Sunnydaze1

Hi all, I am in the process of selling my home in Qld. I anticipate having about $525k in cash equity after the sale. Given how low mortgage interest rates are currently, I’m wondering whether to buy two modest properties at circa $515k each, living in one and renting the other out; essentially, splitting the cash I will have, as a deposit/equity for each.

I have looked at potential rental income levels in my area for a basic rental house. By the time I paid the mortgage, rates, insurance, repairs and rental management fees, I’d have no ‘profit’ per se, but the property would appreciate in value over time (I’d also look at depreciation of course). I’d probably also lock in a low fixed mortgage rate over around 2.2% for 5 years. I’d try to balance things so the investment property was as ‘self-funding’ as possible.

I plan to seek professional financial advice, but I’m wondering if there are any friendly posters on the forum who have recent experience of doing this kind of thing? If so, has it worked out? What pitfalls did you encounter etc?

There’s just myself and I’m trying to look at creative, but sensible ways of growing equity - with a view to paying an eventual lump sum into my super when I reach retirement age (over a decade away at least still) by selling off both properties and downsizing at that point.

I work full-time with a modest wage (<$70k) and appreciate that it’s not a heap of money/equity that I have, compared to what some people have. I’m wondering if my idea is completely ‘pie in the sky’ therefore, or do you believe it may have some merit?

Thanks in anticipation for any ‘words of wisdom.’

spouse of scouse

Good on you for thinking about and planning for your future

My two cents worth is:

Always factor vacancy periods into your calculations. Your rental property may have vacant periods for various reasons, including changeover of tenants and (unfortunately) the time it takes if you need to evict a tenant. Think about whether or not you'll have the cash reserves to keep paying the mortgage, council rates etc on a property that's not generating any rent.

Do lots of research. For a rental, you ideally want a property that won't require major maintenance in the period you'll own it (think new roof, new air conditioning system, major building work).

Location, location, etc. Rentals near facilities/infrastructure are a better bet than isolated properties. Think schools, public transport facilities, shops, parks. Also, if you're very familiar with the area you want to invest in then you're already in front. You'll already know if some suburbs, or even particular streets within a suburb, are more or less desirable places to live. Put a tenants hat on instead of an investor/landlord's. Is this a property you'd be happy to live in?

Just a couple of thoughts, hope it helps a bit and best of luck.

morpeth

I believe a lot of merit to the strategy but a few questions to consider.

I assume the balance left over from the sale is after tax.

My first question is would be can you borrow against your existing property to buy the second.

Second, I find it curious if putting down 50% of the value of a property to be rented the result is only break-even. It might be more beneficial and better to buy two 250,000 properties to rent - might be easier to rent out , and better income to value ratio..I don't know market there, but my experience in the USA and UK would make me question a situation with 50% deposit only getting a zero return.

Third, if possible depending on what the costs , try to use property management firm Tenants can be a pain in the neck, And you will need to have some cash reserve for repairs or vacancies, off the top of my head at least $10,000 minimum at all times, My experience has been better a lower net return without the bother .of dealing with tenants.

Four , try for fixed rate.

morpeth

Actually I have a slightly different view. I would disregard whether you would like to live in the property or not, and instead focus on what delivers the best return, and least vacancy periods. ( I have one relative who followed that path- she has consistently made less money than other real estate investors following that strategy, and in her case worse as when renovations or repairs needed she has a tendency to overspend precisely because she things what she would want if she lived there).

Great advice about infrastructure available.

Sunnydaze1

Thanks everyone for your comments: Some sage words of wisdom. Appreciate it

spouse of scouse

It's always good to give different perspectives When I mentioned putting a tenants hat on, it was in relation to the location of the property rather than how fancy its fittings are. It's been my experience that even within a relatively small area there are streets where the majority of people who are looking in and know that area would be happy to live, and some that they wouldn't.

I agree that it doesn't make sense to over-capitalise when renovating and that applies to owner occupiers as well as landlords. I don't mind spending money on upgrading though, for example when we were between tenants for one of our terraced houses in England we changed the old-style boiler to a combi. The old one was still working but to us it makes sense to keep our properties in good condition and making sure they appeal to as wide a range of prospective tenants as possible, which will sometimes involve modernising. We refused our letting agent's suggestion to increase the rent - I don't see why tenants should pay for us improving the value of our asset.

morpeth

We are perhaps saying the same thing in different ways. I regularly would take the opportunity to upgrade and repair before a new tenant moved in- both to maintain the property, but also where possible increase the rent for new tenants. However there are improvements that I might want as a tenant that strictly are not necessary. I guess my comments are that being a landlord is a business, and with the uncertainties about vacancies or required repairs, best to run like a business. Hence why I also recommend where possible using a property manager besides the inconvenience of dealing with tenants.

spouse of scouse

I agree with most of that and yes, I think we're basically saying the same thing too.

My husband and I put most of our superannuation (employment based pensions) into properties in England, because we planned to stay there forever. Forever lasted for three years I (and I use 'I' deliberately!) interviewed around a dozen property management agencies until I was reasonably happy that I had one that would not only look after our properties, but just as importantly look after our tenants as well. Have been relatively pleased with the former but have had to get onto them several times for not doing repairs in a timely manner, thus inconveniencing tenants. Luckily before we left the UK I'd formed good business relationships with various tradies who I trust to do a really good job, so more often than not I organise repairs and stuff like gas safety certificates and EPCs myself. At least I know they're then done properly and when they should be.

Re rent increases, I've disregarded the property agent's advice to increase the rent on several occasions. We're quite content with the rent we receive, it meets our needs in terms of ROI, and both rewards our excellent tenants and helps ensure they're happy to stay with us. Good tenants are like gold and part of our business plan was to always recognise that.

Rete

This

Having good tenants who pay rent in a timely manner, take care of your property as if it were their own, respects the terms of the lease and you, as their landlord, it what makes being a landlord worthwhile. Too often, those things are missing from the tenant/owner relationship.

morpeth

I quite agree with you about keeping good tenants. For existing tenants I would keep rent steady, or at most raise 1 or 2%.For new tenants if market justified would raise the rent.