Saturday, August 02, 2008

Some people and their houses!

Hubby and I are considering buying another investment property. The property market is sluggish here with prices either stagnant or declining, which makes it the best time to buy, whether for a personal dwelling or an investment.

There are several kinds of investment buyers…some want to buy the property and “flip” it for a profit: these buyers need an undervalued or distressed property that they can buy, wait a few months for property values to rise, then sell at a profit. Other investment buyers specialize in fixer-uppers: they buy properties in need of repair, fix them up and then sell the property at a profit. These investors need in increasing property market in order to profit from their purchase. We, on the other hand, are landlords: we buy a property and rent it out, using the rental income to pay the monthly payments on the property. To make this kind of purchase work, the price and the condition of the property must be such that it can be rented out as soon as possible and at an amount that will pay the mortgage. Pretty much a no-brainer in my eyes, but I am constantly amazed at people who simply don’t get it…especially estate agents!

We were supposed to go look at a possible investment property last night, but at the last minute, the estate agent had to cancel our appointment. Seems the property is occupied by a renter who decided she had better things to do and was not going to let us in to see the property. I wonder if Judy, the agent, has any idea how bad that looks to a potential buyer? Why didn’t the owner show up with keys to let us in? Why is a tenant being allowed to determine when…and if…a potential buyer will be allowed to see the property? I own rental property and if I was keen to sell it, I’d be there with keys in hand if it was inconvenient for my tenant to admit potential buyers...I certainly wouldn’t allow my tenant to control whether or not potential buyers would see the property!

After our experiences with Lynda, who couldn’t seem to wrap her head around the concept that landlords trump tenants, Hubby and I no longer want to see this property because it is apparent that if we do, we will inherit a tenant who thinks she is in control of things, not the owner. Sorry, been there, done that, and don’t have any desire to do it again!

I am astounded at some of these properties…and at Judy’s attitude. I saw four properties yesterday and three of them were appalling. One required a huge investment in repairs, another one was grossly overpriced and inhabited by messy tenants, the third was an absolute pig sty, with things strewn about and washing hanging everywhere, dirty dishes in the sink, even a chunk missing out of a corner of a masonry wall!…the kind of place that “Clean House” moves in and makes over. Amazingly, the estate agent defended not only some outrageous prices, but the filthy, rundown conditions of the properties as well! She knew full well that if we buy it will be an investment property…maybe she doesn’t know what that means in practical terms.

You see, the whole purpose of owning investment property is to make money on it. If you are a landlord, to make a new investment property pay it has to get rented out as quickly as possible because every month the house is unoccupied is a month that the owner makes the payments out of his own pocket. This means the more work the property needs, the longer it will be off the market, which effectively means the buyer’s cost for the property is increased…not to mention the cash outlay for fixing the property in the first place. There is nothing emotional in an investment property purchase (or at least there shouldn’t be), the whole thing is driven by the numbers.

What are those numbers? Well, the first one is “How much rent can I get for this place?” The second one is “What are my monthly payments going to be?” (If you don’t have an idea of what interest rates are and how to calculate your monthly repayment, then you should not be looking at buying rental property!). Now, if the discrepancy is small and something you can make up out of your own pocket without too much pain, then you ask the rest of the questions: how quickly can I have this ready to rent out? How long can I make the entire payment out of my own pocket? How much is it going to cost to make it ready to rent?

These last are the questions that make or break a deal. If you can assume the estimated rental is approximately the same as the estimated monthly house payment, it looks like a good deal, right? But suppose the house, like a house I saw yesterday, has a garage conversion that was so badly done that it now has a leaking roof, sodden ceilings, and the only access is through the master bedroom. And, to add to the trouble, the main bathroom has badly broken tiles and the toilet has had a serious leak in the past which was very amateurishly repaired. Now what?

Well, the first thing you have to do is come up with a rough estimate of the cost of the repairs. Will you do the work yourself? How much time will it take? Each month the building is under repair is a month without rental income, so you are actually adding to your acquisition cost.

Look at it this way: let’s suppose you feel you can afford R800,000 for a rental property:

Cost of property (including fees ): R800,000
Monthly repayment: R7,000
Three months to repair: 3
Cost of repairs: R50,000
Actual cost of property: R871,000

Why R871,000? Because that it what it is going to cost you before you can rent it out to the first tenant: R800K for the house, R21K out of pocket for the house payments, and R50K to fix what is wrong with it. So, to limit your investment in the property to R800K, you’ll have to buy it for R730K or thereabouts…That way, when the property is ready to be rented out, your property investment is actually the R800K you figured you could afford.

Now Judy tried to convince me that the house was priced at its fair market value, but it had been on the market for months and it was vacant and the sellers were getting desperate. If it was truly at its fair market value, wouldn’t it have sold already? Obviously, those who had viewed the property were not inspired by the obvious work that was needed. What the estate agent was refusing to face is that when a buyer is quoted a price, s/he expects to have a property ready for occupation at that price, not a property needing further investment in order to be habitable. “It’s a fair price,” she kept telling me. Yah…if it was ready to move into, I might agree…but not if it is going to cost me another R70K before I can put up a for rent sign!

Investment buyers are, by definition, people who seek to acquire property with the least expense to themselves and then profit from their purchase. We look for properties that are ready to be rented out very quickly or that are priced low enough that a month or two off the market for repairs won’t be deadly to the pocket. And the properties have to be in neighbourhoods that will attract renters who have pockets deep enough to pay a rent that will cover the majority of the monthly bond payment. Over time rents go up and eventually the property will go into a positive cash flow mode, but if you’ve paid too much for the property, either through extensive repairs and off-market time, or by failing to resist an agent’s platitudes, you’ll never get into profit.

One of the things a potential landlord looks at is the condition of the property at the time of showing. A lot can be inferred by the way people are living in the house. I viewed one place where I could not see the bathroom fixtures and floors because they were strewn with clothing. I could not see the condition of the carpets in the bedrooms because the rooms were dark and there was junk and clothing strewn all over the floors. I could not see the condition of the kitchen counters, sink surround, or anything else in the kitchen because it was jammed with dirty dishes and clutter and stuff strewn around. We entered through a patio door…was there something wrong with the front door? The resident’s dog was busily digging a hole in the back garden while the resident ignored him (he couldn’t’ have been shut in the garage for the short time we were there to view the house?).

So, as a possible new owner for this place, what was my impression? I had no way of determining the condition of the property because the place was a pig sty and I couldn’t see the windows or the lights or the walls or the carpets or the floors or the kitchen or bath fixtures. Were the tiles in the bathrooms intact? Was the shower grout in need of replacing? Did the kitchen drains work well? Did the cupboard doors close properly? Was there water damage under the sink? I couldn’t get to these areas, they were blocked by the clutter and mess of the resident. But, when you consider that these people obviously have no interest in cleaning up after themselves, what is the likelihood that they made any efforts to keep the place in good repair? I did notice a big chunk out of a masonry wall and when I pointed it out to Judy she just shrugged and said “Oh, it’s just cosmetic.” Excuse me? A pyramid-shaped chunk of cement nearly two inches across gouged out of the corner of a stud wall is just cosmetic? And who is supposed to pay for that fix and the painting of the room that will inevitably follow?

Judy hasn’t called me back to see any more properties. I think she thinks I’m too picky. But not being picky when you buy a property, unless you can get it at a low enough price to make up for the deficiencies, is just stupid.

Which I, of course, am not.

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