Would you buy a neutral geared property in Sydney western suburb?

Hi,

I am looking at a property (Sydney western suburb) that has following traits:

- Old 3 bed house + new 2 bed granny flat already built.
- 600 sqm corner block.
- 2 km from major train station.
- 50 minutes train to Sydney central.
- Current R2. Proposed R3 as per draft plans.
- Currently leased at $410 + $350 = $760 pw
- advertised for $730-$750k sale.
- detached granny flat is separated by fence for complete privacy
- all utilities separate for granny flat.

Back-of-the-envelop calculation shows it's almost neutral geared considering 105% loan.

Negatives:
- It is outer west Sydney's low socio-economic area.
- Sydney's current market outlook is negative for next couple of years. It may take 7-8 years before the next boom arrives.
- Demographic data shows percentage of full time employment workers is 61%. (NSW 59% and Australia 57.7%)

Considering this property would not cost any money (almost) out of pocket. One can hold it for long term.

Would it be a wise investment choice?

 

You mention a 105% loan? Can you still get these?

 

Yes. As long as you meet bank's current criteria for equity and serviceability.

 

Your talking 105 by borrowing against equity in another property.

The question is, what else can you use that equity for?

 

Right.

Can buy marijuana stocks or lose money in crypto currency

 

What is the timing of the rezoning proposal? ie how far advanced is it - pie in the sky, drafted, or on display?

How much of an uplift will you achieve upon rezoning? Number of units you would achieve (in a development or by itself taking into account the value of the current improvements to the developer is the cost of demolition).

 

As per latest update, community consultation was held and response analysis is completed in 2017. Result shows 8% objected to draft strategy.

Assuming rezoning goes ahead, this site would become eligible for Duplex. Looking at recent sale data for duplexes, it wouldn't be profitable to knockdown and rebuilt as of now.
However, in next 10 years when the market turns it may be viable economically. This is where the "NIL" holding cost of this property comes handy.

 

Are you prepared to lock away ~$200k in equity and >$700k in borrowing capacity for.... wait 7-8 years?

I'm trying to look at the positives to the deal.

 

You are better off finding an older house on a suitable block - the do a Reno and granny flat build yourself. Would get the say result but probably for $100K less.

That would be the best way to protect against future market conditions- we did this a few years ago and have something similar to what you are looking at now. Never vacant and currently putting up granny flat rent.

Create you own gains and cashflow

 

If you put $100,000 into the deal is it positively geared?

Would its still remain positive if you had 2 rate rises. Is the potential for rent increases in the future?

If so I think the deal would be ok.

 

I have a similar property around Penrith, but my PM says not many tenants want granny flat, as there are many apartments popping up. My rent on the main house and GF has barely moved in 3 years. Something for you to consider.

 

Rents are coming down in the area.

$350/wk for a granny flat is really good.
Unlikely you'll get that after a vacancy.

Also, doubtful it will be cost effective to demolish both a house and granny flat to build perhaps a duplex. I imagine the land size is 600-700sqm.

How many opportunities would be missed with all that equity tied up for that long. Also a deal should be determined based on the value of the time. If your properties gone up a million, and development would make $1M using todays purchase price, why would you bother developing.

I've asked this to many investors "are your properties really working for you?". You'll find just like in other industries, only a handful of investors really get anywhere, how did they get there...

 

2 weeks ago leased GF in Liverpool area $390

If I got into market 2 weeks earlier would have gotten $400 (3 new GFs popped us same week)
All now leased around $380-400

Hard to say without knowing drivers

Although I agree demolishing and putting a Duplex I cant see a case for it. Once area is known we can discuss more.

 

Nice.

Most of my properties are near Penrith. Just relaying feedback from talking to my agent and watching the market.

Fortunately I've had the same tenants for years now, and rents are at a premium.

 

@NHG @Ravi
We don't know if OP is looking for a property in Penrith.? not that I can see

In my Liverpool is going though a construction and growth boom, So their is a heap of rental stock on market for the next 12 months. But new cafes new universities mean the market will soak up this stock.


I know I will not gain anything for a few years but I have my purchase set and forget with a GF and landscaping now done. Within 10 years this area. Im counting on the area growing and expanding within that period and within 4 years for rents to start appreciating.
If government is on time within 8 years the airport will be finished and the paddocks will become employment hubs putting demand on housing in area.

My hope any way.

 

Therents seem up there for Western Sydney (not knowing which area of course). Check the reality. I know there are LOTS of rentals vacant in the Mt Druitt area (other areas?).
It sounds like a decent deal but of course factor in interest rate rises, no CG for 8-10 years.
With lending bding difficult if you buy this will you still have borrowming for a great deal if it comes up?
As someone mentioned you may be able to buy and put a granny flat yourself for cheaper. Especially as prices are softening. Deals to be had in the next 3 years in Sydney I think. Personally I would wait for that. .

 

this is really good advice. and i like the way you articulate it. critical reading for any buy and hold investor really
the more you invest, the more careful and nervous one gets
you truly realise less than 5% of property is investment grade
most DA approved sites or even rezoning has no practical value once the sky high construction costs are taken into account!

 

Personally I wouldn't at this point in time of Sydney. You can argue cashflow on paper looks neutral but in reality:
- As other suggested, rent is softening across Sydney so not sure whether you can maintain the existing rent after it goes vacant, plus factor in vacancy between securing next tenant (they'll have more options to choose from so can take their time)
- You'll be borrowing at 105% so even more sensitive to rate hikes
- You'll need to factor in maintenance for both the house AND the GF...if couple of big items such as hot water system or aircon goes out of action, then you'll be hit with some hefty maintenance cost
- Lower demographics = more chances of rent arrears and usually higher turnover in tenancy. Don't forget if rent across Sydney drops then people will be able to choose to move to better suburbs
- On top of that as you mentioned yourself, expect a long time till the next Sydney boom arrives

That sounds to me like a number of risks that's beyond our control and without the CG potential, it's a no thanks for me.

Cheers,
David

 

Just a guess. They said Western Sydney. $350/rent for a granny flat. Blacktown and closer to the city rents for more.

Liverpool is South West Sydney. The other Western Sydney people call the Hawkesbury.

You can call me Sherlock.

 

maybe the question is what is the goal of purchasing this particular property?

even if it is neutrally geared, you are still locking in your cash (20% of the purchase price), plus carrying a large amount of debt ( 80% of the purchase price) for a long time ( numbers of years), and likely seeing no growth.

the opportunity cost is big.