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Buy and Hold New/ish properties

Discussion in 'General Property Chat' started by MTR, 9th Jul, 2016.

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  1. MTR

    MTR Well-Known Member Premium Member

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    I think its taken me just a few years now to realise that yields on resi property if holding long term in general are not that great, in particular if you have a large/ish portfolio of older properties and you can not add any value to these older properties.

    On average you may be achieving 4-6% yields?, currently we are in low interest rate environment, but this wont last........older properties cost more to hold and depreciation may not be viable. Also they are not as desirable as new/ish properties which I expect would be easier to rent and you don't need to tart these up when a tenant vacates?

    If you follow the philosophy that you are holding for growth but did not buy in a rising market then you could be waiting 7 years for growth to happen? in the meantime you are bleeding from ongoing maintenance issues. If you have an older property that has seen some growth then perhaps its time assess and review, even sell up? why? its getting older, its had the growth, moving forward it will cost you more $, and you will probably need to wait for another boom cycle to achieve growth? Take the money and make more money.

    If you purchased a older property which is positive cash flow I think it could easily turn to negative cash flow because maintenance issues are a killer on older propeties, I know this one from experience.

    Unless you become an active investor using strategies such as renovating, developing, flipping etc. I think there is very good reason why investors should consider holding new/er stock or at least mixing it as opposed to all older stock and of course I am not talking about older homes where you can add value, that is a totally different beast.

    These are just some thoughts, be interested to hear from those who only hold older properties.

    MTR:)
     
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  2. Ghoti

    Ghoti Well-Known Member

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    Interesting thoughts. The two "Property Investment Specialists" I originally spoke to were very much house & land packages claiming that main benefits were low/no maintenance and high depreciation
     
  3. Bran

    Bran Well-Known Member

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    MTR, I'm experiencing as you say. Sadly though, my dog (Cairns) has not risen in 10 years, and is negative. The maintenance/repairs have meant its significantly negative (like 12-15k per year pre tax).
    I tried to sell without luck earlier this year. Next (this) financial year the paper loss will be more easily realised.
     
  4. MTR

    MTR Well-Known Member Premium Member

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    House and land packages are very good in rising markets, if you can make 20% when completed/turnkey then you are on a winner.
    I am told there are some very good markets in outer Melb at the moment that generate these returns?

    MTR
     
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  5. MTR

    MTR Well-Known Member Premium Member

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    shame, not sure but I suspect the trades are expensive in Cairns as well??

    Next year, sometimes its better to just bite the bullet and move onto profitable deals rather than burning money

    MTR
     
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  6. Elives

    Elives Well-Known Member

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    1. brand new properties become old as well..

    2. if i'm paying a property manager 7-10% of my rent i want to get my moneys worth etc maintenance issues if i had a brand new property i would want a discount as there are less issues. (will never happen of course)

    3. depreciation is awesome but with brand new where most of it is from capital works. a lot of this you actually have to pay back when you sell (capital gains tax) which i think a lot of people aren't aware of when starting out.

    4. buying brand new generally means less land makes sense for it to be commercial

    5. i would prefer to buy a property for 300k with maintenance issues that goes with an older property then paying 400k for a brand new property with no maintenance issues (working off same attributes) the extra 100k hit on borrowing capacity would hurt to much.

    6. brand new properties are generally more negatively geared when compared to old properties in inner areas (because of the higher purchase price)

    i would consider doing this when getting close to retirement etc buying villas / townhouses like rixter. less headaches, less issues. but starting out i feel you really gotta be as active as you can.

    thoughts? :)
     
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  7. MTR

    MTR Well-Known Member Premium Member

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    Not sure why you think brand new properties are generally more NG-? its the opposite.

    If you are buying with smaller land component, larger home.
    Perhaps @sash can share some of his numbers on new product.
     
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  8. Cactus

    Cactus Well-Known Member

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    It's becoming harder to get the 20% but then by the time your land titles who knows.

    I am sitting on some OTP lots that have been massively delayed, and will be 18 months from deposit to title. Once I complete home I'm expecting more like 40% equity. I'm also in the middle of a number of builds that will be close to 30% equity.

    At the moment I'm finding the SE Melb has moved up a lot in price, it's still possible to put a house and land together for high 3's to low 4's that should val up on completion at low 4's to mid 4's. But some is dependent on the timeframe to titles and what the land will be worth raw then.
     
  9. Cactus

    Cactus Well-Known Member

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    Definitely should be around a 6% yield on completion.
     
  10. sash

    sash Well-Known Member

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    Not sure what people are doing...but.....

    Everyone of my new properties are currently CF+ ...and that is without depreciation.

    Numbers on one I am working on..... 3x1x1 ....12.32sq....1 bth....1 garage...on living....

    Price 265k
    Rent 325pw (conservative I expect 330-340pw) - 16,900
    Expenses $14300 - Council and water rates 1600
    Community Fee - 800
    Mgmt Fees - $1500
    Insurance - $800
    Minor repairs - $300
    Interest Only (243k loan) - $9900

    So it is positive by $2000 before tax and deprecation.

    First year depreciation on this....is about 9k...so that is another 4.5k in pocket! So essentially you are putting 6 in your pocket....
     
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  11. ellejay

    ellejay Well-Known Member

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    I totally agree about the questionable value of buying and holding long term at 4%+ yield in a non rising market (in the hope that there will be a rise in the future). Personally I wouldn't bother with this strategy but each to their own. Most people would be tied to their job to service the mortgage. If you're buying for cash flow then cash flow needs to be at least 7% I would have thought, to cover costs including maintenance issues and to pay down debt (if you're not expecting this to come from growth).

    I started investing by making money on new builds in a rising market, agree this is a fantastic strategy if you have the means to keep buying.

    I still like buying above 8% yield, this usually means older houses. I can't say I've had the issues that you're describing with maintenance. Some older houses have superior build quality and ideally you buy where the previous owner has maintained them very well, replaced appliances etc. Not just random purchase. I don't think you can generalise re cash flow and older houses. So many markets and deals out there.

    As for developing and flipping, the developers and traders that I'm aware of seem to be working pretty much full time doing this. They're choosing to work I suppose, but presumably would need a job if not doing this in many cases. Again, not in all cases, everyone's circumstances are different.

    For me I still like buying higher yield properties around large regional areas or cities (if I can find them). I've got a number of these that have had fantastic growth over the last year, have cost zero to hold, zero in maintenance, have covered all their costs and have scope to add value (most of them). This strategy, along with increasing my salary and paying off debt aggressively has given me financial independence today and only seems to get better as tenants are paying off principal on most of the properties. As I sell some down for equity, others are being paid down ready to sell in the future regardless of growth.
     
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  12. Cactus

    Cactus Well-Known Member

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    1. Yes, but have a longer timeframe with low to no maintenance.

    2. I pay 5/6% +GST all up with No extras for re letting to same tenant, inspections etc. if you have multiple properties, you call the shots.

    3. Pretty sure you only pay half of what you received assuming your on the same tax rate as when you got the depreciation. If your on a lower tax rate even less.

    4. Not sure what the question is.

    5. It depends on whether the yield before maintenance is higher i.e. Outer areas vs established. Then add the fact that lower maintenance means your net yield is higher and therefore your serviceability of the debt is better too.

    6. Completely disagree. I get 6% yield vs 3% yield where I rent in inner areas hence why I became a rentvester.

    If your active and source all components of the H&L in outer new areas, then you are active and are manufacturing equity vs buying a new completed marketed property or OTP marketed complete package where you pay someone else this manufactured equity in the form of their profit.

    Each to their own though.
     
    Last edited: 9th Jul, 2016
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  13. sash

    sash Well-Known Member

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    People underestimate the maintenance on older properties...if you factor that in over a number of years...it does make a serious dent in both CF and potential capital growth.
     
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  14. Cactus

    Cactus Well-Known Member

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    In new properties you can have some teething issues in the first 6 months but typically at builders expense. After that you'd expect trouble free until dishwasher or carpet need replacing.
     
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  15. MTR

    MTR Well-Known Member Premium Member

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    You raise some really good points.

    there are the developers that live off the profits/income and turn over stock to maintain this lifestyle and it is a job, and then you have developers/investors who generate income streams from asset class/investments and reinvest the profits/funds from developments into future projects or whatever.
     
  16. meme plecko

    meme plecko Well-Known Member

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    Sash, your loan is 243k, purchase price 265k. Sounds like you haven't included deposit, stamp duty and other settlement costs?

    What would be before tax cash flow on 106% borrowing?
     
  17. sash

    sash Well-Known Member

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    deposit is included and LMI is capitalised.

    The stamps is 2k (land is just under 100k...200sqm lot) and .....the settlement related costs are about 1k (includes legals). ...these have not been included.
     
  18. meme plecko

    meme plecko Well-Known Member

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    But still, 22k difference between the loan and buying/building cost, that part I don't get
     
  19. MTR

    MTR Well-Known Member Premium Member

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    Is there also an option of selling the block of land once you get the title and make significant profit. If this works can be a brilliant option to make short term gains, and move onto another deal.
     
    Last edited: 9th Jul, 2016
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  20. sash

    sash Well-Known Member

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    Here is how it works...rough numbers

    265k purchase price....
    100% deposit....takes you to around 238.5k loan
    Add back....4.5k odd for mortgage insurance (capitalised to mortgage)...

    Cost to get into the deal (real):

    26.5k deposit
    2k stamps
    1k legals and other costs
    $500 incidentals
    So total of approixately 30k needed for the deal...
     
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