[It’s Portfolio Showcase time!] Continuing on with David’s IP1 – OTP in Granville (Part 2)

I hope Part 1 has given everyone some perspective on how I arrived at my first IP ?

In Part 2 we’ll talk about some numbers for this IP and some of the lessons learnt.

Because it was a unit with rental guarantee so the yield has been quite good since day 1. The gross yield achieved on the IP has been 6.5%, plus good depreciation in the first couple of years, it was a fantastic set and forget first IP! 
Back in 2011/2012 bank interest rate was about 6% (RBA about 4%), so it wasn’t as low as what we have today. At 6% interest rate, even at $450 weekly rent it wasn’t enough to cover all my outgoing expenses such as council & water rate, strata, landlord insurance plus Interest-Only mortgage repayments. In fact I had to fork out about hundred dollars each week just to hold the IP, and then as I complete tax return I’ll get some of the money back.

As we approach towards end of 2012 RBA dropped cash rate to 3% which makes it easier to hold, and then through 2013, 2014, 2015…interest rate keeps going down to their lowest levels. Right now with investment loan interest rate at about 4.3%, at $460 weekly rent it’s about neutrally geared before tax implications.

Estimated Expenses WeeklyMonthlyAnnually
Council Rates $     19.23 $        83.33 $            1,000.00
Strata Fees $     53.85 $      233.33 $            2,800.00
Water Rates $     11.54 $        50.00 $              600.00
Building Insurance $          – $             – $                     –
Management Fees $     22.50 $        97.50 $            1,170.00
Repayments $   330.77 $    1,433.33 $          17,200.00
Landlord Insurance $       5.77 $        25.00 $              300.00
Estimated Totals $   443.65 $    1,922.50 $          23,070.00
Income Comparables
Lower Rent $   450.00 $    1,950.00 $          23,400.00
Higher Rent $   460.00 $    1,993.33 $          23,920.00
Estimated Cashflow before tax considerations
Lower Rent$6$28$330
Higher Rent$16$71$850

Because it’s still within 10 years of initial completion so I’m still enjoying a decent building deprecation, therefore taking it to neutrally geared after tax.

So bottom line is it’s giving me some money in current situation. How about capital growth over the years?

To be honest though I didn’t care, because I know property investing is a long-term game. Unless I’m intending to sell, why would I care about whether price is heading North or South? All I need to ensure is there is a tenant in the property and is paying the rent on time so I can keep holding the IP until the wave comes!

As we know Sydney had a really good run in the last 3 years or so. Likewise this IP also rode the wave during the Sydney boom in the last 3 years. I had it re-valued in 2015 and it was returning at $525K. So let’s have a look at the return it has made:
Purchase Price (Nov 2011): $360,000
Revalued Price (June 2015): $525,000
Equity: $165,000
Capital Growth: 45.8%
Years hold: ~4 years
Average CG per year: ~11.5%

So on average each year the price was growing at about 11.5% while enjoying the 6.5% yield. Now you see why I say it’s a little set and forget beauty!


Lesson learnt: About Rental Guarantee

OK, even though Rental Guarantee sounded like such as wonderful thing in my story, but some warning – the reality nowadays is if an agent is offering you rental guarantee they have most likely already added the cost of rental guarantee into the price. i.e. they’ve jacked up the purchase price to cover the “rental guarantee” part, so in essence you’re paying them all.

Also nowadays I don’t see anyone offering 5 years of rental guarantee anymore. Most, if not all, only offer between 1 to 3 months and at “market rent” in order to attract buyers. To me, you could be up against a lot of competitions if a whole flock of units are due to settle around the same time. This leads into the next lesson….


Lesson learnt: How many units are settling at the same time?

Another tip is when OTPs are completed they usually comes in stages – and lots and lots of them in each stages. This is especially the case for OTPs in Sydney and Melbourne.

As my property had rental guarantee I wasn’t too concerned about how many units are settling at the same time. I did do my due diligence though – I’ve checked how many units were being completed for my stage release and therefore how many units I would be advertising to rent against.

As you can imagine if each stage is releasing 50 to 100 units then you’ll be up against a whole heap of other units in getting it tenanted! Most of the time owners will be forced to put a certain discount on rent in order to attract potential tenant, which means yield will be much lower and there is much higher chance of the unit being vacant on market for longer.

You will definitely want to avoid this situation! So make sure you know how many units are settling at the same time and also in your yield calculation use a more conservative rent and have plenty of cash buffer in place.


Lesson learnt: Quality of OTP builder company is absolutely vital, and there’s always an associated risk

I know a lot of investors actually like OTP a lot – putting aside the beefed up purchase price, they are new so comes with little maintenance required plus you get good tax depreciation.

The issue is though, even with a good OTP builder brand you’re still at risk of a bad quality job…

My IP1 was built with a reputable brand builder and is located on first floor in a complex of about 45. Guess what issue I’ve had??

When there’s a heavy downpour, two of the bedrooms actually leaks!! That’s right – the unit is on first floor but it still leaks!! And not just my unit, apparently other units also exhibits same leaking issue….

Because the owners believe it is a building defect issue, we’ve had to collect lots of evidence prior to taking it up with the builder.

Now the issue has been going on for about 2 years and we’re still in litigation with the builder. Having to hire lawyers means this cost is eaten into owners’ profits. I’ve also had to replace the two bedroom carpets as they were starting to mold (I lost a tenant because of this!), and fix up part of the wall/paint as they were damaged as a consequence of the leak. Ouch. Hopefully I’ll be able to claim back some of the repair cost, if not all, from the builder after the case settles.

So to all the OTP buyers out there – do your research well on your builder quality before paying the deposit!

If you have any further questions about my Granville IP or would like to request any additional information/content, simply comment to this article or fill in the contacts form to reach out ?

Cheers,
David

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