- Purchase Price $248k
- Renovation Cost $34k
- Post Renovation Valuation $350K
- Equity Gain $68k
- Before Renovation Rent $360 p/w
- After Renovation Rent $400 p/w
- Yield on cost 7.4%
- Purchase Date – May 2016
I’d learned about adding value and increasing equity and net worth at Sunnynook Road and I had learned the importance of buying a property with some potential to affect yield and giving myself more options at Ellen Ave. After the East Coast Rd project I was starting to understand debt servicing and how cashflow would affect my ability to buy again. I knew at this stage that my next rental purchase needed to cashflow. fully cover its own costs and help to meet some of the shortfall in the rest of my portfolio which I was topping up with salary and wages. The Auckland market had become impossible to buy a well yielding property providing cashflow without a radical approach (like boarding house set ups, rent per rooms, holiday lets etc). I wasn’t keen on these strategies. The natural next step was to start looking outside of my home city of Auckland. At the time many Auckland investors were already buying property in Hamilton and Tauranga and to a lesser extent Whangarei. The ripple at that point had not reached much beyond there. I considered several locations and remembered the criteria of my accountancy firm, which I adopted. These were:
- Sizable population 400k+ and growing
- Diverse employment opportunity
- Infratructure investment happening or planned
- Constrained land and housing supply
Considering all these points, I settled on Lower Hutt in the Wellington region. I had some experience of the area from extended family, Aucklanders had not really started to move on this area, it met my criteria above and could provide good average yields over 7% with cashflowing property.
I Purchased this 3 bedroom duplex unit in May 2016 and it would become my third rental property. I had viewed and made an offer to purchase several months earlier in a multi-offer situation and missed out. Unbeknownst to me the winning offer was conditional and had fallen over about 6 weeks later. I was surprised to hear this, and more surprised that the agent didn’t contact me to gauge my continued interest. The property was withdrawn from the market. Eventually some months later he mentioned the vendor was considering re-listing it for sale and would I be interested. I immediately submitted a new offer and we came to an agreement of sale at $248k.
Under the sale and purchase agreement, I was to keep on the existing tenant who was a personal friend of the vendor. The tenancy was fixed and came to an end in March 2017. On settlement I conducted a thorough pre-settlement inspection, meth screening (which was negative) and signed up the tenant with my newly appointed property manager for the remainder of the fixed term (for more about how I choose a property manager check out Ellen Ave)
The tenant was a single parent with 2 young children, on occasion her adult brother stayed with her and the children had a pet rabbit. I agreed to a maximum of 4 tenants, and agreed on the rabbit to be housed in a hutch outside. Part of the rent was paid directly from WINZ as an accommodation supplement to the tenant’s domestic purposes benefit. She was not employed, rather home caring for the young children, but this also gave me some certainty with rent payments coming in direct from WINZ. The tenant was not my ideal choice, but given she was a personal friend of the vendor, I felt we were able to negotiate a better price on the sale if I kept her friend on as a tenant.
The house itself had been renovated about 5 years prior. It was starting to get tired and was needing some maintenance with chipped paintwork, stained carpets, and general wear and tear. Outside fencing needed replacing and the roof and house needed cleaning and painting. I had decided that I would leave the inside spaces until the tenancy came to an end but that I’d slowly chip away at the exterior jobs while the tenant lived at the house. During this time we re-fenced the property and, in the end, had to replace the roof. It was originally concrete tiles and had become so pitted and pourous that a re-coat was no longer possible. I did persuade the landlord in the neighbouring, adjoining duplex to replace his side too and the new long run iron roof was a big improvement.
About six months into ownership, the property manager started to report some problems with the tenancy. During regular inspections it was noted that the house was particularly dirty, with old meat sitting in the oven, the lawns long and unruly, and laundry strewn across the back lawn. The tenant was issued a 14 day notice to remedy. Later we had to issue another 14 day notice for tampering with smoke alarms and a few weeks after this the rent suddenly stopped coming in. Together with the property managers we discovered the tenant was obliged to attend an appointment with WINZ annually to continue the accommodation supplement and non attendance meant the payments stopped. With some prompting the tenants did eventually attend and have the payments reinstated, but was unable to clear the arrears. We brought a claim in the tenancy tribunal and a payment order was made with an arrangement to clear the debt gradually over the coming couple of months. After these problems I decided together with the PM that we would not continue the tenancy after the fixed term ended in March and we gave the tenant notice.
In the final couple of weeks of her tenancy we obtained quotes to address the maintenance jobs at the house which we would take care of prior to placing a new tenant. These included, full interior paint, new carpet and vinyl, new kitchen appliances, a new bench-top, sink and tap-ware, and new door handles, drapes and light-fittings throughout. These jobs took about 4 or 5 weeks once the property was vacant. The before and after photo’s in this blog post show the condition of the property on purchase and the result some 9 months later after this general tidy up and renovation (with renovation cost noted above).
On the day the tenant moved out I arranged for an exit meth screening test to be done. After the swabs were taken, tradesmen got stuck into the jobs we had planned and the painting in particular had been largely completed by the time the testing company came back to me with the results. To my horror the test result was positive! Remember on settlement the result had been, no meth detected. The positive result measured 0.04 micrograms per 100 cm2. This indicated that meth had been smoked in the property since the settlement date. The reading was low, and well below the Ministry of Health limit for safe occupation at the time of 0.5 microgram per 100cm2. Complicating this was the fact I had now painted the entire property, which meant it would not be possible to clean the meth away as we had likely masked it with the new paint.
There was no requirement for any action on my part with such a low level as there was no evidence that there was any safety issue for occupants of the house at this level. However I still felt it would be an impediment for me to easily tenant the house in future (or to sell it if I chose to), and would potentially affect my insurance cover on the property, particularly if there was a future contamination. This was because I would no longer be able to isolate a contamination to one individual tenancy and this was a requirement of my insurance. My preference was to have the house clean and returned back to no meth detected.
I instructed the property manager to bring a case against the exiting tenant for clean up and damages. They did this and argued my case with all the evidence to back up the claim. The adjudicator didn’t see it our way though unfortunately, which is often the case with tenancy tribunal and ruled in favour of the tenant. He ruled that he was not satisfied the contamination occurred during the tenancy and that the low level in his opinion fell within a margin of error for testing.
Prior to placing a new tenant in this property a new test has been done showing no detectable meth present. Evidence shows that painting can temporarily mask the presence of meth and that over time meth can leech through fresh paintwork. It is likely that the issue has been permanently resolved, with painting and such a low level reading. There is also potential for the property to again test positive in future as time passes and with meth potentially leeching through the paintwork. If this does occur it should not exceed 0.04mcg, any higher reading would indicate a new contamination.
My plan moving forward is to continue to test this property (and all properties in my portfolio) at entry of all new tenants and on exit of a each tenant, particularly before any painting or maintenance takes place. There is provision in all of my tenancy agreements for testing to also happen during tenancies if the property manager identifies any signs or has suspicion that a contamination may have taken place. This testing regime is now an essential part of insurance requirements for rental properties, without the entry and exit testing, cover for a meth contamination is likely to be declined.
The property had been under rented to the previous tenant in a ‘mates rates’ deal with the original vendor and I was looking forward to getting the rent up to market rates. Upon completion of the upgrades and maintenance, I initially hoped to rent it for around $420 per week. When it came time to list I reviewed the local rents to see what was available and what rents were being achieved. It was clear that comparable properties were sitting around $400 per week and so we advertised it at this level, a little lower than I had planned. We had signed up a new tenant within 2 weeks and they moved in within 4 weeks at the new rate.
The new tenant was a couple with a young child relocating to the area for work. They had excellent references and a clear credit history. The PM felt they were the best of the applications received and so they moved in. The couple has since had a new baby and continue to live at the property and be great tenants.
This property met my objectives with yield and cashflow. and I’ve been keen to add another similarly performing property ever since.