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Posted in Rental House

Naenae Road (House One)

  • 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 The property was withdrawn from the market.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.

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Posted in House Trading

Hauraki Cres

  • Purchase Price – $800k
  • Sale Price – $1025k
  • Reno Cost – $97k
  • Holding cost – $13k
  • Agent Fee – $35k
  • Gross Profit – $80k
  • Purchase date – Nov 2016
  • Sale Date – Jan 2017

 

After the investor loan to value 40% deposit rule came into play in October 2016, I could see that things would be more difficult for me to purchase a new rental property. By this time I had 3 rental properties under my belt and was keen to acquire another in Lower Hutt similar to the one I had bought earlier that year. It cashflowed well.

Add to that I was aware that banks would look less favorably on our ability to service debt. 2 of the 3 rentals I had bought were cashflow negative. I knew I needed to buy cashflow positive investments which could not only pay for themselves but cover the shortfall with the 2 Auckland properties which needed topping up. But how to acquire another cashflow positive investment with the new equity restrictions and debt serviceability challenges?

Property trading! or buying to renovate/tidy up/add value and sell on. I had traded one property in late 2015 and I knew it would allow me to make lump sums of cash I could then use to purchase new rentals, pay down debt or improve and create better rents for existing properties.

After completing the first property trade back in 2015, I had realised there was a significant portion of the profits which I would have to pay to the selling agent and the tax department. At the time I had plenty of equity and no problems servicing debt so it made sense for me to keep the houses to start my rental portfolio. But that was before LVR challenges and debt servicing walls. Now I could see that even the net profit in property trading could help me earn the cash I needed to keep growing my little portfolio.

I reconnected with my favourite agents to start the search. I like to go through my buying rules before viewing anything, it helps me to rule out anything unsuitable without having to waste time viewing a place that’s not right and helps guide the agents to know best what to look out for. Buying rules for a property to trade and a rental are different. I revised the rules and sent them out to my buyers agents. They were:

  • Buy and renovate under 900k
  • 2-4 bedrooms
  • I like character and an elevated outlook
  • No unit title or bodycorp
  • crosslease ok but must be street front
  • ability to add bedroom into existing footprint is good
  • No pools, plaster cladding, long driveways servicing many houses, dodgy floorplans or serious non compliant alterations.

I was looking for something with my end buyer in mind – first or second home owner occupiers and needed to view houses through the end buyers eyes.

I’d looked at maybe 20 or 30 houses which could have been suitable and made a handful of unsuccessful offers and auction bids before finding 8 Hauraki Cres. I had viewed another property around the corner and was walking back to my car. A man walking a dog approached and asked if I was looking for something in the area, he had a house to sell in the next street, just listed. I told him I was looking for a do-up, that it might not suit. Yes, yes he assured me. It was a renovator. Ok, I’ll have a drive past I said.

It turned out that the man had made an offer on another property he wanted to buy with his brother and needed to sell quite urgently. I viewed the property a day or 2 later which was to go to auction and put in a pre-auction offer of $810k. It was refused and I resubmitted at $830. this was also rejected. The feedback was that the man would like to accept the offer, but he needed to get approval from his mortgage broker that he would be able to fund the balance on the new property. He was due to go unconditional on that new property at the end of the week. He indicated that if he could get the brokers approval, he would accept my offer if it was resubmitted before his unconditional date. I did resubmit the offer. It was also refused.

The vendor had been to another auction that week and seen a similar property to his sell for $870k. He felt he could achieve this for his own property if he held out until the auction. Meanwhile he went unconditional on the new house. I was shocked to hear he had gone unconditional without a sale, it was a very risky position to put himself in, with no assurance of a sale at auction. I also knew this would put me in a very strong position to get the property at a great price come auction day, particularly if there were no other bidders.

Over the next 2 weeks I was away on holiday with family and didn’t have a chance to view many properties during this time. I did make 2 more unsuccessful offers though and so come auction day, I was still looking to buy. The market sentiment had got quite low and many properties were passing in with no bids. The LVR rules were starting to bite and I had growing concerns about my profit margins. I had already decided $830 was more than I was willing to pay for this house.

Prior to auction I applied to the vendor for a variation to the contract, choosing my preferred settlement date and asking for early access for my tradies to quote renovation works. Both were accepted. When Auction time came, there were no other bidders. Bidding started at $750k and the auctioneer worked with me to get my offer up to $780k. The property passed in. Immediately after auction I put my $780k in writing to the vendor. after some back and forth he reluctantly agreed to sell to me for $800k.

The vendor was very upset with the result and blamed the real estate agents for this. He felt they should have been able to get me to increase my offer. But he had put himself in a difficult and risky position by agreeing unconditionally to purchase elsewhere. He was now desperate to sell and I was the only buyer. Over the weeks that followed leading up to settlement he refused access, banned the agents from the property and swore and cursed at them whenever they needed to communicate with him. It was a difficult time and I needed my solicitor to negotiate access for my tradies to get in to quote the renovation.

We were closely supervised during these access visits by the owner and he didn’t seem too happy about my plans for the property either. I think it upset him that I was intending to profit from the property, still feeling hard done by after the auction result. It was very awkward doing a tradie walk through to quote work with the vendor hot on our heels. I’d really try to avoid this in future. Its advantageous to be able to quote a project before you take possession so you can get started with works as soon as possible after settlement day, but this was most definitely an uncomfortable situation. The vendor tried to engage with me on all sorts of details relating to the contract, the settlement/move out date, vacant possession, more money for early settlement, chattels he wanted to take with him. I didn’t want to negotiate directly but was worried if I didn’t engage or agree he would kick me out and we would not be able to get our quotes together. In the end my wonderful painter bailed him up in the back bedroom and got him talking about his race car so we could get done and get out. When we were leaving I told him we’d work through the lawyers to get any other agreement or details in writing. Once back in the office I immediately emailed my solicitor to spell out my expectation so he could confirm this with the vendor. Awkward!

Settlement was scheduled for a Friday and after some to-ing and fro-ing with settlement inspections ensuring the place was vacant, it was mine. My team started work the following Monday.

I had already put together a full scope of work and fully quoted the job so had a good idea of the plan and timeline for the renovation. Most aspects of design and colour choices were also made when putting together the scope of works. People often say to me it must be so fun designing the new house, well partly yes, but a lot of it is a formula where you have figured out what works in a previous renovation and so just repeat this. There are some exceptions of course, in this house there were some aspects of 1960’s character I wanted to retain. The polished floors and steel geometric balustrades became feature aspects of the house and I took inspiration from these for the wall colour (Dulux St Claire) with contrasting white trims and doors (a nod to the 60’s) and the geometric pendant light in the dining room. I wanted to retain some of the 60’s character. The stager visited early on and she also drew from these features to build a look for the house.

After settlement and scope of works I did add in some additional work to the downstairs rumpus room. The previous owner had removed the windows and opened the room up to the outdoor carport to increase his workshop size. On the advice of my husband, who felt it would add value and show further potential to close this in again and re-create a usable multipurpose rumpus room. Thanks Nigel! you were right.

Typically the first week is demolition week. The builder is ripping out kitchens, bathrooms. fireboxes and anything else we were removing or repairing. The painter was prepping for interior and exterior painting. I busied myself clearing out the garden, cavities under the stairs, under the house, garage and workshop areas. The vendor had been somewhat of a hoarder and there were two 9 meter skips of rubbish removed from the site.

Then the build up starts, prewire, preplumb, painting, repairs, kitchen bathroom, laundry installation until slowly, slowly it all comes together. This project took 6 weeks. A little longer than usual for a cosmetic renovation because we lost 2 weeks over Christmas – New Year. My builder let me down on this job and was pretty unreliable. He had committed to another project around the same time and while I did discuss it with him and tried to ensure he had a plan to manage the workload before we began, he was noticeably absent at times and did delay the completion. I had hoped to be complete and on the market prior to Christmas but we weren’t quite ready.

I typically visited the site daily. My main jobs were fetching and carrying, cleaning up at the end of a work day so trades can hit the ground running in a clean tidy workspace the following day. running errands to chose and pick up appliances, fittings, hardware. I also did the garden plan and planting on this house, which helps me keep costs down and gives me a reason to be onsite checking on things each day. I do and did use a project manager in this job who subbed most of the contractors. I probably spend way more time than I need to on site and engaged with the tradies given there is a very capable project manager. Probably just me being a bit of a control freak. I have thought more about the scaleability of property trading. How little time could I actually get away with spending and still have things run smoothly and on time. Probably quite a lot less time I suspect. If I had two or three projects running, could I significantly reduce my time commitment. I think so yes, But at the moment, I like to be there and be involved.

The property went on the market on January 17th. I received an offer seven days later and after some negotiation we agreed on a price; $1025k. The offer became unconditional within 3 days and settlement was quick, scheduled for February 10th. This helps minimise my costs. I had thought I’d need to pay and other month of mortgage payments waiting to settle, but wont need to, this saves me about $4.5K.

I’m working toward raising funds to build a minor dwelling at one of my existing rentals (East Coast Rd ). Completing 2 or 3 more like this should provide the funds for the new build. I’m on the hunt now for a new project to trade to keep moving forward.

 

 

 

 

 

Posted in Goals and Strategies

Goals and Strategies 2017

At the end of one year and the start of the next I usually like to set some goals or make some resolutions for the coming 12 months. I find this helpful to guide me through the year and now I’m working full time in my property investment business things are no different. It helps me avoid distractions and analysis paralysis often confronting me in property and ensures I stay focused on my long term goals. I find without goals I can be a bit aimless and lose motivation, excitement and my view of the big picture.

Toward the end of 2016 the Reserve Bank of NZ had introduced new loan to value restrictions preventing banks from lending more than 60% of the purchase price of a property to investors. Until then I had been happily purchasing rental properties to keep long term. My previous 3 purchases had been bought, renovated, rented, revalued and refinanced. I had reached a point where I was getting close to a debt serviceability wall and I knew that the new restrictions meant equity requirements might also restrict my purchase of a further rental investment. My strategies for the coming year would need to be tweaked if I was to stay the course on the longer term passive income goals.

lvrfrom1-october

I needed to figure out a way to increase income to address serviceability and to generate some lump sum’s of cash to meet equity requirements so I could channel this into the passive income train; rental houses. I had done one trade property or renovation for sale previously (Sunnynook Road)) but it is still pretty new to me. Ive now subsequently done 2 of these projects (Hauraki Cres).

 

When setting investment goals I want to build on achievements of the past 12 months but also keep things realistic and manageable, with a balance of work, family and fun. I have settled on the following investment goals for 2017:

  • Complete four trades
  • Build a minor dwelling at 380 East Coast Road
  • Buy one more rental house

At this stage I own 3 rentals and want to keep building this portfolio to reach my goal of six million worth of property in ten years. These goals I set about 18 months ago when working out what our family would need in passive income to replace our current income and become free of any obligation to work. So how to keep building the portfolio when you are hitting a debt servicing wall and now need more cash for each and every purchase.

Debt Servicing

To improve debt servicing we need to up the income. My strategy here is multi-pronged.

The main household income is my husbands salary, he is in line for a small increase some time this year.

I’m now well through the resource/building consent process needed to build a minor dwelling on the back of a rental property I already own (East Coast Road). I’ve incurred a fair bit of expense getting to this stage but there is probably another $200k to actually get the build completed. This additional door should double my rental income from this property. YAY!

The plan to purchase an additional rental house this year will also give another income stream. My goal with this one will be to keep the yield at 7% or above. I’m not yet settled on details of exactly where this property will be located, but I love my high yielder in Lower Hutt – could do another one like that or perhaps a holiday let property. We likely wont get to this until the end of the year. I’m still investigating possibilities – watch this space.

I will work to maximise income from my existing portfolio. The high yielder in Lower Hutt could do with a makeover and that would definitely warrant an increase in rent. I inherited the existing tenant who vacates next month. Rent was always under-market at $360 pw. After paint, carpet, repairs and a tidy up, we should be able to get $400-$420pw. All helping the income. My other two rentals were renovated last year and rents are at market. Perhaps I might be able to increase around $10 pw per rental in the coming 6 -12 months.

AirBNB have been good to us over the summer, we rent out our mountain chalet while we don’t use it. The summer tourist numbers in that region have made for reasonably high occupancy and healthy rental. We’ll keep taking advantage of that this year. We also made the decision to try letting our city home this summer while we were on holiday with a reasonable result.

My final income generating strategy is homestay. I think they call this house hacking in the US – getting an income from the home you live in. My 2 kids are at Intermediate and High School and we are presented with loads of opportunity to host students for various lengths of time during the year. Not sure we could cope with a full timer for the year but a few little short stays work well. I find I’m working from home, driving to and from school and home outside of school hours anyway – why not cash in on that. So, Ive contacted all the homestay coordinators at my kids schools and sports clubs and we are ready.

Which brings me to my second challenge:

Equity

The new equity requirements imposed through 60/40 LVR restrictions mean if I am going to buy any more rental houses, I will need some lump sums of cash for the deposit. That’s not money I have lying around, so how to generate large, quick piles of cash?

In late 2015 I bought, renovated and traded my first ever investment property. This generated an impressive $58k in profit. This is taxed of course, but I can see I could use this as a way to generate lump sums and create a deposit for a new rental house. So my intention is to progressively complete 4 of these property trades in 2017. As I write this I have just completed a trade and listed it for sale this week, so I’m getting more practice and learning more and more about how to maximize profit with this strategy.

I’m now on the hunt for trade property number one for 2017 and hope I can generate around $200k through trading four properties this year. Its never an exact science and I cant be sure if I’ll make a little or a lot. I’ll keep applying the learning’s from previous projects and hope things go to plan.Whatever profits I make will be channeled back to the rental houses, either to build the minor dwelling, buy a new rental house or potentially to pay down debt.

goal-setting.png

That about sums up my investment goals and strategies for 2017. I’m pleased to be able to share them – it makes me accountable to the plan! I’m excited and impatient to get on with it. Here’s wishing all your New Years goals, resolutions and strategies bring you every success this year!

Posted in Rental House

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.

 

Posted in Rental House

Ellen Ave

 

  • 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.

 

Posted in House Trading

Sunnynook Road

  • Purchase Price $740k
  • Sale Price $900k
  • Renovation Cost $80k
  • Holding Cost $10k
  • Agents Fee $30k
  • Gross Profit $40K
  • Purchase Date – September 2015
  • Sale Dates – December 2015

     

This property was my first investment purchase, and became the first property I renovated to on sell, or to ‘trade’. I knew that I wanted to invest in property and that long term rentals were the path to a sustainable passive income. At the time, September 2015, the Auckland property market had really started to heat up and properties were selling for what I thought to be crazy high prices. I could see that the rental yields you could achieve – they were about a 4% average in the city at the time, wouldn’t bring me a cashflow positive investment. I felt at the time that Trading property would be a safe way for me to dip my toes in the waters of property investment. In hindsight, the boom was just beginning, but I wasn’t to know that then. I felt at the time, that buying a rental house would be more risky. I now know that trading property is much more of a risk than the rental property business, but my inexperience and ignorance at the time helped me into trading without really fully understanding the risks involved.

With some luck and a hot property market the venture worked out for me though, and I was able to turn a profit and gain valuable experience in the process.

This property was a deceased estate. The owners had gone into care some years prior and the house had been tenanted until their children eventually came to liquidate the estate. The house was on a cross lease section and was semi detached, joined to the house in front by a concrete block garage – well it was legally a carport which had a garage door attached.  It was the rear property of 2 on a shared driveway. Weatherboard construction with a concrete tile roof and aluminium joinery.

The house appealed to me because it was in a superb school zone, centrally located in a popular suburb, made of traditional construction methods and had the type of accommodation I felt would have wide appeal with families; 2 living spaces, 3 bedrooms and 2 bathrooms with garaging and outdoor flow.

The house had a pretty unattractive conservatory enclosing what had originally been deck space, and consequently the appeal of the house as you approached was pretty ugly. I thought if this was removed and decking reinstated it would be a much prettier house.This conservatory removal turned out to be a much bigger job than first imagined. The conservatory itself, I sold on trademe, but when the buyer came to inspect, they abandoned the purchase, meaning I had additional cost to demo and dispose. The concrete pad it sat on did not allow for the minimum clearance required beneath an exterior door and so the concrete had to come out. It was very thick and the first attempt with labour hire guys and a jack hammer failed miserably. In the end we had to get a digger in and the costs mounted. The end result was a good one and it was a necessary alteration to get the best sale price, but it was the major cost overrun on this project.

The garage was an interesting consideration at this property. I did consider that the house would become more valuable if it was freestanding, rather than attached to the neighbouring place and I worked through a business case for demolishing the garage and replacing it with a carport on another part of the section. I was inexperienced and this was my first project so I consulted a valuer to advise me. She gave me an as is value and also a post renovation value with some detailed information from me about what we had planned for the property. I was also able to get her advice on how much value she felt would be added to the property if it were freestanding, versus losing the garage – also a desirable feature.  She did feel standalone would be more valuable, but on costing this out and with some expensive power box movement required in the demolish scenario, it was decided the garage would stay. The valuer has gone on to be an important part of my team of experts and I’ve used her services many times since this project.

The rest of the renovation was largely cosmetic. aside from the conservatory, there were no layout changes, simply a cosmetic renovation of what was existing and a partition wall and set of sliding doors between the family room and kitchen which I removed, preferring to open the space up for more modern living. Of course I needed the full compliment of tradepeople to get this project completed, I didn’t really have any particular DIY skill, and wasn’t too keen on doing any of these jobs myself. I knew it would take me a huge amount of time and that the quality of my work would not be at a standard needed to get the best sales price. I needed a team. I had been introduced to a real estate agent who was also a property trader and he very generously shared some of his trade contacts with me. I had also heard of a project management company through my local Property Investors Association who offered a full renovation service. I got quotes from them and compared prices with the other individual tradespeople I had contacted. In the end I settled on a combination of the two and had various companies completing different aspects of the work.

One job I could do was grunt work in the garden. This property was badly overgrown and bamboo featured heavily. With the help of a friend who could operate a chainsaw and reverse a trailer, (Note to self – I must master these skills) we set to work cutting back the jungle of overgrowth and loading it onto the trailer and off to the tip. I came to affectionately call this garden grunt work, which I’ve now done on many occasions ‘the gym of life’. It is hard physical work that has me aching for days afterwards, but it also gives me an excuse to be onsite daily and keep an eye on tradespeople and progress. After the  garden clearout, this house had a much larger yard, another great selling feature for families.

On completion of the work, we were well into November. December is not the best time to sell a house with people winding things up for the year end at work and preparing for Christmas and summer family holidays. Coupled with this the reserve bank had implemented some LVR restrictions on investors in Auckland. 30% deposit was now required and the market had softened. The Real estate agent I had chosen, who had been so helpful to me in setting up my team of tradespeople and offering his experienced advice during the project recommended a sale by deadline private treaty. Most property was being sold by auction at the time, and this was new to me. His reasoning was that at a time where the market had become flat with less buyers around, an auction without a couple of bidders to drive bidding competition may not achieve the best result. With deadline treaty, we would still create the urgency to make an offer with the deadline date, but whether or not there was competition would be largely unknown to any prospective purchaser, who may be more likely to make a strong offer. A deadline date also promoted a multi-offer situation. We would also open up the property to any conditional buyers who may have an interest closed to them through auction.

Within just 9 days I had an offer in writing at 880k and I was disappointed. But I was also critically aware of Christmas looming and the prospect of languishing on the market for a month. This would have upped my holding costs so we worked to negotiate. I had already calculated my break even price and the minimum I’d accept. I was a novice negotiator so relied on the agent and we got the offer up to 900k. Someone once told me your best offer is usually your first. My agent was individuating to me that he didn’t think the purchaser would go any higher. They were cash unconditional and wanted to settle in less than 2 weeks. This was very appealing to me and so we sold.

Now in hindsight, I know the market rallied considerably around March the following year. But I wasn’t to know that then and still feel now I was better to exit with a reasonable profit and move my money on to new projects.