Our Latest Buy (Part 4)

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Howdy boys and girls! Me again.

Let’s dive straight in and plug on with part 4 of our latest real estate purchase (read Part 1, Part 2 and Part 3 here).

Last time I disclosed that we bought Property 3 for a surprising offer of $210,000 against an asking price of $298,000.

Let’s take a look at the pros and cons for this one… and you decide whether it’s a good buy or not!

Pros

So um… where to start?

I guess from the beginning!

In Part 1, I stated that the property was listed for $298,000, however 1 bedroom units in the same complex were asking $310-$320,000.

So you’re probably wondering why 1 bedrooms were asking higher than 2 bedrooms?

Because the owners were different!

The number one consideration for an individual property is:

Why is the owner selling?

It could be for a myriad of reasons, but if you can determine the exact reason – you’re ahead of the game.

In this case, the elderly owners were desperate to sell – they needed liquidity in the form of cash to transition to the next part of their lives.

Hence why we could low-ball hard at a substantial discount to the already lowered asking price.

Lesson: Remember that the market dictates the price for an asset, price is what you pay, value is what you get!

Secondly, we also lucked out in terms of the highest and best use for the land.

What does this mean?

Each plot of land is allocated a “zoning” from the local council.

This zoning determines what can be done on the land. In our cities, this can range from a standard residential lot (one dwelling), to high-rise apartments.

The pot of gold at the end of the property rainbow is to have your land rezoned by council.

Because the more dwellings which can fit on the land, the more valuable it is.

Remember in Part 3, when the agent mentioned in passing something about development?

At the time, I had no idea what she was referring to, but after scratching my head –  I went back and did some more research and yes, the council DID rezone the land very recently.

Rezoned it as:

Mixed use, up to 10 storeys.

From it’s current 12 units to perhaps a 60 or 70 apartment block… EFFING CHEERING.

Ironically if it had been the block of units next door, it would have fallen under a 15 storeys zoning…

But can’t complain too much – it’s something we weren’t expecting to fall into our laps.

Although council has stated they are looking to prioritize the lots earmarked for 15 storeys first.

Between you and me, I reckon a conservative 10-15 year time horizon is more realistic for this one to come good.

Mind you, the strata committee are soliciting offers right now from interested developers – but I doubt they’ll get any, wrong part of the property cycle for Perth but one can only hope!

Lesson: Always try and find out what is the highest and best use for any property you are looking at, the local council usually has information on individual lots. The pot of gold is RIGHT THERE.

The third main pro to this property is the fact that it was in original condition.

Which means that we were able to, and have done, a few cosmetic renovations – repainting the kitchen, reinstalling some door handles, replacing light fixtures, installing some fly-screens and glossing up the floorboards – to bring it back in line with market and appeal to tenants.

Mind you, older properties generally have more maintenance and repairs down the track.

Still, I’m a big favourite of cosmetic renos – they are relatively straightforward, and add visible improvements to a property.

This should also translate into adding equity should you wish to revalue your property for a refinance.

Which is why I avoid off-the-plan and new builds, everything is built and finished at a premium – it’s built into the purchase price, which you pay for!

Lesson: Whenever possible, try and add value to a property through some elbow grease. You’d be surprised how much value you can add just through a paint job or a simple face-lift.

Cons

Aha, not everything is rainbows and butterflies, there are a few things to be mindful of.

Primarily, I’m a little concerned with all the development and buildings going up.

The threat of oversupply is going to be reality in the next couple of years once these new towers go up – there’s 5 behemoths being built within a 500m radius.

But I tell myself that it’s a different market – 2 bedders are going for around $550-$600,000 in those towers, even if prices drop down significantly, I doubt they’ll be competing in the $210,000 range.

So we should be OK… especially with the rental yields we are forecasting.

I mean, hard to imagine an owner renting out their newly built apartment for $280 on a 2.5% gross yield.

Still, it does mean that rent rises are capped for us, given there’ll be a price range when tenants would want to live in a newer, better property.

Lesson: Whenever you’re buying real estate, remember the old demand vs supply rule – more demand prices rise, more supply prices fall and vice versa.

Another con which I’ve factored in, is the holding costs.

Golly gosh, the cost of managing agents in Perth is expensive!

We’ve been quoted 16%, yes 16% management fees before – why don’t you just take all of it far out.

Currently on 10%… and that’s on the lower end.

Makes the 5%+GST you get in Sydney and Melbourne seem like charity.

In addition, because it’s a unit – we do have to pay strata fees.

Not ideal AT ALL and the $650 per quarter is bloody expensive for what you get, tax deductible or not.

If it wasn’t for the discounted purchase price and the future development potential, I would most likely have crossed this one out.

Still, cost of doing business I spose… sigh.

Lesson: Always factor in the holding costs… remember it’s not gross figures which count, but what’s left over in the net! 

Lastly, the con which really isn’t that big of a con personally, is the fact that Perth is about 4,000 km (2,500 miles) from Sydney.

That’s a bit of a jump in anyone’s book.

To be honest, I don’t really have an issue with investing inter-state, that’s why we hire property managers to look after all our properties.

But how can you trust them you say?

Well how can you trust anyone offering you a good or service really.

What if something goes wrong with the property?

There are tradies and builders everywhere in Australia – yes, you do pay more because you’re inter-state (believe me), but again that is the cost of doing business.

Rather pay the $3,000 to fix some plumbing if that property value can increase $30,000 p.a.

However don’t be fooled in thinking that management of your existing properties can be outsourced 100% – end of the day it’s YOUR financial journey. If you’re just a passenger, you’ll be taken for a ride eventually.

Lesson: Just like in love, distance shouldn’t be a barrier! There’s value everywhere, not just in property or shares – it’s up to you to go look! 

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There you have it.

Hopefully I’ve done our new portfolio addition justice, and hopefully I’ve entertained and educated you guys along the way.

And never fear, we’re on the lookout for our next buy… the journey never stops!

Stick around, I’ll be sure to update you all when it does eventuate!

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