Buy and Hold New/ish properties

That's cool sash, I assume that you would be using equity/borrowed money for this 30k deposit and expenses as well, so that's another 1.2k in interest at 4.07%, right? So, even if you borrow 273k (that will cover for everything), it's still CF+ by $800 before tax and depreciation, nice

 

Yes I do this too with back to back settlements. That way you never have to put any more than a deposit down.

It's a great cash on cash return. $5k down $35+k back at settlement. Have done this a few times with good success.

 

I think there is merit in this, especially from a cashflow perspective, but I question whether the long term yields are that different, if anything I suspect the older properties would do better.

Two properties for $400k
Property A: old house, value $100k, land value $300k
Property B: new house, value $300k, land value $100k

Cashflow will be better on property B (depreciation, better rent) but you can bet the old house is in a better area and longer term the land price will drive CG and property A would outperform. It is evident in Sash's example:

Depreciation deductions help with cashflow, but they are also an approximation of the loss in value of the property, the above example is $7k in the red, if the capital gains aren't keeping up with that because the new home is in a subpar area then come time to sell that loss would be realised.

 

There are many variables in this. Actually last year I bought an older brick property in Illawarra (so regional I guess). Only 5.3% yield. It seems to have increased around 18% since purchase. Has cost no maintenance so far, so should be perfect time to offload. It's one block back from Lake Illawarra though. The lake is a 2 minute walk down the road and a gorgeous beach is 5 min drive/cycle ride away. For me it has scarcity value and I'll happily put money in to get it to positive yield and hold long term.

 

Care to share numbers?

 

Well I can't fully since I haven't sold it, except to say I paid $425k and rents for $440 ($450 next yr
new lease). So crap yield but I'm prepared to suck it up to be there.

 

Appears you have left the $4500 LMI out as well, when calculating your end debt figures?

If the loan was 90% PLUS LMI , the total loan debt should be $238,500 + $4500 ie 243K

If the loan was 90% INC LMI your deposit couldn't have been just 10% (26.5K) ...it would have been 11.7%. So you'd have needed to cover the 10% deposit + the LMI of $4500 - or @31K

 

@MTR, I have similar view as you on this. Except I actually bought it OTP. The main reason is that the cashflow would be good given it is new.

Bought my 1st IP at 580K in 2014, 3/2/1 house. It is currently being rented out for 570 pw. So I don't have cash flow issues especially I have all these depreciation over next 25 years, not to mention low interest rates these days.

Just got it desktop valued at 817K ..... And yes, just got my loan approved to pull out all those equities with another bank, and will settle within 2 weeks.

 

Can someone help me to understand more on this one?
Say for the following example:
Purchased brand new for $400,000
You kept it for 10 years, and sold it for $800,000
So your CGT liable is $400,000 minus expenses from buying and selling etc and the 50% discount CGT. Let's say expenses are $50,000, so $350,000 x 50% is subjected to your marginal tax = $175,000

Let's assume your claim $10,000 every year for the 10 years as depreciation. So a total of $100,000. Some of this amount needs to be considered in your CGT calculation.

Question:
As a guide what is the % of this $100,000 ( from depreciation claim) needs to added CG?
Is the 50% discount CGT applicable for the depreciation claim?

 

I believe depreciation would be added back to the gross before any discounting.

 

Older solid low maintainace properties are the way to go.

Great yield and great capital appreciation. What more would you want. This is what I buy on the Gold Coast and it's served me very well. A grey strategy when you have a fast growing region getting redeveloped more densely.

 

I would not offload. This one sounds like a long term keeper.

 

yes I found this post that explains Depreciation & CGT

 

For me its all about older properties to add value to from day one. Also buying bmv even 20k, if 3k a year for maintenance then you bought yourself almost 7 years of free maintenance. So for me newer properties just don't work. Rather than pay a premium for a place i would rather buy something older, add value to create a chunk of equity and when the value adding is complete the yield also will increase. So to me it's the best of all worlds. Create equity. Increase yield. Hold long term or sell.

 

Agree with everything you say but would add that building new properties can create a chunk of equity as well as being CF+, but might be lower CG than an established area. The trick is not paying someone else profit, and making it yourself. Same as renovating vs buying renovated.

 

You hit the nail on the head MTR!
I started in "old residential" rentals too and though they all had positive yields the many big maintenance bill really changed the cash flow to negative
There are so many big bill items .
Repainting inside and outside
Rotten weather board
Roof replacement
Gutter replacement
Re wiring
Re plumbing
Re piling
Refurbishment of kitchen
Refurbishment of bathrooms
Drains repairs
Re carpeting
Re vinyl
I initially also believed these items last almost forever ...but not so
So i switched to commercial with the big profit margins but buildings and interior fitouts date ...they last but they date and tenants like modern buildings
Refurnishment of commercial buildings are not cheap
So again i fine tuned to warehouses snd carparks and yards ...they don't date.
Recently I have switched to land only and left the tenant to fully maintain their own building ...land requires little maintenance and does not date.
To avoid the land losing its appeal have chosen only land with seaviews or close to cbd
This is all at the expense of net yield /margin
Net yield on the last 29 properties weighted average is now only 6.5pc so only 35pc of the rent is profit (before interest and tax ) but atleast there are zero vacancies and zero cost (well almost I still need to issue an invoice every 7 to 12 years supported by a rental valuation from a registered valuer )
.....my personal learning from the school of hard knocks!

 

Completely agree with you.

 

Blueskies you are so right!
Depreciation is a true cost ...items that depreciate eventually are worth nothing due to wear and tear or becoming obsolete
Looking long term even a house will have no value (the space it occupies is better utilised by another building) ...only land does not depreciate

 

This.

I've seen house and land "packages" advertised by the developers and builders with whom they are in cahoots with, anything from 50-100k dearer than I can buy the land and organise the build myself. Sometimes even with the same builder.

It's all well and good to buy new H&L, but it is vital you do the running around. Otherwise it will cost you dearly to have others do it for you. Developer makes money on the land. Builder makes money on the build. Sales agent, developer and builder make extra money on a Package. 50k worth of Packaging Profit is better in my pocket for next deposit/s. For a little bit of stress and legwork it is well worth it. Personally I enjoy the process.

 

Land and houses packages work well in a rising market because land/values are rising on completion you should be making around 20%+ profit. As has been mentioned before because you are building in new/outer suburbs where land is not an issue when the markets tank these properties can fall back significantly because there is an oversupply of land and houses are all cookie cutter designs.

How do you mitigate this risk? This is what I did when I was building L&H in a booming Perth market, I built 4 per year and sold 2 on completion, the remaining 2 provided significant cash flow, a balancing act really.
Also if you are going to do this you need to ensure you are not building close to peak.

MTR