Coastal apartments secured for 5K down - too good?

Hi fellas

I could use an experienced investors opinion here. I am looking into an apartment investment in Tauranga for just 5K down. Contruction is yet to commence and prices go up as soon as this happens. I have to make a quick well informed decision as soon as possible. The remainder of the 10% deposit (31K) is payable on completion of construction which I think is all pretty normal (?). I have heard of these people selling these apartments on for good capital gains prior to completion of construction.[8D] Now Im not into this for the short term but rather for the long haul as I think inner city apartments on the coast have got to be a goer. The rent would have to be in the $650 - $675 per week depending on what the body corp are asking for the investment to pay for itself. Is that ridiculously high rent or 'normal' for that type of lifestyle.

There are not many left and was hoping you could all help me out and tell me what your thoughts are surrounding this type of investment strategy.

Thanks in advance.:) Studson.

Studson

Perhaps if you give the name of the proposed apartment complex, it may give you a more meaningful answer?

Cityside Apartments, Tauranga CBD. Graeme Rogers is the man behind it and I know that he was behind the Anchorage which is a holiday accomdation in Tauranga also. I understand too, that he has his fingers in the retirement village pie and owns a few of these as well although I could not find a heck of a lot else on the net about the guy. Is he a shark or is this a genuinly reasonable offer.

Steve, have been burnt by disclosing information, if it is as good as it looks on the surface I dont want to be missing out again!

Cheers

In most apartment developments there are normally some apartments that go for "wholesale" prices as the developers have to presell a certain percentage before the banks will approve funding.

The fact that you are looking at holding for the long term is probably
wise at this stage as many inveestor are still trying to make a quick buck through deposit bonds a la the Henry Kaye way of investing/

You might want to check out how many other developments are going on in the area as if a lot come on the market around the same time over supply will push your rental prive right down.

What are you estimating the body corps to be because the rent shouldn't have to be that high to pay for itself.

Are you looking at it as an investment to provide cashflow(using an interest only loan) or more for capital gains/equity (P & I)?

PJ

Thanks for that. I will suss out the amount of other similar developments that could cause a drop in prices due to supply/demand. I have also learnt that a carpark is a must from these threads!!!

Estimating 4 - 5K for body corp p/a. Well thats $75 - $100 p/w! I have only worked out repayments on 324K (360 less 10%) over 30 years, so not as an interest only loan at this stage but not opposed to the idea. So it wont be providing cashflow for a wee while yet!! LOL

I hope to make handsome capital gains but will use this as leverage to get my hands on more cash to trade in stock and perhaps other investments. Circumstances depending, it may be wise to flick it sooner rather than later but I do like the idea of it in my portfolio for the long term.

Im heading to the UK for a couple of years and will be returning when construction is almost complete so Im just trying to build something here before I go. I dont know anything about the UK markets and from what I understand I wont be getting into any property deals over there in a hurry!!.

Cheers

personally i'd be seeking some form form of independant analysis of the likely rental to be obtained.

your whole investment is based on what rent will come to you.

cheers
moi.

Hi

I have learnt since that it is actually 5K to secure the place and then the reaminder of the deposit to be paid within 20 days with either cash or bank bonds. After disecting the info pack the apartment I think is a better deal is actually worth $459K.

I only have $26K with which to invest. I was thinking of borrowing the other 20K and pay this off aggressivly before the development is finished, so that the banks may assisst with 90% fiance once complete and the title can be signed over to me.

The rent is based on a per night system at $175. It is a two bedroom, 101sqm apartment with two decks on the third floor of this 'yet to be built' development. The Devonport towers are the newest and most similar development in the Tauranga CBD and the two bedroom rooms there are going for $180 per night except there are no gym or pool facilities. Both have conference facilities.

I talked to an apartment valuer from Tauranga yesterday and he told me of an available apartment at 150sqm going for $439 but it was 6-8 yrs old. Both seems to be resonably priced wrt the maket based on the info gathered so far.

There are however about 4 apartment developments at the moment going up around Tauranga (and more likely!) which should be ready within the next 2-4yrs so this will put strain on the market price, the fact that Cityside is due to be completed by Dec 2006 is in my favour but I would think it may be wise to look at selling it on prior to the completion of the other similar developments. What are your thoughts?

I also talked to my soliciter which was interesting. If there is a drop in the market price of apartments exacerbated by supply and demand and other factors such as immigration, building material costs it could be crippling. If I was to go ahead with this, pay the 10% deposit of 46K but in Dec 2006 it has actually LOST value then the bank would only lend on 90% of the valuation at that time effectively leaving me seriously short of the amount I would require to purchase the property and I would inevitably loose most if not all of my initial deposit. Ouch!. Of course if it goes the other way.... I think its fair to say that with the current state of the economy and the looming slowdown and the housing market the way it is the property Im considering, may not hold its speculative value.

On another note, the banks are pulling out of the apartment market in Auckland as an apartment 'crash' is imminent within the area. Lack of students, net immigration outflow, housing slowdown, pinch of the interest rate rises in 12-18 months time, building materials likely to increase as crude oil prices continue to climb etc etc.

All opinions and thoughts appreciated and welcome.

Cheers. Studson.

STUDSON, One golden rule in property is, it is much better to buy what you see rather than buy what you might see. You being a young guy starting out i think would be wise to buy what is already built. I dont know anything about your intended purchase, but beware. Lots of people get promised all sorts of bargains that seem to fall over, and leave them with nothing. I have been in the building game for half a century watched it all happen so many times. Why risk it.
best of luck macdunk

Thanks for the advice. Much appreciated, but luck is for the ill prepared!. I think you are right tho Macdunk, it is a high risk venture with potentially devestating consequences. Its all good for the developer who has all their assets protected in trusts but for the small man who becomes nothing more than a blemish on the sole of a developers shoe, it can break him...me!

I have started to look around for 2-3 bedroom homes in the Papamoa, Tauranga area. I have been informed by my bank manager that friends of hers took what they could get which is a three bedroom hardy plank place with a reasonable section and and a gge ansd they pay $360. She said that cause of the shortage people are willing to pay what ever it takes to secure a home.

Macdunk, I'm interested to hear what you think is going to happen to house prices and what the influence of interest rate rises of late will be. Where might some of the better cap gains be? Is it better to wait to purchase a place, i.e will it become a buyers market as opposed to a sellers market in the near future or are things just going to slow rather than stop and head the other direction?

Thanks in advance, Studson.

Studson, whatever happened to house prices in the last fifty years will happen in the next fifty years. Will average up 10pc a year or there abouts. Buying a house is the best way for a young person to get filthy rich without trying. Rules as with anything must be strictly observed. For rental purposes, Transport and schools with handy work locations are essential. Never buy a good house in a bad street. Always find out rental valuations in the area from a neautral source. Find out from the housing corp what type of house and in what areas they will lease a house from you and set up a deal with them before you sign the dotted line. They will do maintenance collect the rent and fix up malicious damage which is on them. Place the lowest deposit on an interest only loan which might only leave a token ammount at the start to stump up. Buy low maintenance if pos brick and tile is best hardiplank is ok exterior plaster over a timber frame avoid like the plague that is where the leaky home syndrome resides. In five years time get the house revalued and take out a bigger loan and buy your second house. It dousnt matter if you are a factory worker thick as pig poo if you carry on doing that you will end up a very rich person indeed. Always buy 3brm with a garage. macdunk
PS The property must be cleared by the council or dont buy.

dont know if this helps but seen a 5 month old apartment(3bed 2 bath)in braemar villas in bethlehem,has shared pool and tennis court,presently rented for $325week asking price $309000 private sale,dont know if it stacks up cause im in the south island moving to tauranga on monday and just looking at options as well

Hi Studson. I wouldn't touch it with a barge-pole.MacDunk is quite right. These sort of investments are not for the young investor - you will almost certainly get burnt - you have to go into too much debt, you won't get the rental they say you will, and the apartment market isn't all that good, although Tauranga is more insulated from any decline.

These sort of things are suited to the 'retired farmer' type investor. Thatismyopinion.

Thanks to all for the advice. I will be taking it all in and following up on it. Quite like this idea of hassle free investing from macdunk so will be delving further into that. I am curious tho, why go interest only? Is that to ensure that the rent covers all expenses or is it best to try to slam some principle along the way if possible? I would appreciate some insight as to when it is best to go interest only and when it is best to pay off principle aswell and what factors help determine the descion one makes surrounding this. TIA.

Danchop, sounds interesting but that would leave me in 'up to the eyeballs' which I cant really afford to do while planning a working Holiday in the UK, and again I think as cap said, Tauranga may be more insulated but I'm unsure of the direction of the apartment market in general. Appreciate it tho and I'm sure it is an opportunity for someone. Sounds to me like a better opportunity than what I have been looking into re: Cityside!! And they look quite nice too! Cheers.

Capatilist, thanks for your words too. Point taken and as a compromise I will be looking around the Tauranga area for a 3 bdrm place with a gge close to schools and the like as an investment while in the UK. I appreciate now that this type of investment is more for someone who has money with which to make a more risky but potentially more profitable investment.

I will be keeping an eye on the progress of the Cityside venture just for interests sake. Thanks again, Studson.

Studson if you can find one that the rent will even cover the interest you will be very lucky. You will probally be feeding in at least another $100.00 per week out of your pocket. Do your sums.

STUDSON, Interest only with the reason. Horses for courses it is a business venture not a private home to live in you are buying. The ultimate goal is to use as much of the banks money with the maximum capital gain, and the least outlay. Enigma raised the point that at the beginning you may have to contribute a bit yourself, but that is short term. Do some rough sums. A $300000 property will increase in value at the borrowing rate or roughly double in value every ten years. Lets presume Enigma is correct, and you have to stump up a hundred dollars a week for the first year. So what by the third and fourth year it is paying you a hundred dollars a week. In ten years time the house might be worth [lets be conservative with the price]$550000. It only means you have used the banks money with your deposit, which all being equal the rent reimbursed with you collecting the capital gain. With this as with everything, there are traps. Interest rates might increase, so at this moment in time with low rates lock in a fixed rate for as long a term as you can. It will cost a bit more but keeps you in an understandable position. The idea is to borrow on your first property after a few years and do it all again. Paying the loan off contradicts the business purpose, you can become a property magnate starting with a deposit on your first house. macdunk

I am new to the property market and have not much knowledge about it. However, recent thoughts revolved around buying a place somewhere for investment.

I started looking on the internet for houses in the category: cheap around $50k - $100k and found that there are quite a few places to be found, but most of them needed substantial repairs done.

In general what I found was that houses in the above price category being generally in tidy and good condition (no repairs needed for at least another 10 years) were selling like hot cakes anywhere in the country and the only chance to secure a buy would be to have finance in place and put a contract on the house immediately conditional only on a LIM and Builder's report.

After a few weeks I bought a solid 2-bedroom house for $53k in Taumarunui with 820 sqm of land. I was on the internet the day it came on the market (reason for selling: a deceased estate) and imediately secured it with a contract.

The place is tenanted returning 9.9%/year which easily covers mortgage-payments and rates.

A sure investment??...it seems to be so having read the story Studson shared with us.

duncan macgregor:

Paying the loan off contradicts the business purpose, you can become a property magnate starting with a deposit on your first house. macdunk

Excuse my ignorance but what does that exactly mean???

Thanks. I have read the post over 3 0r 4 times but, what I dont quite understand macdunk, is how one can ever expect to be gaining money from the situation you have described while only paying interest. I think that if it were costing you $100 p/w for arguements sake, unless you are paying off some level of principle then you can't expect the rent repayments to put money in your pocket (?). It would stand to reason that you would continue paying money into the property at the same rate each week unless rental income goes up or your interest rate or drops - which is'nt likely if you are tied into it for e.g. 5 yrs. (I think its fair to assume council rates
wont be coming down!!).

The only other way I can see the place putting money into your own pocket is if the rent goes up proportional to the capital value of the property. A 550K place today is going to rent for alot more than a 300K place today. Is that what you are getting at?

Please explain in further detail. TIA.

Studson

You have got to differentiate between buying a house for personal use where paying it off is a priority, and the smart thing to do, and a business deal. A person in hudsons position starting out with a rental property that is not a smart thing to do. The smart thing to do, and remember age is on his side,is to get the first property paying its way. The house price inflates, the rent inflates, sooner or later his initial deposit is sitting on a real bargain. The house is worth much more than he paid for it, and the rent more than covers the out goings. Let us be super conservative and say this takes five years. If he is a wise person, he will get the house revalued and take out a bigger interest only loan that just covers the outgoings, and buy his second house. The thing to remember is you are useing the banks money making money, never pay the principal back until you sell up. Selling up is the next step, always at the top of the cycle, and try and buy at the bottom with silly underpriced offers to desperate vendors. To buy your first house, dont worry about the cycle, get on the ladder. When buying a house that you really like but think the price is slightly to high, BUY IT. The price is to high this year, next year the price is right, and the year after its a bargain. If you do that who cares what you earn in a job you will end up rich without even trying. macdunk

i,m not a fan of this interest only idea... what has worked for me - buy a 3bd+gge house on int+principal, rent out, chip in out of you own pocket weekly/monthly as much as you can, get the principal down, get the interest bill down (and pay more principal), build up capital in the property, build up the value (in 2,3,4yrs of owning this will happen without any input from you), then borrow again, buy again, and repeat....and repeat. which ever way you go about it - do something "get on the ladder"

CLIPS, Nothing wrong with what you did, it worked well thats all that matters. Interest only against paying the pricipal only means you move on to your next buy quicker. If you want to slow the process down or stop with what you have then what you did is best. If you want the benefit of the largest property gain with the least money involved then you are wrong. After your first buy without adding your own personal money towards it with the final goal being that this is your money that will keep you in luxury in your old age then i am right. The profit is in capital gain, the more capital gain you take on board the better. The faster you get the second property with peter paying paul the better, paying principal over the top slows you right down. macdunk

MacDunk lets take danchops example above $309000.00 rents for $325.00 per week. $309000.00 at 7.5% 2year fixed mortgage interest= $23175.00 divided by 52=$445.67 per week. Add body corporate, rates, insurance,management fees And a small allowance for vacancies & maintenance. and you are about $10,000.00 in the hole plus loss of interest or dividends & capital gain from investing in market. definately you may be able to claim a Tax refund but if you are on a working holiday overseas this may not be possible. Unless there is a guarantee of substantial capital gain in Two years in my opinion this would be an investment for a half blind idiot.

Enigma, Why not take a real example the one i bought and sold to my daghter and friend. We can all find examples they put a small deposit down and it self funded. Then made a nice capital gain. Some people on the share market buy a dog other people make a lot of money. macdunk

Duncan and a lot of people do the same with houses. Most are dogs.

"The faster you get the second property with peter paying paul the better, paying principal over the top slows you right down. macdunk"

This was the key meaning for interest only buying.
It took me 25 adult years to buy a house. I built it myself. Now 6 years on I have a mortgage on 5. With rent rises, each pays for itself. and each has doubled in value with the boom. And with interest only (except for my permanent home) the extra money I can put in the stock market or buy another house.[8D]
But had I started what Macdunk has shown at a young age, I would be amazingly rich.[8D]

As a boy, I listened to my father (who is NOT rich) It was always, don't get credit. Pay everything in cash. What a shame! He admits his error now. :(


Mercury

Oh I should point out that the houses I have are all cheapos or Icould not have afforded them. Having built the first myself saved me a lot ( but I learned a lot too) (kept the wife active mixing cement....and now keep her washing dishes (just joking about the dishes))
But by interest only housing deals, the extra money can buy another. Putting it against a principal and interest loan lowers the amount owed by very little. And with inflation, it doesn't help to get your next house if the money is tied up in equity.
Sure the equity helps buy a house, but only with a bigger mortgage than you would have had you saved the extra interest and used it as a downpayment.

Good luck to you all....and Amanda...you can do good with the cheapos if they are paying for themselves.
Provided they are not in an area that goes downhill.
I know a woman and man who lived in Rockhampton for awhile. They bought a cheapo rental property and Rocky didn't do good for many years. They couldn't resell the house for what they paid for it. However, the boom will finally have changed that. They may not want to sell anymore.

Hey Macduck...you seem to be knowledgeable.
Two of my properties are in the Bundaberg are (QUEENSLAND) WHICH is a transforming area. Used to be sugan but changing to mixed veges and fruit.
My house is at the bottom of the market. pays for itself, but only a modest $1000 a year profit after expenses. major repairs would lessen that quickly.
The other is just out of town, on a 5 acre piece that floods when the rains come. About 2 inches under the house. Highset.

but Bundy was one of those stagnating towns. Prices actually went down after an earlier boom. do you think I should hold on rather than sell and buy a house by the sea?
I am 55 now....have about $200,000 in the bank....no super (30,000) and no permanent job. My back gave out after years of construction work. For the last year I have just been trading.
I like your words. Your ideas would be worthy of my attention.

Mercury

MERCURY, If you have a self funding property with an expectation of a decent capital gain with no expected large expences looming, why sell if you dont require the money. It is like everything else, sit down and write out the expected price today if you sold, and what you would buy to replace it as an investment, then what position is best for you. If you did sell out you are in the position to build a block of units, you living in one renting the others. Being in the building game means you know what goes on, even although your back is buggered. The world is your oyster, sit down and get it all written on paper then sit back and think it out. best of luck macdunk

Thanks for your reply Duncan. I wish i were as wise as you suggest....as a former tiler, i can't say I understand the building finance game as well as i would wish.
However, my wife and i would like to live within walking distance of the sea.
So if I sold one house investment I would gain $70,000 plus 100,000 by selling the house I live in.,,, giving 170000. Then Ithought I'd kickin another 130,000 and get the cheapest house by the sea, in a reasonably popular area.
For $300,000 I could get a 2 maybe 3 bdrm fibro up to weatherboard by the sea. Land values in the area I am looking at are about $240,000, but there isn't any land for sale.
What do you think of that scenario?

Not wishing to take up too much of your time.

Mercury

Mercury, Nobody can give advice in a situation you describe. It seems you are to young to wallow it out on the beach, it would get pretty boring. How about a business of some kind, motel or something that you can with your wife run in semi retirement.
You really need to sit down and nut it out, with your wife first. To buy a house with most of your capital and watch the savings diminish is not a good option at your age. macdunk