my not so great investment experience: Cheapie strategy

Most of you will know me from Somersoft.

Id like to quickly summarise my not so great experience with the cheapie approach. and that is a not so perfect exerpeicnes that usually arent reported by the media/magazine or even on forums

in terms of CG, ive bought well each time so none have dropped below the purchase price. some of gone up, but considering syd and melb have boomed over the years, unfortunately, most of mine havent shown that sort of growth.

anyway, that aside, its the management side that has been more of the problem.

I have a few in some of the not so great areas, however I was intenidng to offset these risks of bad tenants by using agents and being selective about tenants

anyway, in the past 12-18 months I have had the following

1x tenant do a runner in the middle of a lease, no arrears, no damage
3x tenants do a runner in the midde of a lease, leave a mess, a few bits of damage (bond well short)
3 x tenants do a runner in the middle of a lease with arrears
1 x tenant after tribunal being 10 weeeks in arrears with the house being trashed
1 x house which has had 2 insurance claims, one with a break in and ounching holes everywhere in the house
1x house which has been set alight, massive damage, insurance claim
1 x tenant doing a runner leaving large arrears and trashing the house, insurnace claim
1x prooerty vacant since march (multiple agents listed, prices dropped, listened to feedback)

I have listed most of these for sale, as at one stage all i was doing was paperwork for insruance claims and getting quotes for repairs day in day out , however they wont fly off the shelf due to the area

some of the areas the other agents wont manage any more due to the reputation as well as me ending relationships for various reasons

I dont blame anyone, however, Just lettimg everyone know that buyin the right property is only part of the process, and managing the properties is also another task,

I intend to shed about 25% of my portfolio. However the interesting thing is that over the years, at all times there were a few minor and major maintenanec issues, which was fine however, the last 12 months I think ive had about 30-40% of my portfolio requiring decent medium to major maintenane, which has been a considerable chunk of my day

anyway, keep your chin up everyone!!!!!

TMNT

 

Thanks for sharing. Sucks that you've had that experience.

I have a similar portfolio to you I believe with several cheapies in low socio-economic areas.
My problems over the entire time of ownership total:
- 1 tenant not paying when I first purchased (inherited the existing tenant) , put her on centrepay and haven't heard a thing since
- 1 tenant leaving mid lease (later this month), but gave us a month's notice. This will give me a chance to improve the property.
- 1 tenant who has new maintenance requests every month, but I don't mind doing them - keeps the house in good nick which in turn makes it easier to rent. Have increased her rent with no complaint.
- Rest have been smooth sailing

I've also been able to get equity releases which has in turn been used to buy more of them and rinse repeat indefinitely.

I think it comes down to
- Condition you keep the properties in
- Quality (not price) of management
- Not buying in the truly bottom areas (eg Davoren Park SA, Ashmont NSW, etc)

 

Not sure where your properties are located, however we are starting to hear more and more stories of the drug ice sweeping though some of the regional areas - I'm not implying this is the case however it would explain why things have turned south in the last year...Wellington as a prime example. Sorry to hear your story and hope things improve from here on.

 

Thanks for posting this @TMNT. I think many of the cash flow chasing investors don't post the potential hassles of their tenants in lower socioeconomic areas.
I personally don't think the hassles of lower socioeconomic economic areas is worth it. I'd rather a smaller portfolio in better areas than 20 cheap homes with problem tenants.

 

I have a similar strategy to you TM, about half a dozen cheapies but I haven't had any of those issues...yet. I'm not sure where yours are located but it definitely sucks re trashing and non payment crap. IMO often no consequences for those who do this stuff, so they don't care. I don't go for really low socio-economic areas because as above I also couldn't be bothered with the potential risk. Not saying it can't work but I'd rather pay a bit extra for properties. It's always a gamble, hope things get sorted for you.

Maintenance is one of the things that often gets overlooked when people quote their returns. I haven't been able to get to my properties for the last few years so guessing there's some big time maintenance coming up.

 

Agree.
I'd always advise quality over quantity.
However, this depends on your investment model.

 

That seems to be a heck of alot of problem tenants. Are they all in the same suburb or same council? Any chance we could get an idea of where?.....just general area....no need to be specific

 

Some questions:
* Over what time period was this portfolio put together?
* What sort of cash flow does it generate overall?
* What's it worth compared to the original property values (as a percentage)?

 

I feel you I've had some little cheapie money spinners went about 3 years with little to no maitence required in the last 6 months alone I've had 3 replacement air conditioners. It goes in cycles though hopefully your in for some smooth sailing soon.

 

Terrible luck! Sounds like the PM was just signing up the first people who went through the door!

 

A lot of people who bought in low socio economic areas in the 2770 postcode 2-3 years ago, are laughing now. I regret not getting into a property in the 2770 postcode 3 years ago.

 

Wow!....and you are still positive about property. ...kudos.

Spot on about the management.

 

The original reason for me to go for the cheapies is because it allowed me to buy more. Cashflow and a belief that gentrification meant a higher percentage return. Obviously maintenace was going to be a bit harder. That i acknowledged

I do have them in areas such as ashmont dav park, bendigo, ballarat, rockhampton, cessnock, muswellbrook,smithfield plains, Bathurst

I deliberately avoided places like wellington being too small.

Unfortunately this strategy isnt going to plan 2014 to 15

 

I guess that's one of the disadvantages of having properties diversified throughout various states. You really have to rely upon ancillary staff (PMs to source and manage tenants and tradies to carry out repairs regardless of whether you can do them yourself).

One of my uncles lives in Davoren Park. It was around 10 years ago now but he went back to NZ to look after my grandparents. Since he intended on coming back to Adelaide he decided that he would rent his place out. He left it in the hands of a PM. The whole time he was in NZ the rent was getting paid and he didn't hear anything from the PM so he assumed everything was good. When he came back to Aus a year later the place was absolutely trashed. The windows were boarded up like a vacant, carpets were stained with bong water, bathroom hadn't been clean and some of the doors had been kicked off their hinges. The tenant had created issues in the area as well so my uncles house was targeted for a few months (graffiti, people breaking into his house, people smashing his windows) until they realised it wasn't the tenant living there any longer. My uncle reckons eventually somebody would've burnt the house down the way it was going. Since then he hasn't had any issues but it goes to show how damaging incompetent PMs can be.

 

Sorry to hear about your misfortunes. I have been having maintenance issues galore at the moment and it really made me think about slowing things down abit and changed my strategy due to it.

 

I've had a couple of real beauties as well.

Sadly - and to their own detriment - a large number of the "lower-end" of society in terms of education/wages/job description/residence location and so on - have this destructive mentality that ;
1. it's ok to rip of the "rich folks"
2. they are victims in everything and nothing is their fault.

What p.i.zz.es me of is when mindless shows such as ACA etc show the "poor ripped-off tenant at the hands of the unscrupulous and greedy Landlord".

They rarely show the situation from the ripped of Landlord's side.

We are cultivating and encouraging a society of delinquent ****** and losers.

I had to go down to Point Nepean Plaza (in Rosebud - a suburb of "blue collar" and below) yesterday afternoon - something I rarely do - and I was absolutely disgusted at what passes as the general standard of humans wandering around the Mall on a Sat arvo these days.

Just a disgrace, and makes you feel ashamed to be a human, really.

I was thinking; "Is this where we are heading as a species?"

The scary thing is; you could go to 20 Malls at that same time around Melb, and out of 20 Malls, probably 15 would be of this look, while probably only 5 would be of yer "Chapel st" standard.

We are breeding quality, class and pride out of our DNA, I reckon.

Rant over. Happy Father's Day.

 

I also try to avoid telling people that I am from Sydney to either real estate agents, tradies or anyone for that matter because they see dollar signs.

Really annoys me when tenants make unreasonable requests such as can you swap the light switch from point A to point B when its working perfectly fine! Or to have painting done when its already a natural colour and painting was done recently!

Overall my tenants are great but I have a young couple who I am thinking of getting rid of when the lease expires in 5 months time.

 

I just experienced my first dreadful tenant experience in seven years (I guess it had to happen sooner or later...).

I have had a unit in 2760 for 5 years and never had an issue until in January the tenants from hell moved in. I finally got them out after deliquency, tribunal hearings, and police being called several times. What sucked was that in December I reno'd it and spent a bit of cash getting it ready for new tenants.

Once they were vacated and the locks changed, I went in last weekend and the place was disgusting. I found ice pipes, trash, discsrded furniture everywhere. Dirty nappies everywhere (its sickening but they had a 5-month old baby...). They had schellacked (melted black plastic??) To glue things everywhere.. the floors!? Walls, ceiling. It wont come off :/ The once new carpets are completely soiled with parts burnt out and other parts blackened. When I was moving their trash outside the building, concerned neighbours would come across and chat 'are they gone?? That poor baby!!". On Monday I'd spent 20 minutes filing a report to DOCS over the phone. People like that should not have children in their care...

You get the picture. Tenant selection this time will be very very strict...


...Can I make a suggestion that will come off as being incredibly both 'sterotyping socio-eco's' 'reverse racism' (Considering I am an anglo-australian myself)?

These lower socio-eco areas (I'm talking cap cities only, not regionals), mostly (here comes the stereotyping part!!) In my experience are composed of two types of citizen:

1) low socio anglo's (welfare, sometimes drugs, or if working at all, are scrimping and scraping week-to-week paycheques...)
2) New migrants/ethnic groups looking to get ahead. These folk are typically hungry fod success, polite, quiet, not on drugs, and employed full time (or at least studying/working part time etc.)

I have never, ever had a bad tenant experience with my ethnic tenants. Be it Asian, African, Indian, Pakistani, Chinese, Turkish, etc. Never had a problem.

Whilst it is 'not allowed' to favour one nationality over another, I now ask my agent to send me the first and last names of applicants (they normally dont like to reveal this until I've accepted 'mr and mrs random citizen'), BEFORE I make any decisions.

In my lower socio-eco areas, I have to tell you; The Chans, Singh's, Agdashloo's, NjuMja's, Nguyen's, Mahajans etc. get bumped straight to the front of the queue ahead of the Smith's, Joneses, Robinson's etc....

Ps i got burned by Centrepay!!! Dont be lulled into safety when your agent recommends these tenants! Why? Because (as just happened to me...) the tenant can discreetly CANCEL it at any time. They dont even have to tell the rental agent. They just reverse the centrepay without telling anyone and it can take four weeks for your agent to discover they'd even done it!

 

Would you ever consider renting it out to Department of Housing where they cover the repairs?

 

Sorry to hear this TMNT - I agree with your strategy to cull the worst of your flock - particularly in the far flung inland regional areas.

I'm sure it's of no consolation to you but your story reflects the inherent fear I have in buying outside metro suburbs. Of course bad s*** can happen in metro too but in general, much less likely. That's why the bulk of my properties are located within 20kms from the CBD.

Appreciate your unbiased, candid post though.