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Hiya boys and girls!
Been a lil while since I’ve seen you in these parts right.
Excuse me, as I got caught up with all the craziness that’s been going on this week.
But I’m back!
We’ll be diving into the nitty gritty of it today.
The numbers involved and the pros and cons of the property.
So we secured this two bedroom villa with an offer of $220,000.
Like I mentioned earlier, it was on the market for $279,000 initially.
Given it’s size, I certainly thought it was over-priced.
But at a final listing of $229,000 – this brought the price range in line with a 2 bedroom apartment/unit for the suburb.
And at $220,000 I think there is value.
Luckily, this was confirmed by the lender’s formal valuation – which came in at $230,000.
Valuers try to be conservative as much as they can, so I think the true market value is a bit above that.
But hey, $10k off the bat isn’t too bad!
And based on the higher valuation, I could borrow 90% of $230,000 which meant a loan of $207,000.
Which is effectively 94% LVR against $220,000.
So the total cash contribution was $13,000 + $9,186 costs = $22,186
And if we take the value gain of $10,000 – this represented $10,000/$22,186 = 45.07% cash on cash return.
Are you following me so far?
Here’s a rough spreadsheet for those visually inclined:
The property also had a tenant already in there (not my choice), paying $260/week.
Which meant a gross yield of $260 * 52 = 6.1%
(The actual gross yield should be lower given vacancies but it’s a rough guide).
On an investment loan rate of 3.52%, the P+I monthly repayments are $931.84.
And the monthly rental income comes in at $1,126.67
So at a very basic level, the income is enough to cover the loan interest and principal payments.
Of course, there will be costs, vacancies, strata, maintenance, rising interest rates etc, etc.
But hopefully… this one will come good.
Apart from the numbers above – I think location wise, there’s decent long-term growth prospects for the suburb.
As I mentioned in part 2 (here), it’s slowly but surely gentrifying.
I think if you look at it, a suburb sub-5km in from a city like Perth, should always have good demand irrespective of whether it’s gentrifying or not – from both a renter and buyer point of view.
So that’s a tick.
Secondly, the location of the villa is about 400m to the water (Swan river), with its city views and bike paths and children’s parks.
So there’s a tick there because Aussies… we love water right?
Actually I think everyone loves water, it’s difficult to function without it.
The villa also sits in a block of 8, on a land lot of 2,045 sqm which equates to a share of 255.63 sqm.
Which if we were to buy a vacant block of that size – would cost much more.
Of course, that’s over-simplifying it, as the council rates notice shows the land value sitting around $120,000. But I think that value was based on the Perth market in 2018 given the last date of council land valuations (won’t bore you with details, but it’s how they calculate land tax and rates).
To understand how much values have dropped in Perth, just take one look at the sold prices of the other villas in the complex:
I think this is encouraging, because most owners are reluctant to sell at a loss, hence will wait for values to creep back up. This reduces turnover, which reduces supply, which increases prices.
Mind you, the other properties are in better condition than ours, some have gone through extensive (beautiful) renovations.
As I mentioned, a lot of the surrounding area is being rebuilt with brand new, shiny and premium looking townhouses and duplexes springing up.
I’m hoping one day, that it translates to the old “worst house on best street” saying.
Not saying ours is the best street (not by a LONG shot), but it certainly helps when all the properties around you is fresh and new.
Ah yes, with every good there’s bad, every Ying there’s Yang, every crunchy Vietnamese Pork Roll a soggy dripping version.
Not going to sugar coat it, just because the suburb is gentrifying, doesn’t mean it’s already gentrified.
There’s still plenty of dodgy looking characters walking around.
And the suburb itself has numerous unit towers and apartment blocks which is notorious for social housing and/or shady individuals.
Mind you, having lived in shady areas myself – things are never as bad as they are made out to be. Only thing is, I know this, but not every prospective renter or buyer does.
Which means we’ll have to be extra careful with who we choose as tenants (more on that later).
It’s also situated on a “main road” by Perth standards.
Which honestly, for those of us from Sydney or Melbourne… is not.
In fact, when I told MrsFrugalSamurai, she had a mini-freak-out.
Because the usual rule of thumb is to not buy on a main road.
But as she was freaking out, I was laughing out loud.
In my head of course, I don’t dare to laugh out loud at MrsFrugalSamurai in person, no that’s akin to suicide.
WOOSH goes the frypan in my FACE.
Anyway, I was laughing because IF the main road becomes an actual main road by Sydney/Melbourne standards – man, can you imagine the population growth that must have occured? The subsequent pressure on property values? KACHING baby!
But of course, I just sat there, and took her abuse like a MAN.
Long-time readers would know that I prefer older properties as opposed to new – based on the fact that they were built to last.
Unfortunately, there is still maintenance and upkeep to be done.
And regular refreshes of the complex to keep it from looking run down and ragged.
This would mean increased maintenance down the track and also higher strata levies.
Which is why the strata is pretty high I think, around $6-700 per quarter. Although this is about par from what I saw in Perth.
Annoyingly I can’t seem to find a lower priced strata complex – and this is what frustrates me most about buying into complexes.
Luckily most levies are tax-deductible, but still annoy me. Who likes ripping a bandaid every 3 months?
Why not just buy a house TheFrugalSamurai?
I know – I REALLY want to, but the yields on houses in every major city is fairly low (in the decent areas, further out they are better) and I don’t really want to buy further out.
The villa is smaller in comparison to others on the market – sitting at 67 sqm.
Which is why it languished on the market methinks.
The size will limit the future tenant pool – most people prefer space right?
Unfortunately size is something we can’t change so we’re stuck with it, although 67 sqm is still bigger than the unit MrsFrugalSamurai and I are living in right now, so I think there’s still a tenant pool out there.
And speaking of tenants, as I said, there’s already a tenant in there.
Interestingly the previous owner put a tenant only in the first couple weeks of January, as we were in the early stages of negotiation.
Ideally, I try to buy vacant places because that way, we can try and control who we put in the property.
And even though the tenant is paying $260/wk, I’m not the biggest fan because by all accounts, he seems like a MASSIVE hoarder.
You should have seen the inspection reports and building reports, boxes and stuff everywhere.
I’m a little bit concerned with this actually – honestly, I think he is using our place as a storage unit.
And because stuff was packed in, it hampered our building and inspection report, which missed out on a bit of damage to the bathroom – which I only found out afterwards.
So that’s a missed cost there. Who KNOWS what else was missed.
But hey, that’s why you get good property managers and insurance, and fingers crossed any damage can be repaired by strata.
To be honest with you, I’m the type of guy who tries to mitigate as much as I can before plunging our hard earned $$$ into anything.
And I was pretty close to pulling out of the deal based on this tenant – I don’t like to fly blind.
But then I took a step back and thought about it, end of the day, investment is not without risk.
As long as the long-term fundamentals are OK, then why not?
After all, how else was a boy from the suburbs going to live a better life, if you don’t take a chance!
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