Reflection:
But, I remember a time when it wasn’t so hot. I remember when real estate around the rest of Australia was taking off and yet Darwin seemed to be in a funk. And it wasn’t that long ago. It was during this lull in the Darwin market that we headed north and purchased a rental property. When it seemed nobody wanted to buy in the top end; that’s when we bought.
Setting:
We’d been going up to Darwin for the previous two years. Taking a bit of a holiday each time and I was of course looking for a good rental property. But, I couldn’t get myself to buy anything. The numbers didn’t seem to work. The prices seemed a very high for my taste and the rental return was not up to scratch.
Finally, in mid 2002, we took another trip up north and this time we bought. The numbers still didn’t look all that great but I could tell it was a good time to buy. I’ll discuss why in the article.
We didn’t buy in Darwin but in the satellite city of Palmerston. In a new section called Rosebery.
I remember feeling a bit unnerved about the purchase. This was the most we’d every paid for a house, and yet it wasn’t as nice or as big as some of our other rental properties. I didn’t organize the finance properly and therefore paid a big price for this mistake. I found out my mistake when I went to sign the finance papers. It cost me over $5,000! I’ll talk about that in the article too.
But, the story has a happy ending. This has been a remarkable investment property; a perfect example of how residential real estate can be so forgiving. Mistakes are generally forgiven if you buy the right property in the right location at the right price and hang on to it for the right length of time. It turns out we ticked all the boxes and the property has delivered over and above expectations!
Where’s the agent?
I drove up to the open house. The “For Sale” sign was prominently displayed. I checked the newspaper for the address. Yup, right address. I had the right house. I then checked my watch; right time. And, it was Saturday so I had the right day. But, I was the only one there. Door locked and no agent. I waited.
While waiting I checked out the house. I walked around the yard, peeked into the windows, checked out the neighbors and the neighborhood. It all looked promising. Good looking property in a nice neighborhood. It had potential. I was looking forward to seeing the inside.
I never saw the inside. After about 20 minutes of waiting, I decided to proceed to the next open house on my list.
Good time to buy?
I’ve never forgotten that open inspection. It’s cemented in my mind. It was probably the biggest factor in my decision to finally buy in the Darwin area. My thought process went something like this, “How bad is the market, when even the real estate agent doesn’t show up for the open house?” I’ve heard of open houses where no customers show up. That’s a bad market. But, when the agent doesn’t show up? What kind of market is that? Maybe the kind where you buy?
I traveled to other open houses that fateful Saturday and the story was similar. Not much foot traffic; seemed there was little interest in buying. You could sense in the way the agents talked and they way they carried themselves. The market felt soft. I felt if we were to get a property in Darwin, now was the time.
The prices still appeared a bit high to me, but I’d wanted to get something happening in Darwin for a while now and I was determined to follow through. This can be a dangerous strategy but it can also work well as it forces action. I’ve found over the years that action is better than no-action; even if just for the painful learning experience. But, it’s through painful learning that I’ve been able to make better decisions later on. If I continued on a path of inaction I would guarantee myself a useless outcome called – NO RESULTS. I was determined to get a rental property on this trip. But, it wasn’t a sure thing. I had some help from the agent. My hat is off to this agent as she helped me arrive at the correct buying decision. If it was another agent, we may not have purchased.
After looking at properties in Darwin and Palmerston, I decided we’d concentrate on the Palmerston area. The homes were generally newer and a lot more reasonably priced. And, Palmerston seemed like an up and coming area. It had all its own amenities and a sense of community separate from Darwin. And the 20 km separation meant that folks living in Palmerston could easily commute to Darwin for work.
Pick a house
After looking at a dozen or so properties it was time to decide. I really wanted a four bedroom home but none of them stuck out as exceptional and they had a significantly higher price tag than the three bedroom homes. I wanted to buy in Fairway Waters for several reasons. First, the homes seemed somewhat nicer. The neighborhoods seemed to have more trees and bushes. It was new but not so new that you hear the builders hammer around every corner. It just seemed more mature, organized and established. Next, it was the closest neighborhood to Darwin. Folks living here would have the shortest commute to Darwin. And, they’d still have as good or better access to Palmerston as any other neighborhood. But, these very features made the prices in Fairway Waters higher than other areas of Palmerston.
So, we looked elsewhere.
I kept coming back to this three bedroom home in a new area called Rosebery. At the time, Rosebery was mostly sand. A few houses; lots of sand. But, it seemed very nice. It was only a few years old but looked brand new. It had potential. It had pride.
The house was very nice. It had all the trimmings folks are looking for in a home. Open kitchen, dining, and living areas. Three spacious bedrooms; with ensuite and walk-in closet in the master bedroom. A nice spacious patio under the main house roof and a nice big carport out front. Lovely landscaping with green lawn to front and back and a much needed and desired garden shed out back. The overall presentation was immaculate. My property manager once described the house as “yummy.” I believe that pretty much sums it up. The place was “yummy.”
Do the numbers stack up?
But, there was the sticky issue of price. They were asking $225,000. And, they were telling me it would rent anywhere from $250 to $270 per week. Interest rates were fairly low, but I could tell from these numbers that I’d be out of pocket each month on this deal. But, if I could get it for less, then maybe it would be manageable.
What does Robert Say?
I’d been reading Robert Kiyosaki’s books and I taken on board his mantra that an investment should make money from day one. None of this “negative gearing” stuff. Negative gearing is where you’re taking a loss; more money going out than coming in. The negative gearing strategy relies on the hope of capital gains later on down the track. Negative gearing says, “You make your money when you sell.”
Robert says this is an unwise strategy because who can guarantee capital gains? He calls this speculating and recommends against it. He advises you should only buy when the investment makes money from day one; any capital gain is a nice surprise bonus. Robert has a different philosophy – you make your money when you buy – not when you sell. If you buy well, you’ll do well. But, if you pay too much, then you may set yourself up for trouble. You may get yourself in a situation where you must sell because you can’t service the debt. When you must sell, you leave yourself open to losing money – lots of money. He says your investment strategy should not hinge on hoping that property values increase every year.
I agree with him whole heartedly. I’ll bet a lot of people in the United States wish they’d paid attention to Robert’s advice. Especially, after the global financial crisis (GFC) where a lot of lending appears to have been based on the belief that real estate prices would always rise. What happens if they don’t? Thanks to the GFC, now we know. Not exciting.
Decision Time
So, I faced a bit of a dilemma. Should I get this property even though, initially, it would be negatively geared? Or, should I skip it and keep looking for something at least cash-flow neutral?
I was already well versed in negative gearing. I had several properties that were not pulling their weight every month. The negative cash flow was not very much but to continue the trend could be financially disastrous. It’s like a leaky boat. A few small holes may be alright; you can bail the water out faster than what’s coming in. But, if you get too many leaks – or you get a big one that’s gushing – you may find yourself and your boat at the bottom of the pond. I had visions of ending up at the bottom of the “financial pond.”
This property would not make money from day one and therefore I was hesitant to buy. So, we packed up the family and the car and headed back for Alice Springs. I felt pretty bad about not getting a property. This seemed to be the right time to buy and I wasn’t buying.
Have you heard of “buyer’s remorse?” That’s the sinking feeling you can get after making a purchase; normally a large purchase. The doubts start creeping in. You start second guessing yourself. “Why did I buy? I never should have … what a bad decision.” Well, I was having the opposite. I was having “non-buyers remorse”. “Why didn’t I buy? When will conditions be this good in Darwin again? Have I missed a great opportunity? If I don’t buy now, then when?”
This isn’t a fire sale!
“Hey, Daddy! Phone’s for you.” My daughter exclaimed. I was in the backyard and she handed the phone over to me.
“Hi, this is Dave.” I stated calmly.
“Hello Dave, this in Gennie (pronounced Jenny) from Raine and Horne in Palmerston. I’m calling to ask about that house in Rosebery. It’s a beauty isn’t it?”
Gennie’s a pro. She followed up. She knew I was keen to buy. Now, it was a matter of getting me over the line. I resisted at first.
“It is. And, I’d really like to buy it but the numbers don’t add up. The rent doesn’t justify the price.” I explained my main objection.
Gennie came back quickly. “The price is negotiable. Why don’t you make an offer?”
I thought to myself, “She’s good. She’s not getting off the phone until I make an offer.” I liked her style. I was not offended by her approach at all. I was looking for a reason to buy.
I tried to stall for time, “We’ve been going up to Darwin for the past two years looking to buy and haven’t done it yet. I would like to get something in Darwin.”
“What are you waiting for? Now, is the time to buy. I just picked up a 3 bedroom cottage and it’s bringing in a good rent. I wish I could buy a lot more. If you don’t buy now, when are you going to?” She let me know how she felt. Course I realized she’s working for the seller and her job is to find a buyer. And she’s looking for the highest price possible.
I thought for a moment. The asking price was $225,000. If I can get the house for about the $215,000 mark it may be worth it. At that price, I could maybe get to positive cash flow after the first rent rise; in about a year. I wanted the house. I let my emotions take over.
“So, you’re open to offers?” I countered.
“Sure.” Gennie replied.
“Ok, what if I come in with $210,000?” I wanted to test the waters. Hey, what if the owners accepted? I just got 10 grand off my price. It’s worth a try.
Gennie never hesitated. She shot right back. She was in control. She wasn’t going to let the house go for less than the number she had in her mind. Here’s what she said …
“THIS ISN’T A FIRE SALE!”
Believe it or not, I liked her response. It told me I was too low. I would rather guess on the low side than the high side.
“Well, you asked me to make an offer, so I did. I don’t need the property. I’ve got plenty right now. The numbers have to work.” I threw it back to her. Again, stalling for time and hoping she’d give me a hint on what price would get it. My patience paid off.
“If you came up another $5,000, I’d take it to the owners.” She told me what I wanted to hear.
“So, if I offer $215,000, you’d present that to the owners.” I stated the obvious. I wanted to sound a bit detached and merely approaching this as a business deal. But, inside I was emotional. I wanted the house and I was willing to put up with the negative cash flow at first. I don’t recommend negative cash flow to anyone, but that’s what I was thinking at the time. You see, I’m not a super savvy investor like the ones you read about in the “get rich” section of the book stores. Sorry to disappoint you!
“Is that your offer?” Gennie wanted to get off the phone. Let’s do this thing.
“Ok, put in an offer for $215,000.” I told her.
The owners accepted and we signed a contract to buy at $215,000.
Unpleasant Financial Surprise
“What’s this amount for $5,048?” I asked the finance officer.
“That’s for mortgage insurance.” She replied calmly.
“How come?” I sort of snapped back with a tone suggesting I was unpleasantly surprised to see this on the bill.
“When you don’t put 20% down, we charge mortgage insurance.” She explained quite matter of factly.
I told you I wasn’t in the running for top investor! That’s a five grand fee I could have easily avoided if I was more savvy. I remember being disillusioned at seeing this on the bill. Why didn’t the financial officer tell me there’d be a fee if I didn’t put down a 20% deposit? Why didn’t they present me with options? Either put down 20% or pay the $5,000 mortgage insurance. But, they just pressed on with the application, apparently assuming I wanted the largest loan I could get. And, assuming the mortgage insurance wouldn’t be an issue.
I was surprised. I shouldn’t have been. I learned a lesson.
I needed to develop a relationship with my lender. A relationship where I get the best advise. Where options are presented and discussed. In the end we may have opted to go with the mortgage insurance option, but it wasn’t discussed, it was just presented. I didn’t feel comfortable knocking the forms back as I didn’t want to jeopardize the deal. I felt the deal was bigger than the mortgage insurance fee. Looking back, I’m sure glad I didn’t blow this out of proportion and nix the deal.
But, I was miffed at this unnecessary expense. I felt like I paid an extra $5,000 for the house. To this day I feel like I paid, $220,000 instead of my negotiated $215,000. It’s a bit embarrassing. But, that’s what happened.
Off to a Rough Start
The house was happily rented almost straight away for $250 per week. This was $20 a week less than what we were told it would fetch. Off to a less than stellar start. My numbers were looking worse than projected. Paid $5,000 more than what I needed to (mortgage insurance) and had it rented for $20 a week less than expected.
My positive cash flow projections were also wrong. It took about 3 years to achieve positive cash flow. We had some expenses in those initial years that held us back a bit. For instance, installing an air conditioning unit to the third bedroom. That set us back about $3,000 which will put a cramp in your cash flow. But, for 2005 and beyond, the property has been a positive cash flow money maker for us.
Happy Ending
Despite all this, I’m very glad we got this property. Here’s why:
• We had the house valued this year to establish a line of credit. Bank valuation came in at $410,000. We have a $328,000 line of credit with this property.
• The house is currently rented for $420 per week. When the lease comes up in Feb 2010, the rent will move to $500 to $530 per week!
• The other day I checked the median house value in Rosebery. I couldn’t believe the number – $560,000!
• It has a very strong positive monthly cash flow.
Forgiving Nature
I like this story because it illustrates the forgiving nature of a solid real estate investment. Even if you mess up at the beginning when buying like I did – paid too much, rent too low, mortgage insurance fee – it can still turn out to be a great investment in the long run.
Let’s run a little twist on this. Let’s say I outsmarted myself and didn’t buy this property. I was so smart, I didn’t buy any properties; none of them met my criteria for buying. And, let’s say today, I didn’t have this property or any other properties – would I be better off?
Bottom line. I’m so glad I went out and bought properties and made mistakes. It beats the heck out of making no mistakes and having no properties!