A couple of weeks ago I consulted a client on the selection of a suitable investment property. At one point he decided to get my opinion on the listing that he found in his letter box. The ad stated that it was a run-down property (the pictures clearly demonstrated that too), 50-60 years old. It was located in a low socio-demographic street in South Auckland. The client believed he could pick up the property for about $500,000. The property would at least require $50,000 worth of renovations. Once the property was renovated the ad promised to deliver a weekly rent of around $450 for a 3 bedroom house.
When I asked my client what attracted him to this ad he replied: “Low price and good cash flow”.
This particular client never owned an investment property in the past so as you can imagine he was a complete novice when it came to analysing the investment opportunity (or liability in this case). My short answer was that I would never recommend a property like this to my clients. Why use Diamond Property Group when you can just go on Trade Me, right? The long answer is a bit more detailed and here are my reasons why the investor of typical profile (married, 1 dependent, $200-300k mortgage, $20k bad debt, $110k combined income) should NOT invest in this property:
- Location – when sourcing an investment property we always look for high growth area with strong rental demand. We want the investment to be in a location that offers access to good schools, public transport, shops and other amenities. We also want to make sure that we can easily find a quality tenant who will treat the property with respect and pay rent on time. When you decide to invest in low socio economic areas with higher level of crime, lesser quality schooling and inferior amenities you are putting your financial health at risk. Not only you may have on-going issues with tenancy and maintenance, when you decide to sell the property it will always be the less preferred option for future buyers.
- No tax advantages – the older the property the less depreciation on chattels you can claim. In a current condition there would be no depreciation on the existing chattels due to its age. A lot of people underestimate the significance of this non-cash expense. in contrast, the brand new properties at around $550k mark will allow you to claim about $12,000-$15,000 of depreciation expense in the first year.
- If this person decided to renovate this property it will cost him 10s of thousands of dollars in vacancy while he is renovating. With this person’s lack of experience and current shortage of tradesmen you are looking at 3 months long job with no income coming in.
- This property had a section of around 400 sqm hence there is no opportunity for minor dwelling or subdivision in the near future.
In conclusion, not every property in Auckland is going to be a good investment. When we recommend investments to our clients we ensure that the journey will be hassle-free AND affordable. Therefore, we would be able to source a brand new property in Hamilton at very similar budget.