East Coast Rd (part one)

  • Purchase Price $1065k
  • Renovation Cost $120k
  • Post Renovation Valuation $1310K
  • Equity Gain $125k
  • Before Renovation Rent $0 p/w (the house was uninhabitable)
  • After Renovation Rent $580 p/w
  • Yield on cost 2.5%
  • Purchase Date – May 2016

After I finished the project at Ellen Ave I started to look for something new to work on. I’d learned that the equity gains were good when buying property I could renovate to add value and had the added benefit of improved rents. If I held the property rather than on-sold it, I would avoid the selling agents fees and IRD tax payments to retain those equity gains to add to my own net worth. It also meant, I could refinance some of my initial funds out of the deal to use in the next one.

The other big learning in the Ellen Ave deal though was around yield. The Auckland market was in full growth mode and had been increasing in value by as much as 25% per year during this time. Rents were not increasing at that rate. Not even close, if anything they had remained flat for several years. The average Auckland yield was getting pretty low at around 3% (interest rates were also at an all time low in the low 4% range). These kind of yields didn’t make much sense as a long term buy and hold investment, but investors were still buying up everything in sight because of the phenomenal capital gains on offer. I knew that I needed to consider how I might improve yield with some creative thinking for the next purchase and so I started looking for a property which had some development potential.

The Auckland Unitary plan had been released in its draft form and very many Auckland properties were in line for zoning changes which allowed for increased density. My plan was to acquire a property which was zoned for more intensive development and a reduction in minimum site size. This would give me several options:

  • subdivide and sell the section
  • subdivide and build a new rental (2 for the price of one)
  • demolish and build 3 or 4 terraced houses for rental
  • build a minor dwelling for rental

Either way I had learned from the Ellen Ave deal that lots of options were good so that I could improve and maximise the return from one site, create new rental streams, and potentially accelerate capital gains just because the property and the site had so much more potential. These were some of the messages my property savvy accountants had been hammering for the past few months and they made a lot of sense to me.

I first came across this property about 9 months prior to purchase when I had made an offer which was declined. (from memory that offer was $980K) A real estate agent who I had worked with a lot mentioned that he knew the owner and thought I might be successful if I tried again. I ended up paying a fair bit more, and after much back and forward agreed to purchase for $1065k. Now in hindsight, I had been looking for a while, had many offers rejected and had missed out on lots of properties, I was starting to get despondent and feeling pretty desperate to secure something and start on a new project. This is never a good head space to be in as an investor, you need to remove all emotion from a purchase and stick to the numbers. Looking back now I think I paid more than I should have for this house because of the way I was feeling. I make a point of remembering this feeling and reminding myself to stick to business when I start to feel like I’m never going to find the next project.

The property appealed to me because it is zoned mixed use urban of 620sqm allowing for significant further development. The house itself was uninhabitable on purchase but the bones of a basic 3 bedroom hardiplank clad dwelling with basement garage struck me as easily rent-able when remedied. The property sat in an unusual and highly desirable triple school zone with 3 prestigious and sought after high schools as well as very good primary zoning. The existing house would allow for immediate addition of a second dwelling at the rear without need to disturb the set up of the existing house or potential tenants.

The magnitude of the renovation task ahead though was a little daunting. The house was not fit for occupation on settlement and had been vacant for at least 12 months prior to my purchase. There were roof tiles missing and water leaking into the dwelling, several patches of rotten flooring where you could look through to the basement below, hot water cylinder removed, ceilings falling in from water damage, windows chained shut, no guttering or downpipes on the house, a second level ranch slider opened out to a missing deck and a 6 foot drop and some charming graffiti on the interior walls. There was a huge amount of work to do at significant cost! The biggest project for me to date.

One of the alarm bells that rang for me at a house as derelict as this one was the potential for a methamphetamine contamination. In addition to the very poor state of the place, there were also unusual surveillance cameras set up watching the driveway and the inside of the garage. Something fishy had been going on here…As part of my pre-purchase due diligence I had access to a test provided to me by a party previously interested in purchasing the property. She had decided to pull out of her contract on the property as the work was too much for her, but did have a meth test done and agreed to share the report with me for half of the testing fee. The test was clear. Whatever strange activity had been going on at the property, it was not meth. (See my post Naenae Rd part one and Naenae Rd part two, for more on meth contamination)

My amazing team of tradesmen lead by a project manager who I had by this time used to renovate 3 houses set to work and completed the necessary repairs and cosmetic upgrades to transform this house into a livable modern home. We also needed to replace the broken garage tiltadoor and we insulated the property underfloor and in ceiling to meet the new legislation coming in for insulated rental properties. There were also new fences built.

People often question my decision to use a project manager, and wonder if I could trim the renovation budget by managing the work myself. Initially I used a project manager with a good cohort of sub trades on his books because I was inexperienced and needed the guidance. My plan was to shadow the project manager, learn as much as I could and transition to self management as I gained confidence. I’ve kept using this project manager because; He has experience with all sorts of aspects of a renovation I do not and each new property throws up new challenges. His sub trades are highly motivated to drop everything to work on his jobs because he provides them so much work. Because of this volume he gets great rates from the tradies. This saves me time on a job and keeps my holding costs to a minimum. I have found when quoting up comparisons, I am unable to get the job done much cheaper. I can avoid difficult conversations and negotiations with tradesmen when things don’t go exactly to plan and I have one point of contact for all aspects of the project. If I ever get to a stage where I am engaged in more than one renovation at a time, having a project manager in place would assist me in scaling things up.  Plus we have a great rapport and I like working with him. I have started to do some parts of a job outside of this contract but for the most part continue to use a project manager.

We completed this house in around 10 weeks and listed it in August ready for rental with my property manager. Initially we listed it for $600p/w but in the middle of winter with no takers after 3 weeks dropped it to $580 and had a couple of applications soon after. I had anticipated a family with older children seeking the favourable school zoning and we may get tenants like that in future at this property. In August though, few families are moving into new homes, and are generally settled in for the duration of the school year. We accepted an application from a professional new migrant couple from the UK, with their adult son. They were unable to provide references for previous rentals in NZ as they were new arrivals, but the PM obtained references from the employer and proof of funds to cover rent payments while they established themselves.

I purchased this property primarily for its potential, specifically as I wanted to improve yield somehow. The yield as a single dwelling after renovation was a disappointing 2.5% and I was topping up the mortgage payments each month. I needed more income from this property so it could support its own costs. After investigating both subdivision and minor dwelling options, I settled on a plan to build a minor dwelling at the rear of the site to give me an additional rental income. I’m now in the midst of that build project, read about that in East Coast Rd (part two) for more on improving the yield and cashflow of this property.

 

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