Case Study: Make your first home a profitable rental property
by Peter Ambrose, December 2017
The last few months of 2017 have been a great time to be an investor in Wellington. The number of listings on the market has increased quickly since the election and with many investors still sitting on their hands, despite low interest rates and rising rents, I have been out there putting in offers on many properties.
Many investors are looking for ways to make a deal work despite the high LVR requirements and one viable strategy is to secure the property to live in and convert it into a rental property later.
Below is an example of how I recently helped a young couple looking for their first home. This couple had become very frustrated after missing out many times in a market where most properties were going to tender or auction. They were looking for a property that would be suitable to live in now as well as to hold long term after they have moved on.
They engaged iFindProperty under our Premium Buyers Service, where we find a range of property that meet our buyers criteria and they get their weekends back. Our clients were simply tired of wasting their time searching only to miss out. They also wanted to leverage my experience as a property investor and coach.
Their requirements were quite specific and as they are planning on doing their “OE” next year, the property had to at least break even on rent to ensure they didn’t need to worry about funding any costs while away. That included, rates, insurance, property management and maintenance.
We spent some time getting very specific on the requirements and we really started looking all around the region and I engaged all my contacts to send me any on or off market deals that looked suitable.
We looked at quite a few over a period of 2-3 months and missed out on some at Auction and Tender, but eventually I landed a fantastic deal from an industry contact. I was called on a Friday to say that a city fringe Home and Income property hadn't sold at tender and that I should act quickly before it got advertised with BEO. We did! By Sunday evening we had it under contract.
Over the weekend we reviewed the supplied builders report and the supplied LIM. We had managed to negotiate a 5-day due diligence clause and by Monday we had organised our builder and property manager to go through so we could set a budget for the repairs (structural and cosmetic) and also get before and after rental appraisals.
We were just in time because a backup offer arrived just after ours!
After reviewing all the information and obtaining costs, my couple went unconditional and have now secured a great deal.
- Purchase price $650,000
- Reno budget including adding another bedroom $150,000
- After repair rent is around $1,250 per week, representing a healthy 8.12% Gross yield and around $250per week positive cashflow when they travel overseas.
- While in New Zealand they will rent out the 4 bedroom and live in the 1 bedroom which means most of their costs will be paid while still in New Zealand – free rent!
- They will gain an instant $100,000 in equity and this will continue to grow over time.
Not a bad result for a “first home!”
Don't listen to the media hype, they generally don't go into all the details or understand the fundamentals of successful property investing. Now is a FANTASTIC time to invest in Wellington.
- There is a rental shortage that is going to get a lot worse before it improves, so those who own well looked after rental properties are going to do very well
- Interest rates are very low and do not look like increasing.
- The high LVRs have meant when a rental is sold, it is much more likely to go to a home owner, increasing the competition for remaining rental properties
- The healthy homes bill will scare away more investors, further increasing the competition for rentals
- Ditto for the government looking to remove negative gearing tax benefits (I'm not a fan of this strategy anyway)
- At the same time, immigration is still high and thousands more students will be attending university under the new free tuition scheme, with increased living allowances
- Wellington is still (and is predicted to remain for some time) land-locked with little buildable new land close to the city centre
- The quiet end of year period always means there are fewer buyers, while vendors are strongly motivated to get their properties sold so a quick offer at the right time can be very effective.
- So in short, low rates, rising rents, rising population, more students and a trend towards fewer rental properties. In saying that, the fundamentals of what makes a good property investment haven't changed.
The professional/serious investors I know are extremely active in the market right now looking to add to their portfolios and are renovating and improving on the properties they do have.