- Purchase Price $308k
- Renovation Cost $78k
- Post Renovation Valuation $390K
- Equity Gain $4k
- Before Renovation Rent $330 p/w
- After Renovation Rent $430 p/w
- Yield on cost 5.8%
- Purchase Date – June 2017
This little 3 bedroom duplex unit came on the market for sale about 12 months after I had purchased its neighbour. The 2 units share a party wall and are adjoining one another. I had let the elderly owner know months prior that I would be interested in purchasing the unit if he ever wanted to sell it. He emailed me after we had been in contact about replacing our shared boundary fence. I was disappointed he did not seem interested in receiving an offer directly from me, preferring to direct me to his chosen real estate agent. He was elderly and frail and perhaps he thought he would get a better offer if the property was offered on the open market.
The unit was marketed for sale by closed tender and I viewed it on a trip down to finalise some maintenance and renovation work on my neighbouring unit. The house was in very poor condition with 1950’s original decor, kitchen and bathroom, and a lot of immediately obvious deferred maintenance. Rotten window frames in places, sub standard electrical fittings and wiring, a fireplace with no chimney, worn dirty carpets, torn shabby vinyl. There was asbestos stipple ceiling treatments in 2 rooms and the sitting tenant was burning a strong smelling incense at the viewing. So strong that the agent waited outside as it was pretty overpowering. It was difficult to view the garage as it was stacked full of a stored house-lot of furniture. After viewing I arranged for a meth contamination test to be undertaken. Remembering that I had recently had a positive test result in the neighbouring unit
The results came back positive at a low level of 0.07mcg per 100 ml. I knew this was minor and it did not put me off making an offer on the unit. I thought I could use the information to help put off some of the competition or at least to have them potentially reduce their offer, so I informed the agent the result was positive, I asked him what his obligations were in sharing this information, knowing he would need to share the positive result with any interested parties. I did withhold the report initially. Eventually the agent asked if I would share the report with the vendor and they offered to pay half of the testing fees I had incurred, which I agreed to. Meanwhile I had tracked down a few decontamination companies and they were advising and quoting on remediation and cleaning of the house, so I had a fair idea of what cost would be incurred in cleanup.
The sale by closed tender process, works well for the vendor but is not so great for buyers, particularly in a sellers market where there is healthy competition for a property. There is really only one shot to be the party who gets to negotiate further with the seller. I needed to offer my best price and to make the offer as clean as possible. In any other method of sale, I would have started at a lower price. I was pleased to come out of the process with the property under contract at $308k, but also knew I’d paid top dollar for this house, which was really a dump and needed a lot of work to bring it up to my standard and to be rent ready.
The upside to this property was that individually neither this one nor my adjoining unit could be subdivided, but together their large shared back yard was now subdivisable. That was a project I would consider for the future.
I had agreed with the vendor that the property would have vacant possession on settlement. I knew I needed to address the maintenance issues and tidy the property up in order to get the best rent and couldn’t do this work with a sitting tenant. I also needed to resolve the meth issue. It was a shame for the tenant who had lived at the property less than 5 months. It didn’t feel good to be displacing her and her children, but, I also did not feel good about renting the property in the very poor state it was in, it desperately needed attention. The previous elderly owner had become too frail to manage the increasing maintenance requirements.
The layout in this unit differed slightly from my adjoining one and was very slightly larger, but similar. On settlement I got to work stripping the place out, and cleaning the meth. The contractor who did the meth cleaning also removed the asbestos. We restricted access to all other trades while this work was going on and the contractors had 5 days to fully decontaminate the property before other trades moved back in to fix it up. Asbestos removal and disposal cost $5k with an additional $5k for Meth decontamination. After cleaning the house was re-tested with a ‘no detectable meth’ result. The other considerable cost on this project was a total rewire which set me back a further $8k. I was pleased with the outcome, but the cost involved in these 3 areas was huge and came right off my equity gains on this project.
I again used tradespeople recommended by my property managers, but did find it quite tough sticking to time frames and keeping tight quality control being out of town. I visited the house 3 times during the 3 month renovation. This kind of project near my home would have been complete in 4-6 weeks maximum. I found I was not around when tradespeople needed a quick answer on something so they tended to make decisions on things I would have liked to be involved in. There were a couple of jobs that had to be done over as they weren’t the way I wanted them.
We completed a full renovation which included the usual plaster, paint, floor coverings, new kitchen and bathroom, as well as deferred maintenance and repairs. The enhancements to this property included the installation of a set of sliding doors and a deck to create the outdoor flow that was lacking and removal of a large wardrobe in one bedroom which prevented a double bed fitting in the space. We removed the old defunct fireplace and relocated the heat pump from the hallway to the living area. The house had been given a new roof a year earlier and the exterior was fully repainted, driveway widened, yard fenced and gated.
As we drew closer to completion, I was keeping a close eye on available properties for rent in the suburb to get a gauge on the competition. In the 3 or 4 weeks prior there had been no 3 bedroom properties at all available for rent. The property manager confirmed rental availability was very tight. The very similar adjoining unit has been let 4 months prior for $400 per week, on completion I decided together with the property manager to list the house for $430 per week and after a flurry of activity and viewings with the property manager had a new tenant lined up within 5 days. A young couple in their mid 20’s, saving for their own home, operating their own business nearby. They have indicated they are keen on a 2-3 year tenancy. On the recommendation of the Property Manager, after credit and reference checking, they moved in soon after on a fixed term tenancy of 6 months. I like to start new tenancies on a 6 month fixed term. Not too short, not too long and gives us a chance to see how the tenants live in the house, without too long of a commitment. Ideally all going well we will re-fix for 12 month terms ending in January. I like January end dates as it offers me a chance to re-let or re-fix at the best market rent during peak time.
These two adjoining houses should now be well set up and with maintenance issues all addressed for a few years. I don’t expect to have to spend much on these for a while now. The next stage here will be to investigate the development potential of the land at the rear. With 2 cash-flowing investments, there is no rush to develop. I’ll post on any resulting development in a new post at a later date.