Sacrificing Yield for Security

Looking for opinions on this situation.

We are in cooling off for a recent purchase of a duplex (3 & 2 bed). We have bought sight unseen and will fly interstate to view the property prior to cooling off expiring.

Property A (purchase) has a 6% yield with two existing tenants wanting to stay on.

Property B had a 6.4% yield, one side vacant, the other side tenanted.

Property A (5/3/3) was in a better position (cul-de-sac) had an additional garage and I thought the layout was slightly better.

Property B (5/3/2) was on a slightly larger block (28 sqm), but didn't have the additional garage and not as much street appeal. One side was tenanted and the other was vacant.

Early in the piece the agent for Property B told me the last tenant went through the place with a hammer and that the other tenant didn't want photos taken of the place for sale. Agent for Property B claimed the yield could easily be increased to 6.5%, I was skeptical of this because the rent he proposed for the 3 bed side was the same as an entry level 4 bedroom free standing home in similar condition in the same suburb. He couldn't provide a compelling reason why Property B was achieving such a high rent compared to other properties in the area (apart from "My agency achieves the best rents in the area").

We ultimately went for Property A based on the additional garage for the 2 bed side (something that is unique for the area), it having more appeal to families being a cul-de-sac, being fully tenanted, and having rents very close to fair market value (We could probably increase the yield to 6.2% with a slight rent increase, still within FMV)

What are your thoughts?

EDIT: I should mention a bit more of our thought process:
Market rents on Property A = less vacancy, stable, decent tenants
High rents on Property B = more vacancy, less applications, risk of undesirable tenants who can't compete on places with lots of applications.

 

Solution .....

Buy both

Then you can report back in a year and tell us what happened .

Cliff

 

Well I never really thought about that being an option...

You're right! We'll buy both!

 

That would have to be the fastest problem solved ever on PC.

One question.
One solution.
Agreed.

 

You have to strike while the iron is hot!

We won't concern ourselves with 'all your egg's in one basket' non-sense or 'No, we won't lend you the money', they can go jump with that sort of loser talk! We're buying it!

 

You also answered your own question about why the rent is so high on property b.

 

You think our thought process is pretty accurate? We thought there might be another perspective not covered or something we missed.

Bathrooms and living looked bigger on property B but houses were similar floor space area so not sure if it was just better photography or they were actually bigger.

 

I would buy the one which has the rent which could be increased in the future, not the one which has the suspiciously high rent that may need to be decreased should a new tenant be required.

 

Bigger yield usually requires bigger risk. Question you should be asking yourself is whether or not your finances can take the hit if things go south.

 

Rent from our other IP can cover the payment on this place as well. We will also build up the offset pretty quickly, belt will be tightened for the next 6 months to beef up that offset a bit more

 

Nice! Sounds like you have it all planned out already for a worst case scenario
Probably the only other question you need to ask yourself is whether it is still a gem if you can't get the 6.4% yield.

 

How do you beef up the offset accounts with these yields?? Sorry, I don't get it?? Not saying you should or should not buy, no clue, just trying work out how you have extra cash to do this from rent, after all expenses etc.

 

Plenty left over from my income. We put a really good chunk in offset last FN sticking to our budget and not buying anything extravagant.

EDIT: I should also mention the place becomes cash flow positive after the depreciation benefit is factored in. It's positive roughly to the tune of $5k p.a. (using Rixter's worksheets )

 

The depreciation benefit came into it as well, everything else we looked at had no significant depreciation benefit.

 

We're always open to suggestions on how to pump up the yield a bit more @MTR without losing the tenants or getting horrible ones!

 

Personally I think the all eggs in one basket concern is nonsense . There are many people who have done very well by doing one thing and doing it again and again . Most of the serious investors on the forum don't have multiple different properties in different suburbs . They may either have on or several areas they watch /Usually something in their home state and then suburbs they watch in other states .

I'm more of a " put all your eggs in one ( of a few ) baskets and watch it carefully ", type of person .

We rarely buy just one property in an area . you get to know the area , the agents get to know you and take you more seriously , and you might hear about deals that others miss out on .

Have you run the figures to see if you can afford both ?

Cliff

 

No chance of affording both. We had to go to Liberty for the loan, other lenders wouldn't look at us. We also bought only 30k under our pre-approval limit so we are pretty maxed out.

Over the next year we will increase our savings as much as possible and try to boost our incomes as well so we can buy again in 2017.