Although I’ve been absent from the blog over the Christmas and New Year period I’ve had the calculator not far away as I’ve done the final figures on the renovation to see if the time and effort put into the project was worth it. Whilst I’m not endorsing sharing all of your finances in a public forum like a blog I think it’s important to delve into this project to show that it’s something manageable by most people and that it won’t break the bank. For that reason, following are the basic figures about the purchase, renovation, financing, valuations and leasing of the property.
So what does this all mean? The total cost to purchase and renovate was just under $21,000 (including the deposit). If I just purchased the property and did nothing to it but rent it out it still would have cost $14739, still would have been worth $112,000 and would be lucky to rent for $130/wk. With the renovations the valuations showed quite a range. While the first one was clearly an overestimate (get me $175k and I’ll sign on the dotted line!) finding a mid-way point and doing the comps with what is for sale at the moment (see this similar unit currently for sale) $150k would not be unrealistic. The rental amount also rose with it being snapped up for $160/wk within a few days of being on the market.
So for just under 3 weeks work the $112k property rose in value $38,000. Take away the reno costs and purchase costs (excluding the deposit) and it’s a nice profit of $28,000. Looking back now it’s great to think that for each day of work the value rose about $1500. I can imagine most people would be happy earning that!
Noting that I’ve decided not to sell but to lease it out the net rent is $149 with mortgage repayments of $121. The remaining rent totals $1456/year which will go towards rates and maintenance. Factor in the depreciation at tax time and I’m confident that this will be a positively geared property. And with over a 7% return you’ve got to be happy with that! Although there are a lot of numbers to digest, I hope that this demonstrates that investing and renovating doesn’t need to cost the earth and you can still make a tidy profit with a bit of hard work. So now it’s time to focus on the next project which was already in the pipeline whilst the renovation was going on. More on that soon…
Many landlords fall into the same traps, but if you are not careful these consistent oversights can turn into huge landslides of trouble.
Setting the rent too high or too low
Before purchasing an investment property, extensive research must be carried out to determine an appropriate rental price. If the rent is set too high, the property might not attract enough interest from prospective tenants. It will sit vacant and gathering dust while you achieve no profit return. On the other hand, if the rent is set too low you may experience financial pressure and the property may attract undesirable tenants.
Look at listings similar to yours in both features and locality to gage what the rental price should be.
If a property manager is hired, they should be able to provide you with information on similar listings and advise you on an appropriate rental price.
So in September of 2013 I published a post talking about the difference between Company Title and Strata Title. The example that I used to illustrate this was a one bedroom apartment located in Potts Point in Sydney. This time capsule of a property had been boarded up for over 20 years and was in largely original condition. Whilst that post was talking about the restrictions that may be in place with Company Title, today’s post is quite different. The apartment itself was snapped up quickly (for a value of around $435,000) and someone’s been pretty busy over the last 8 months!
By the looks of the sales pictures the unit was taken back to its bare bones and given a new lease on life. With only 53 sq m to work with it’s a pretty small canvas but what a result! Who would have thought that in less than a year the same place would be showcased with descriptions such as beautiful polished hardwood floors, a streamlined Caesar Stone kitchen with integrated stainless steel appliances and a stylish designer over-sized bathroom (over-sized for 53 sq m I’m guessing). They even managed to squeeze in a concealed laundry.
As with the first sale it came on to the market and was under offer in no time, this time at $610,000! Click here to see the agent’s listing. Although I’m not a professional renovator I think we can safely guess that the renovation itself would not have cost $175,000 so there is a tidy profit in store for this savvy flipper. The catch with this property though is that it still falls under company title so landlords looking for a good investment would have no luck as leasing is not permitted in the building. I’m guessing that it will make a nice pied-à-terre for an executive on the move! Check out some of the before and after images below.
You wouldn’t be wrong if you said that property investment and the subsequent property management that goes along with it can be a competitive business. It can take a good amount of research and experience to decide on what your criteria is that makes the ideal property manager for your requirements. Whilst my property manager Jamie and his team always do a great job, it’s also interesting to see some different approaches that property managers may take. Coral Sea Property Management in Townsville, Queensland, have certainly gone down a different path with their recent advertising of properties to rent and it’s caused a bit of a stir in the community. Whilst it’s given me a good laugh I’m not too sure if I’d want Monica out the front of one of my rental properties, what do you think?
Click here to view their complete range of rental posters, full marks for creativity!
The article below appeared today in the news.com.au real estate section and is a timely reminder of the financial drain that some people can find themselves in over the Christmas period. When it comes to weighing up between the many costs of surviving Christmas or paying rent on time the landlord can often be the loser ending up with a nasty new year surprise! The key lesson mentioned in the article and one that I fully support is to ensure that you utilise the services of a professional property manager, they are are worth every cent when something goes wrong and they know exactly what to do about it, after all, that’s their specialty. Read on below or click here to go to the original article –
THE festive season is a danger period for property investors, and real estate experts are warning landlords to make sure they don’t suffer a financial hit from tardy tenants.
The general manager of Harris Property Management, Suzie Hamilton-Flanagan, says rental arrears can jump by more than 20 per cent over Christmas as tenants find other areas to spend money. ‘Sometimes rent is the last thing on their list,” she says. ‘Landlords managing their own properties need to make sure they are on top of this from the start, or they risk paying for their tenant’s good cheer.” Some landlord insurance policies provide cover for tenants who fail to pay, but Hamilton-Flanagan says if a landlord fails to go through the correct processes when dealing with late-paying tenants, ‘an insurance payout for a late rental claim can be impacted”. She says one suggestion during December may be to send the tenants a card, perhaps with a small gift, gently reminding them of payment dates during the busy Christmas season. ‘Create a relationship with the tenant and treat people as you would want to be treated. The mentality of a tenant is they are paying you this money and they want bang for their buck – they want the property maintained, repaired and the landlord to be respectful.” The first step in preventing late payment is to select the right tenant from the start, Hamilton-Flanagan says, which involves checking a tenant’s payment history by contacting previous agents and landlords.
Carolyn Majda, executive manager at landlord insurer Terri Scheer Insurance, says one of the best ways to protect yourself is to use a professional property manager. ‘That way you have someone who is looking after the rent religiously,” she says. Majda says a lot of property managers send out pre-Christmas newsletters with rental payment dates included. ‘It’s nice to send a Christmas card – we all lose track of dates around this time of the year.” She says investors who manage a property themselves need to be on top of any late payments immediately. ‘Don’t let it start accruing. The longer time goes, the bigger the problem for both landlord and tenant,” Majda says.’Even if it is a day late, be on top of it.’It’s also really important that you take out insurance at the start of a tenancy, before you have people in there, because if they are behind in their rent it can create some issues – it’s almost like having a car accident and then insuring your car.”
In the news this week we’ve seen a report about a French tenant who decided to let loose in his landlord’s apartment after his landlord refused to return his $2,500 deposit. Not only did he do some major damage wielding a sledgehammer but cleverly (read: not clever at all) recorded himself doing the damage and then posted it on YouTube. The video is titled “vengeance d’un locataire” (revenge of a tenant) and shows him doing his finest work to the bathroom toilet, mirror and shower before moving into the living area to do a bit more impromptu demolition. Whilst we don’t know the background story to this situation, the response by the tenant might be seen by some to be a touch extreme. I think we can also safely guess that not only will he now not be getting his deposit back, but with video evidence plastered all over the internet this outburst is likely to end up costing him a whole lot more than $2,500.
Some lessons to learn from this example –
Get a professional property manager to take care of all things to do with rent and bond payment.
Make sure you always have current landlord’s insurance with a good amount of cover.
Don’t leave sledgehammers around near a disgruntled tenant.
I had some great responses to my post on October 13th about doing the sums when looking at investment properties and how important (and sometimes surprising) it is to get an idea of how much it will cost you to start and also to maintain. I’m always keeping an eye out for great examples so will post them when I come across something which shows a simple and affordable approach.
This property is a simple one bedroom unit in a complex of 12 units. It’s in a well established suburban area which is well regarded and in the same city as my first example. The area again demonstrates good infrastructure and is close to necessary facilities (shops, hospitals, schools etc).
On face value the unit appears to be well maintained but of course you would want to inspect not only the property itself but also look around the complex and the units around it. It is for sale for $142,500 and is returning a healthy $190/week. Let’s say that it ticks the boxes as far as the quality and standard of the complex and we manage to get a realistic offer of $140k accepted. What do the figures look like and is it affordable?
How Much Will It Cost Me?
Property Price – $140,000
Deposit (10%) – $14000
Mortgage – $126,000
Stamp Duty – $3470
Interest Rate – 4.69%
Conveyancing – $800
Mortgage Insurance – $1800
Total Costs (estimated)
Once again, these are the main costs with a deposit of 10%, if you can get to 20% for a deposit the mortgage insurance disappears and the total estimated cost would then be $32,270. So you could get this property for an initial outlay of between $20,070 and $32,270. This is all great but let’s once again look at how you maintain this. Rather than being overly conservative, this time I’ve gone with one of the better interest rates that I can find at the moment of 4.69%
How Much Will It Cost To Service?
Council Rates – $900
Rent Income – $190/wk
Interest Rate – 4.69%
Water Rates – $900
Repayments/Wk (10% deposit)
Body Corp – $800
Repayments/Wk (20% deposit)
Property Mgmt. – $700
Yearly Repayments – $7826/6968
Yearly Costs – $3300
Rent/Yr – $9880
For a 1 bedroom unit the rent is very good and in a tight rental market this is becoming increasingly realistic. If you started with the 10% deposit you would find yourself out of pocket $1246 a year (or $24 a week). If you managed to pull together the 20% deposit you would be out of pocket $388 a year or less than $7.50 a week! A dollar a day really is loose change! Come tax time and factoring in some depreciation I’d think it could even be likely to end up being cost neutral.
Again remember this is a ‘one moment in time’ scenario and things can change, but even with some unforeseen expenses and the odd maintenance request a property like this has the potential to be a great starter for an investment portfolio!
One thing that property investors can sometimes discover the hard way is the importance of ensuring that they have adequate landlord’s insurance on their investment properties. When things are going well and you have a great tenant who looks after the property and pays their rent on time it can be an easy thing to overlook and can often be avoided because of additional cost. I’ve discovered through personal experience and listening to the experiences of others that it is an essential component in every investor’s bag of tricks.
Yes it is an additional expense (although if you do your research you can get some good deals) but it is worth its weight in gold if things go pear-shaped (and it’s tax deductible). One of the other traps that property investors can fall into is assuming that the building insurance on the property automatically covers them for landlord and tenant associated issues, this is not always (and often rarely) the case. Make sure that you are familiar with what your building policy does and does not cover. The benefits of landlord’s insurance come into their own if there are issues with rental payment defaults and malicious damage to the premises. Give it some thought, what expenses would I have if a tenant doesn’t pay their rent, intentionally damages the property or even if they move out and leave the house full of their unwanted junk? It could really add up. Then consider, what happens if there ends up being a couch on the roof, old mattresses up a tree and old underwear in the garden…the mind boggles but it does happen! To see an example of when you would definitely want to ensure your landlord’s insurance policy was up to date (although somewhat extreme) check out the recent example below from Melbourne.