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INVESTMENT CASE STUDY - Looking a gift horse in the mouth

We were working with a new client who time had a relatively limited budget based on their available equity. At the time the price range was mid to low $300s which even then was challenging.

It’s important to note that a lower price point can still be workable but the important thing is for the client to adjust their expectation accordingly. For house and land this generally means looking a bit further afield. It might also mean looking at locations that you would not choose for yourself. But that doesn’t mean that location isn’t highly sought after by someone else.

There’s a saying “One man’s floor is another man’s ceiling”.

We had come across a small block that was in a good quality estate and while small the backyard had an outlook over parkland which gave a great sense of space. A lot of homes in the area on similar sized blocks were typically 3 bedrooms with 1 garage or a carport. We thought we might be able to a 3 bed with a double lock up garage.

After discussions with one of the builders we work with they felt there could be a way to actually get 4 beds plus a double garage on the site. And after a bit of playing around they came up with a solution. And still under our budget with an all up cost of $345000.

Our expectation for rent was $350 a week. 4 bedroom homes in the area were renting for more than this but given the smaller block we thought it more realistic to pull back expectations.

Nonetheless on that rental figure the property just tipped into positive territory as per the cashflow projections below.
 

Based on the budget and the cashflow we felt this was a really good option for the client. Aside from the numbers on the property the area was a strong area for employment, well serviced for schools and shopping, well developed transport infrastructure and had already demonstrated a solid track record of long term growth.

Unfortunately, the client turned their nose up on the area due misplaced beliefs about the quality of people who would rent the property so they did not proceed.

Knowing we had come up with something pretty good I really wanted our clients to benefit and not see the opportunity pass to someone else. I immediately contacted one of our existing clients who was not too far away from needing to add another property to their portfolio. Once they had an opportunity to review the information they didn’t hesitate and we got the property off the market straight away.

As soon as the property was complete a tenant walked straight in paying $430 a week. Remember our estimate was $350. 2 years on the same tenant is still in the property now paying $435 a week and hasn’t missed a beat.

The increased rent has made this property well and truly cash positive as the cashflow forecast below shows. A recent appraisal of the property now puts it at $425000.
 

I’d certainly never promise that we would get this result for a client every time but even if it only achieved our original projections it would have been a good option.

The lesson from this is not to let preconceived beliefs shape your decision making. Pay attention to the numbers and the evidence. Just because something looks like an ugly duckling doesn’t mean it can’t be a beautiful swan.


Cheers

 

Greg Carroll