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Sacrificing Yield for Security

Discussion in 'General Property Chat' started by Tim & Chrissy, 6th Feb, 2016.

  1. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    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.
     
    Last edited: 6th Feb, 2016
  2. See Change

    See Change Timing Lord Premium Member

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    Solution .....

    Buy both :cool:

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

    Cliff
     
  3. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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

    You're right! We'll buy both! :p
     
    Bran likes this.
  4. York

    York Finance Broker Business Member

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

    One question.
    One solution.
    Agreed.
    :D
     
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  5. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    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! ;)
     
  6. WattleIdo

    WattleIdo renovating Premium Member

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

    Tim & Chrissy Well-Known Member

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    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.
     
  8. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    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.
     
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  9. Adele

    Adele Well-Known Member

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    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.
     
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  10. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    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 :)
     
    Adele likes this.
  11. Adele

    Adele Well-Known Member

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    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.
     
    MTR likes this.
  12. MTR

    MTR Well-Known Member Premium Member

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    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.
     
  13. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    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 :))
     
    Last edited: 9th Feb, 2016
    MTR likes this.
  14. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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

    Tim & Chrissy Well-Known Member

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    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! ;)
     
  16. See Change

    See Change Timing Lord Premium Member

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    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
     
  17. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    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.
     
    ellejay likes this.