Zhiyang has landed a brilliant deal in Timaru, in the heat of a seller’s market, no less. This was an off market deal through a property trader known as ‘Handsome Holdings Ltd’.
The purchase price for this property was $890k plus a finders fee, bringing the total to $905k. For this, he has a 6 unit property, each unit having 2 bedrooms, all on a corner site on a main road sizing 1800sqm of land.
As it stands, the rental amount on each unit is $270 per week. Zhiyang did some research on this and went around 2 or 3 property managers to get a price estimation. Ray White estimated the current rental expectation for each unit to be between $270-$290 per week, before renovations.
As Zhiyang intends to renovate and fix issues within the property, he expects the rental amount to increase to $300-$320 or even more per week, increasing valuation.
A registered valuation came in at $960k with a completed renovation at $1.275 million. Zhiyang intends to invest approximately $15-$20k per unit for cosmetic and structural renovations. His builder’s report addressed in detail any concerns $20k has been put aside to fix any issues across the entire building.
A fresh lick of paint, carpet and changing the benchtops for each unit and a proposed $120k will renovate this entire property to invite higher rent and higher valuation.
In terms of financing, as this is a multi-unit deal a non-bank lender would not consider them. So it was a main bank for Zhiyang and quite a bit of cash was needed to go into the deal. Thankfully he had a cousin who had cashed up and was willing to go into this investment with him and his mother was happy to help with the renovations.
Looking at the figures, $765k, or 60% of total expected price of the property after renovations, is what can be taken out. Investment properties must have a LVR of 40% or more. As there has been an initial investment of around $480k, Zhiyang has calculated that he can top up an additional $230k, so only needing to leave $250k in the deal.
Assuming completed renovations allow for a new rent to be about $320pw, this will yield $1920 weekly rental income. A 5% vacancy rate and a property management rate of 9.8% as well as other expenses, including mortgage repayments at 2.5%, brings the total net income of about $24k per annum.
Again, this is based on the mortgage of $765k with $450k cash invested.
You can’t get much better out there at the moment in terms of cash on cash return. It’s nearly 15%.
Because the mortgage coverage is a whopping 13% and with a lot of cash in the deal, Zhiyang found out that his borrowing capacity actually increased by $300k.
With such a benefit for Zhiyang, he can consider repaying those who have helped him with the $250k deposit, his cousin, with a little interest tacked on for a win-win deal. If you are having difficulty convincing investors to come into a deal with you, the newest version of the mhq spreadsheets do have a deposit mortgage repayment feature available, allowing you to safely calculate how this might impact your net income.
Remember, this doesn’t have to be a fixed repayment that raises red flags to your bank and impacts your borrowing power negatively. You can repay them every 6 or 12 months so that it doesn’t look like a cash flow commitment for you.