“I was too weak to defend, so I attacked!” General Robert E. Lee talking about the battle of Chancellorsville.
Feb/Mar 2009. We were already under contract to buy one house. The Chinchilla deal fell through. Yet, the market conditions were still favorable; very favorable. I wanted to get another property before everyone started realizing it’s a good time to buy. But, I was looking for something in the lower price range; say, $300,000 to $400,000. Only trouble, most of the buyers seemed to be looking in this range. And with the first homeowner’s grant in full swing, houses in this price range were getting snapped up the quickest.
When a great property came on the radar, I balked because it was outside my target price range. But, with Marieta’s encouragement, I looked at it closer and the numbers stacked up. It was a keeper.
To buy or not to buy?
“That’s a really nice house. We should get it.” my wife Marieta said emphatically.
Yes, I wanted to get it but I was unsure. We just entered a contract to buy a property. It hadn’t even settled yet and we’re looking at another one. It was a bit too fast for me. Also, we still had the bad business investment hanging over our head and I was still in a job I hated. Would another house mean more years at the awful job?
“I really think we should hold off for a while dear.” I replied half heartedly. I didn’t believe what I was saying and Marieta could sense it. If the deal makes sense, why not get the house. But, I didn’t want to look at it any further. I just thought the price was a bit too high and we didn’t need another rental property because we already had enough. Same old excuses. But, Marieta wasn’t going to hear it.
“That’s a good house at a good price. We’ll be sorry if we don’t get it.” She persisted.
I could sense she really wanted the house so I thought I’d throw in some logic to shut the deal down.
Numbers Stack Up
“Ok, I’ll go ahead and run the numbers and see what it looks like.” I replied with an air of authority. I was going to show her the deal didn’t make sense. For some reason I thought the price was too high and it wouldn’t work. I’m glad I ran the numbers.
I came back out of the office room with a smile on my face. “You’re right dear. We should get it. The numbers say we should get it. All we have to do is get $525 per week and it pays for itself. And that’s at the asking price. If we get it for less, then our rent can be less. But, for that property, $525 a week should be a snap.”
“Call the agent and make an offer.” Marieta replied. Marieta can be very “let’s do it now” oriented. Which is good. But, I usually take a bit of time to think about what I’m going to say and how I’m going to approach the deal. I’m sure this has cost me a few good deals over the years but, again, real estate has been very forgiving and I always believe another good deal is right around the corner.
What Makes it a Good Deal?
Let me backtrack and discuss with you the house and the deal. First the house. It’s gorgeous. It sat on the market for what seemed like ages. I kept seeing it in the paper week after week. It looked nice. Two story brick on an elevated block. Nice big 2 car carport with gradual sloping driveway. Nice veranda around the front and side of the house. I’d look at the advert each week and wonder why the property didn’t sell. Must be in a bad neighborhood, I thought to myself.
One day I decided to take a drive past this house that wouldn’t sell. After the drive past, my interest went way up. The house was located in one of the best neighborhoods in town. All very nice homes with great presentations; neat and tidy yards; a proud neighborhood. I got home and called the agent for a viewing.
After the viewing my interest skyrocketed. It was immaculate. Very solid brick construction. Four large bedrooms upstairs with ensuite of the main bedroom and a separate family bathroom. Downstairs was a large living room, nice modern kitchen, lounge room and laundry. The carport was expansive; two cars plus. The yard was nice and tidy with a garden shed and clothes line. The house was a winner.
I then asked Marieta to come see the house. She agreed and we went back for another look. As mentioned above, she liked the house very much and was keen to buy.
Now the deal. Asking price $488,000. For our market here in Alice Springs, that was a very reasonable asking price. Interest rates had drop to historical lows. That’s why I was out looking. I could borrow money at around 5%; unheard of. Just a few months ago I was paying close to 9%! So, at 5% interest I worked out that we only needed to get about $525 per week in rent to make this deal work. For a house like this – with all the features and the great neighborhood – $525 a week should be easy. But, it still represents a risk. We couldn’t guarantee this rent but we knew the market well enough to know the risk was minimal.
I called the agent.
Make an Offer
“Marieta and I like the house very much. We feel it would make a great rental property.” I explained to the realtor.
“Oh, it would be excellent and would pull in great rent.” The realtor replied.
“How come the property has been sitting on the market for so long?” I asked.
“Not sure. The owner hasn’t let me do any open inspections. But, that’s going to change. We’re going to start up a whole new sales strategy starting this week with heavy advertising and open inspections. But, if you make an offer and it’s accepted we won’t have to go through all that.” She was working the sale. And it was working.
I didn’t want the property go to open inspections. People would see what I saw – excellent value for money. Like I mentioned, even at the asking price, the property stacked up. So, I wanted it. Now, it was just a matter of finding out how low the seller would go. But, if I played around too long it may go to another buyer. Time to think.
“I don’t really need any more investment properties. We’ve got enough.” I love to use that line mostly because – it’s true! And it gives me the psychological boost I need sometimes when negotiating. I really don’t need the property. But, if we can work a deal, I may buy it.
“But, we’d like to have it in our portfolio if we can reach the right deal. Is the owner open to offers?” That’s another question I like because I’m essentially asking permission to make a low offer.
“Sure, they’re open to offers but I don’t think they’ll take much less than the asking price.” She replied confidently.
“I’ve run some numbers and come up with an offer that we feel confident about going forward with. If we could get the property for $470,000 it would work. Would you put that offer to the owner?”
“I will but I don’t think it will fly. I’ll call you later to let you know.”
Then we waited.
The phone rang and I got my answer.
“The owner won’t take anything less than $480,000. If you sign a contract for $480,000 he’ll take it off the market and you can have it.” She let me know the seller’s bottom line.
Just what I was looking for. The deal worked at $488,000. Just by putting in an offer, the owner took $8000 off the price tag. I knew we were going to get it but that’s not what I said.
“Ok, I understand. I’m going to have to rerun the numbers and discuss with Marieta and then get back with you. How about if I call you later today?” I replied.
Marieta and I talked about it some more and decided without a doubt we would pay the $480,000 price tag. The only risk was getting a tenant at $525 per week or better. This was the cutoff rent; breakeven rent; the rent where the property paid for itself. But, we both knew this risk was minimal. And, even at a lower rent, the holding costs would be negligible. The risk was extremely low and the payoffs potentially very high. Especially, in this tightening rental market. My fear was the rents were going to skyrocket even further and we wouldn’t have any property to rent! I wanted to be a part of this boom.
GFC? What GFC?
Luckily, it seemed there weren’t too many other people out there with the same fear as me. They seemed to have other fears. As I read the paper, listened to the news and talked to people, the dominating fear was the global financial crisis or GFC as it was now called. I wasn’t quite sure why people had this fear. After all, none of them could show me this GFC thing. Where is it? How is it affecting you? What are you doing about it? What can you do about it? Seemed the only thing these worriers could do about the all consuming GFC was one thing and one thing only – WORRY!
I didn’t want any part of it. I don’t need a GFC. I can quite readily create my own localized GFC without anyone’s help. I made bad business decisions and I paid for them and am still paying for them. So what? I was marching on. I had to fix my own mess. And if I saw an opportunity to do it then why would I hold back because everyone else says, “Don’t you know there’s a GFC going on? What are you doing investing at a time like this?”
All I could see was the localized opportunity. Let me get this straight … I can buy a nice solid built home in a nice neighborhood and have people clamoring to rent it at a price that will pay all my expenses. The rent will cover, mortgage interest, management fees, taxes, insurance, maintenance and repairs. Then, if history is any indicator, I can look forward to some spectacular capital growth in the asset. Historically, it’s about 10% per year.
Capital Growth
A few words about capital growth. My focus is on the potential for capital growth. Is the property in a nice neighborhood? Is the property solidly built? Does it have the features most people are looking for; large rooms, aircon, carport or garage? Is it close to amenities like shopping, schools, recreation areas? Is the cost of land in the area increasing? If the answer to these questions is a resounding “Yes!”, then you probably have excellent potential for capital growth.
But, I always keep this simple – but elusive – truth in mind; there is no guarantee of capital growth! Look at all the capital growth they’re not getting in the USA right now!
Why Would I Turn Down This Deal?
At the time of this purchase, I’d been investing in residential real estate for over 15 years. In all that time I had dreams of finding property that would pay for itself from day one. I’d already been down the path of investing in property that cost me money every month at least for the first several years. Now these properties are all positive cash flow but it had taken a while to get there.
Add a House to the Portfolio
I called the realtor, “Ok, let’s do the deal for $480,000.”
A month later the property settled and we owned it.
A week later we signed a rental agreement with the police force; one year lease for $600 a week.
A great deal just got better.
We didn’t stop there … story continues; read part 6.