House Review – Is It a Good Investment Property?

• 4 bedrooms and a study
• 3 bathrooms
• 2 double carport
• Reverse cycle aircon
• 914 square meter lot
• Sits right on the golf course
• Located in one of the most sought after Alice Springs neighborhoods.
• Beautiful views
• Indoor spa
• Atrium
• Large modern remodeled kitchen
• Big formal dining room
• Big tv and living room
• Big master bedroom en-suite – modern and remodeled.
• Large verandah, with very nice views, very inviting.

And, now for a list of objections, issues, concerns …

• It’s dated.  Probably well over 20 years old and looking the part.  But, kitchen has been remodeled and looks great!
• Not sure I like the spa in the middle of the house.  One of those … “It seemed like a good idea at the time.”
• Not sure I like the atrium.  This could be valuable living space.  Could be a positive in that the living space could be increased easily by closing in this outdoor area in the middle of the house.

And, the asking price is …. ?

 

Click here to see listing.

Is that value?  Not sure.  But, you’d be hard pressed to find a home in Alice Springs with all these features for under $800,000.

I did a quick check and there are at least 5 homes for sale in the golf course area with asking prices over $800,000.  Four of these come in from the mid to high $800s.  One is priced at $820,000.  So, you can see, the $800k mark is not unusual.

There is one home in the golf course area with an asking price of only $695,000.  It’s not located on the golf course; it’s on the other side of the street.  But, the home is elevated and would offer some magnificent views of the golf course.

The sales advert says the home is 364 square meters.  That’s a nice sized home.  This number must include the garage, but even if the garage is huge – say 64 sq meters – the house still offers 300 sq meters of living space.  Compared to the norm, this is a big home.

But, I haven’t walked through this one.  Not sure why the big price difference.  But, if the house is in reasonable condition – and it looks like it is – then is should sell quickly.  Click here to see listing.

Back to the Open House … Does it make a good rental property?

I would say not.  Definitely, an owner occupier home.  The price tag is just too high to make it viable as an investment.  Yes, you could probably get anywhere from $700 to $750 a week in rent, but this would leave you in a serious negative cash flow situation.

Let’s run the numbers to see what the punishment would be …

Let’s start with a few assumptions as follows:

Asking Price:  $819,000
Purchase Price:  $800,000 (You’re a good negotiator!)
Stamp Duty and Buying Costs:  $40,000 (5% is a good rule of thumb)
Interest rate: Say 7.2% variable (you may be able to do better?)
Down payment:  $160,000 (20% of purchase price; remember the banks don’t like to lose!  You take all the risk, they hold the asset as collateral.)

Now let’s crunch some numbers …

Interest Payments on Loan
Annual: ($800,000 – $160,000) X 0.072 = $46,000
Monthly:  $46,000 / 12 = $3,840
Weekly:  $46,000 / 52 = $885

Other Investor Expenses:
Council Rates (est) :  $2,500 /yr (Why do they call it rates?  It’s a tax pure and simple!)
Insurance (est):  $1,000
Utilities (est):  $600 (e.g. power and water)
Maintenance:  ??? (It’s not zero!  But, let’s not worry about it for this preliminary calculation)

Total Other Investor Expenses
Yearly:  Rates + Insurance + Utilities + Maint = $4,100
Monthly:  $341
Weekly:  $79

Now, add them all up and your total expenses come out to:


Annual:  $46,000 + $4,100 = $50,100
Monthly:  $50,100 / 12 = $4,175
Weekly:  $50,100 / 52 = $963

Let’s Assume a Fantastic Rent!

Now, let’s assume you get a fantastic rent; someone’s willing to pay you $800 a week to live there.

Remember, this is not out of the realm of possibility.  How do I know?  I have a data point.

High Rent Data Point!

There an old work colleague of mine who renting a house on the west side of town.  It’s a nice 5 bedroom home with a pool.  It’s new and modern.  It’s in a good neighborhood.  But, it’s not on the golf course.

My former workmate and I were discussing investing and property so I felt somewhat comfortable asking the delicate question, “If you don’t mind me asking, how much are you paying in rent?”

His answer floored me.  It was as if he hit me with a left hook.  I couldn’t believe it and almost wanted to ask him for proof.

My former workmate looked me square in the eye and said with a sheepdog expression, “Nine hundred a week.”

I was speechless!  I expected a high number, but nothing that high.  When I finally got my tongue back, I asked him, “When are you moving out?”

So, there’s my data point.

Let’s go with a high number; $800 a week!

My $800 a week figure is achievable.  But, I wouldn’t count on it.  You would probably have to settle for something lower to get it rented straight away.  But, let’s run with the $800 a week number for now.

Cash flow.
Weekly:  $800 (rent) – $963 (expenses) =  -$163 (negative)
Monthly:  -163 X 52 / 12 = -$706 (negative)
Yearly:  -163 X 52 = -$8,476 (negative)

Now, you call your accountant and see how depreciation and your tax bracket make it all work.

But, the real numbers show a holding cost of about $8,5000 per year.  And that doesn’t include maintenance costs!  And, remember, you’ve lost the use of your down payment (deposit) money.  A whopping $160,000!  Not chump change (at least not to me!)

An exersize for the reader … How do the numbers look if you have to settle for less than $800 a week?

Now here’s something to think about … what if you have to rent it for only $700 a week?  What do the numbers look like then?  Not pretty; even with a high powered accountant eking out every possible tax break.

Negative numbers have never really looked very attractive to me.  Especially, when it comes to property investing.

Is it a good investment property?

I’d give this property a thumbs down as an investment.

Do you see some issues with my calculations?  Do you arrive at a different conclusion?  Let me know.