuation from the seller of $335,000. Presuming the valuation is accurate and unbiased, this gives the buyer a little bit of initial gain, and some leeway in case they were forced to sell suddenly.
(4) Capital Gain Potential – From the cash flow above, a buyer is never going to get wealthy from the cash flow alone. In the past, most investors have made their money through long term capital gains. Therefore, do you think this property will increase well in value long term? Is it in a good area, good schools, close to shops, a growing area with jobs available etc ?
This particular property is on a good sized section in Auckland. Obviously there are different suburbs in Auckland, but in general there is a shortage of houses in Auckland, and therefore the Auckland area should receive reasonable long term growth.
There are no guarantees on what will happen with property prices long term, and your personal opinion is as good as anyone else. You can also look at www.reinz.co.nz to get historical information easily.
(5) Long term maintenance or problems – I personally keep away from any problems with the roof or foundations, as these can be quite expensive. When buying a property, you need to consider what major expenses you will have over the next 5-10 (or even longer) years. In my cash flow I have allowed $1,500 per year for repairs, but this really depends on the property. Painting can be a large cost to consider, and is often why investors like brick houses. For a new house the repairs should be a lot less.
If a lot of renovations have recently been done on the house to dress it up for sale, you need to consider the quality of this work and if poorly done, how quickly you can fix the problem. For example a good paint job might last 10 years, but a bad paint job might be less than 5.
(6) Overall does this property help you meet your long term investing aims and goals? Quite a few people promote buying 3-4 cash flow positive properties to one negative cash flow property. This approach can be quite good, as the cash flow positive properties support the negative one, and the negative property should be the property that is going to give great long term gains.
Every investor is slightly different, so it is a matter of you having a strategy that meets your needs and also works with your income level and stage in life.
Overall
The property referred to above isn’t too bad (presuming rent is realistic long term), and it is hard to find properties giving a Gross Yield of over 9%. But it still comes down to the capital gain potential of this property, which would require investigating the house itself a lot more and the area of Auckland it is in, which I haven’t done.
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