- Purchase Price $560k
- Renovation Cost $65k
- Post Renovation Valuation $715K
- Equity Gain $90k
- Before Renovation Rent $390 p/w
- After Renovation Rent $470 p/w
- Yield on Cost 3.9%
- Purchase Date – December 2015
After finishing up at Sunnynook Road, I had learned a valuable lesson in the cost of selling properties. After that project I calculated that I had lost $60-$70k in profits to my real estate agent in fees and to the tax man in gst and income tax payments. I knew I could afford to keep the properties and rent them out, this had after all been the original intent to start investing – to grow a passive income through rentals.
When I started looking to buy my next project I kept this lost profit firmly in mind and began to look for a renovation project to hold. I hadn’t yet really thought too much about yields nor had I made the important connection between cashflow and debt dervicing limits. I did not really understand how reducing serviceability would eventually limit my ability to borrow with the bank. In time this property helped me learn that lesson.
The initial appeal with Ellen Ave was that I could undertake a renovation and increase the value of the investment and therefore my equity position, improving our net worth and theoretically then be able to refinance out of the property a large chink of my capital for the next deal. So I was looking for a renovation project where I could add value, which would also be an attractive rental proposition.
I bought this property in December 2015. The RBNZ had 2 months earlier imposed a 30% deposit restriction on investors in the Auckland market and that restriction coupled with Christmas fast approaching meant there were few bidders in the auction rooms. Bidding against one other buyer the property was passed in and I secured it right after auction with an unconditional cash offer of $560K and settlement in the new year. The contract also allowed me to get into the unit with my team to scope and quote the renovation works prior to settlement.
3/18 Ellen Ave was a brick and tile 2 bedroom unit of 60 square meters, the middle unit in a block of four on a unit title. The vendors were the executors of a deceased estate. The unit was dated, dirty, and damp in need of a complete overhaul, but it had good low maintenance bones and was walking distance to public transport, shops and a university. It also had a lock up garage and a large fully fenced exclusive use garden. My initial thoughts were that the ideal tenants would be an older couple or university student flatmates.
My plan for the property was to modernise with low maintenance durable materials. Prior to settlement we had access for tradespeople to come through the property and quote the work. so we had a full scope of works and fixed price quotes in place and trades ready to start work on day 1 after settlement. This helped me minimise down time and holding costs in the initial period where no rent would be coming in.
Aside from the cosmetic updates you see in the photos above we also updated the hot water cylinder to a mains pressure system and relocated it under the house to give more storage in the kitchen. The gardens were cleared of a decades overgrowth – the garden had become too much for the elderly owner and I wanted lower maintenance for future tenants. 10 Year photoelectric smoke alarms were put in and insulation was also installed underfloor and in the ceiling cavity. We also needed to have the roof tiles professionally re-coated as they had not been maintained for some time. This caused some unrest with the neighbouring units who wanted to clean and maintain the roof themselves to save on cost. However it had become so porous that waiting any longer without attention and we would be running the risk of needing a full replacement. During the year after my renovation all three of the neighbours came to also clean and re-coat as I had done.
The works took about 6 weeks all up and on completion I scheduled a registered valuation and a chattels valuation. The registered valuation came in at $715k and I was very pleased with my $90k in equity gains. The chattels valuation was undertaken for the purpose of chattels depreciation and would be used by my accountant to optimise my end of year accounts.
This flat would become my first rental property but I already knew I wanted to appoint a professional property management company and so as soon as I took possession of the unit I set about interviewing property managers. I knew my mortgage broker also had a property management division and had been referred to another management company through my membership with APIA. I arranged to meet both at the un-renovated property soon after settlement. I had prepared some casual questions to ask these managers including the following:
- How do you vet tenants?
- How do you advertise for tenants and manage viewings at a property?
- How do inspections and reporting these to owners work with your company?
- What happens when a tenant defaults on rent?
- How often do you attend tribunal?
- How many properties would one full time manager be dealing with?
- Do you have meth testing clauses in your tenancy agreements?
- what are your fees, and do you discount fees for owners with multiple properties?
- What rent would this unit fetch today and then after renovation?
- what do you recommend I include in the renovation to get the best rent?
- Will it be you who manages this property or will another of your team do the management?
In addition to our conversation, I wanted to get a feel for who I would work well with. For me relationships are everything and I wanted to appoint someone I felt a connection with who I felt would be warm and firm but also fair with tenants, I wanted someone who would be respectful of my tenants and treat them well.
We appointed Anne, who met all of my requirements and who I felt I could work well with. She seemed kind but also seemed to be the type not to take any nonsense and be very effective. She now manages 3 of my rentals and so far shes been amazing!
We brought the property to the rental market in March, a time when the mad rush of new year tenancy changes is usually complete and schools and universities have been back in class for a few weeks. Initially we listed the unit at $500 p/w, but with less tenants looking we spent 2 weeks with no takers, so rather than let it sit empty dropped the asking rent to $470 p/w. At that price we had our first tenant lined up within a week.
I was surprised that the tenant we signed up was neither an older couple nor a student from the nearby university, rather a young immigrant family from the middle east with a toddler and a baby. Initially I was worried 4 tenants might be too many for the small unit, but after 3 weeks of vacancy and with all other checks coming in well, we decided to proceed with the family. They still live in the unit now 18 months later with a slightly higher rent of $490 p/w and have been careful and quiet tenants.
We settled on a 6 month fixed tenancy. I like fixed term as I can better control the timing for re-letting should a tenant not renew. 6 months as an initial period is long enough to test a tenant out and uncover any issues but not so long that if its not a good fit you can end a tenancy fairly swiftly. After the initial 6 months its now my preference if the tenants are working out well to re-fix for additional 12 month terms with a specified end date around mid January. This is usually the best time of year to secure a new tenant while achieving the best rent.
While the unit is now well set up for tenancy and is achieving about $40 p/w above the average for its type and location, the property is still negatively geared and requires a top up of about $500 – $600 per month from my funds. There is no more I can do to maximise rent at the property and all I can do to improve cashflow is to pay down debt and wait for rents to rise. While it is a good house it is also my lowest performing investment. These points have helped me to really consider the return and potential upside for future rental property purchases in addition to the equity potential on offer.