Rent Money is Dead Money - part 3

Another interesting comment from a reader regarding the prior post Rent Money is Dead Money:

I am a number of months into my apartment owning experience, and your colum on buy versus rent this weekend was very interesting. 

 

It has surprised me how relatively expensive apartment living is in comparison to houses.   Unencumbered by the facts, you would think that apartment living would be cheaper due to massive economies of scale:

 

·         Two pools supported by 400 units not one pool by one house

·         Four large garbage collections from four points rather than traversing a neighbourhood with 400 different pickups – council gets the benefit of this one – and nobody would use tip vouchers.

·         Maintenance of larger grounds, but offset by 400 units supporting, versus grounds per house

·         Economies of scale on hot water heating by using much larger units

·         Economies of scale on water requirements

·         Economies of scale on heating and cooling due to insulation from two sides, roof and floor not being open to environment.

 

Obviously the above benefits are eroded by the cost and maintenance of elevators, the onsite manager, profit margin for developer, security, etc.

 

For my apartment, annual fees for rates etc are not $5k per your note but $9k, comprising $6k body corporate and insurance, $2k rates, and $1k water.

 

The $6k for the body corporate was not particularly out of line for similar units when I was looking around.

 

The $2k for rates is just as a result of robbery by Brisbane City Council.  My home rates are only $1.4k.  Rates for my apartment should be only $1k but a 2.1 parity factor was put on by the Council when they went through that rate adjustment exercise.

 

Obviously at home in a house, I have no body corporate, but realistically I should consider the $45 I pay a fortnight for lawns mowed as equivalent, and I look after my own pool.

 

So I am paying $1.2k/yr for lawns mowed, if I got the pool looked after I am guessing that would be $40 per month or so.  Say that’s $2k per year.  Home insurance is probably $600 per annum, can't tell as it is bundled with contents.  There are other costs with the pool, all the chemicals, the pumps/chlorinators etc and some provision for outdoor maintenace , say another $1k per year.  So in fact that is $3.6k per year, maybe a bit higher than I thought it would be.  And there are probably other episodic costs that I haven’t been quite fair to my unit on.  I just had to spend $3k to get my home pool fence up to spec.  Maybe the comparison is not as bad as I first thought.  If I am honest there would be other expenses on my house that would be covered by Body Corp for equivalent unit.

 

But still, even with all this, it seems evident that the apartment is still more expensive than house and all those economies of scale are eroded.

 

Obviously the other cost savings that you really need to be taking with an apartment are as follows:

 

·         Dropping Gym memberships and using shared facilities at the common areas.

·         Dumping at least one car – that would give a pile of savings, that are only going to get higher.

 

I don’t see the power bill for my unit, but this is an area where I suspect apartments are losing out to houses.  I've had for over a year solar hot water and solar panels for elec gen on the roof.  These have paybacks of around 5 years or so based on current elec price and are only going to get shorter payback as power bills increase.  How are apartments getting onto the bandwagon of sustainability.  I am sure it is impossible to get a pile of owners to cough up more money to install solar hot water or solar panels.

Rent Money is Dead Money - part 2

This is a note from a reader, in response to the prior Rent Money is Dead Money post.

Here’s an actual position scenario sent in by a reader in support of the report “RENT MONEY IS DEAD MONEY” that is, is it better financially to rent than own an apartment. The figures quoted here are actual, dated within the last 6 months. The apartment is a 2 bedroom in Newstead, approx 12 years old with good partial views of the river, 1 car parking, in a well managed complex.


Cost of Ownership VS Renting the same apartment. (round dollars)

Most recent sale price = $650,000 (2 years ago were selling for $725,000 to $795,000)

OWNING

Rates                                  $2060 p/a

Water & Sewage              $804 p/a

Insurance                           $480 (personal property) p/a

Corp Body                          $4169 pa

Sinking Fund                     ??

Extra Levy                          ??

Total cost of Ownership $7513 /12 months =$626.00 p/m

Loss of Interest on capital ($650,000 @ 6.11%)  = $39,715 pa /12  = $3,309 p/m

Total cost to buy outright for cash  = ($3,309 + $626) = $3925 p/m

COST PER YEAR TO OWN = $47,100

Other: At present, is a depreciating asset while ownership costs continue to rise.

RENTING

Rent paid  = $2100 p/m  = $25,200 p/a

BUT

Still have $650,000 in bank earning $39,715 pa (Bankwest, citbank, ING, ANZ (6%) et al online saver accounts, immediate access to funds)

Other: Property prices continue to fall, and may fall further in 2012 = no depreciating asset to carry.

Flexibility to buy if/when prices fall further. 

No responsibility other than taking good care of the property and paying rent on time.

COST TO RENT  = $25,200

SUMMARY

To own = loss of $1825 p/m x 12 = $21,900 p/a worse off owning a depreciating asset, just to say you own it. ($47,100 -$25,200 (rent) = $21,900). Who would want to own one with a loss like that!

I’m better off renting than buying AND still have liquid cash in bank. Therefore, with my money in the bank, I’m $21,900 a year better off renting.

THERFORE

To equal the return I get from the bank for the same money it would cost me to buy into these units, the unit would need to be priced at $427,000. Therefore, the real price of these units is $427,000. At $650,000, they are grossly overpriced, as we all know. $427,000 is the real value of these units.

And to the critics, don’t mention inflation  - I don’t believe in it over a short term 2-4 years. If you insist upon mentioning inflation, I’ll raise you a clear hand with “depreciating property prices”, 10 times the loss of inflation in just 18 months or “CGT” later or Negative Gearing (surely you’ve lost enough already without NG!).

Apartment values outperform houses in Brisbane

Headline in today's paper:

UNITS continue to outperform houses in Brisbane, according to the latest market research from property analysts RP Data.

Extract from story:

"And, from an investment perspective, they offer superior rental returns. The gross rental yield for a Brisbane house is currently recorded at 4.7 per cent compared to 5.3 per cent for Brisbane units."  [Note: this does not take into account higher costs for apartments, namely body corporate fees.  It may be the case that net yields are similar for apartments and houses.]

The level of vendor discounting for houses is also greater - 8.3 per cent compared with 6.8 per cent for units.

"Discounting levels for houses are higher than at the same time last year, however unit discounting is slightly improved from the 7 per cent 12 months ago," Mr Kusher said.

"Despite the inflated discount levels, both measures are below their recent peaks of 8.7 per cent and 7.8 per cent respectively."

The average time it takes to sell a Brisbane property is also at relatively high levels.

Of those properties that sold in October, houses had been on the market for an average of 61 days and units 60 days. Both measures were higher than they were 12 months ago, but both had improved from their respective recent peaks of 66 days for houses and 61 days for units.

Mr Kusher said the data was for October and therefore did not take into account the Reserve Bank cut in interest rates by 25 basis points on Melbourne Cup day."

Full story here.

Two Queensland Buildings

From a recent article by Matusik: A Tale of Two Queensland Buildings

"Firstly, an investment dwelling’s worth should be determined by income – that means rent – just like it does for offices, shops and factories.  It shouldn’t be determined by a “comparable” resale.

Secondly, how and where the developer spends his or her money on a project shouldn’t affect the market’s (nor valuers’) perception of value.

• An investment’s value shouldn’t be determined by what a buyer once paid but by its income.
• The distribution of costs has no bearing on the end value of a product."

Full article here.

Improving Market?

It is useful to look at recent sales of apartments, and compare the price at which the apartment sold with the price that the vendor originally paid for the apartment.  In find this is more useful than looking at medium or average prices.  For example, if a building has a mix of 1 and 2 bedroom apartments, and for the last six months, only 1 bedroom apartments are sold, then the medium price will decrease.  This does not tell us whether the 1 bedroom apartments went up or down in value.

I recently had a look at sales in the Fresh Apartment building on boundary where Taringa mets Toowong, at 20 Campbell Street.   This building had its carpark flooded in the 2011 floods, but no apartments had water in.  The two magnificent pools were not flooded either.  It was developed by Vecchio, who is currently developing Rive Apartments (see post above.)

Apt 20:.  This apartment is 2 bedrooms, 2 bathrooms, 120 sqm (85 internal, 35 balcony).  In March 2007, it was advertised off-the-plan for $459,000.  The next year, it was still for sale off-the-plan for $504,000.  It was sold by the developer in May 2008 for $566,000 (probably this was above market price).  The first owner then resold it in November 2009 for $537,000.

Apt 23:  This is a 3 bedroom, 2 bathroom apartment, with a North East Aspect over the pool.  It is 148 sqm in total. It was sold off-the-plan for $669,000 in July 2007.  It resold in September 2011 for $569,000.

Apt 54:  This is a 3 bedroom, 2 bathroom penthouse apartment.  It is 117 sqm internal plus a large 84 sqm balcony..  It sold off-the-plan in April 2007 for $807,000.  It resold in August 2011 for $600,000.

So take care when buying off the plan or from a developer.

Two Books

Before buying or investing in an apartment in Queensland, you should consider these books:

• Buying An Apartment Off The Plan in Queensland - A Guide For Successful Buying
• Investing in Brisbane Apartments - A Guide for Successful Investing

I see that BigW is now selling Kindle Book Readers.

Charlotte Towers - Recent Sales Results

There have been 5 reported sales of apartments in Charlotte Towers in the July 2011 to October 2011 period.  Charlotte Towers was developed by Devine, is managed by Oaks, and is located at 128 Charlotte Street, Brisbane.

All sales have been one bedroom, one bathroom apartments, without a car space for parking.

• Apt 3101 - sold for $313,000
• Apt 2605 - sold for $325,000 (purchased off the plan for $326,000; listed for sale at $349,000)
• Apt 1406 - sold for $306,000 (purchased off the plan for $291,000)
• Apt 609 - sold for $302,000 (purchased off the plan for $295,000)
• Apt 3309 - sold for $302,000 (purchased off the plan for $347,000)

Taking into account stamp duty, legal costs, and real estate agent fees, all five of these original owners sold at a loss, and is some cases, for a loss greater than 10% (not taking into account inflation, interest costs and any furniture packages that may be been purchased -- so the overall loss will be somewhat more substantial.)  There are big risks in purchasing off the plan from the developer, and buying an apartment in Brisbane as an investment is not so easy.

Also, note that the highest reported sale for the whole building, for a four month period was $325,000.

With a tower being built across the road, values are unlikely to increase for some time.

Invest in Brisbane

Shares or property?

• The Standard & Poor’s 500-stock index was off more than 14 percent for the quarter — and more than 10 percent for the year so far.
• The Dow ended the quarter down 12 percent and the Nasdaq lost 13 percent.
• ASX index of shares fell 13% in the September quarter; down over 15% for the year to date.

"The market has fallen over 15 per cent so far in 2011, putting it on course for the second sharpest annual fall in 2 decades and the heightened volatility has led strategists to take a cautious view -- despite historic low valuations."

Real estate investments are far less volatile than shares.

According to RP Data, Brisbane apartment prices increased 3% in the quarter ending August 2011 and prices are flat year to date.  RP Data believes Brisbane real estate is at the bottom of the market.  There is a significant price difference between Brisbane and the Southern capitals.  Rent yields are increasing.  It would appear that now is a good time to buy in Brisbane.

Before buying an investment property in Brisbane, read Investing in Brisbane Apartments - A Guide for Successful Investing.  You can read this ebook using a free Kindle Reading App, or you can buy a Kindle reader for use in Australia.

Brisbane Investment Apartment

Don't forget to read, Investing in Brisbane Apartments - A Guide for Successful Investing, recently published and available at Amazon for immediate download delivery.

New Book: Investing in Brisbane Apartments

This is a plug for a new book published this week, Investing in Brisbane Apartments - A Guide for Successful Investing.

Currently, this book is available only via the Amazon Kindle store. If you don't have a Kindle, then you can download for free Kindle software apps for an iPad, iPhone, Mac or PC. If you can read this blog, then you can use Kindle software to read this new book. Click on the following link for the software to read this book:

Kindle Reading Apps

The Chapters include:

• Apartments as Investments
• Buying Decisions
• Off the plan apartments
• Renting Your Apartment
• Foreign Investors
• Legal Structures for Apartments

Investing in Brisbane Apartments - A Guide for Successful Investing

Sunshine Coast Not Investor Friendly

Property valuers Herron Todd White report that the Sunshine Coast is not investor friendly. High taxation, and no representation. Not a good long term situation.

"Holiday units are typically returning a gross yield in the vicinity of 7% to 7.5% however after management fees etc, the net yield would be in the vicinity of 5%.

One of the drawbacks of owning investment property on the coast continues to be the additional levies that are being charged by the Sunshine Coast Regional Council. these are charged on all non-owner occupied properties, even when they are holiday homes which are not rented. this leaves a sour taste in the mouths of investors, most of whom are not locals who don’t have the opportunity to cast a protest vote."

Source: HTW Report

HTW Market Update

If you purchase a flooded property, you may find yourself paying 5% to 20% discount on what similar but non flooded properties are selling for in the same suburb and without a dramatic discount in rent. ...

That said, there are some suburbs that were tarnished by the flood that offer excellent value for non-flooded stock due to the overall lack of buyer confidence. For example, st Lucia has a ready source of student renters, is close to the CbD and enjoys good local services, but its riverfront areas copped a hiding in January. As a result, the dry property (and there is plenty) has also had a downturn. not too long ago, one of our valuers had a look at a two- bedroom, three-level townhouse that sold for $400,000 and will easily see $430 per week in rent. A 5.5% gross return in this location is a very nice earner indeed. ...

General market conditions across the Gold Coast are very tight. only those properties where the vendor is willing to meet the market are selling. there is generally an oversupply of similar properties listed for sale. Feedback from locals within the property industry indicate that the market may not yet have bottomed out which is concerning potential buyers. Our opinion is that we are bumping along the bottom similar to the late 1990’s and that properties will sell within a wider value range depending on the circumstances of the vendor.<
Source: HTW Report

Why I Like Property

A recent article from Washington Brown Group is titled "Why I like property". It makes good points, provided that you are looking for a long term investment that can go through periods of being hard to sell (like the present).

Investors Returning

New mortgage sales figures for May point to investors returning to the Queensland market. More than a third of loans (36.5%) processed in Queensland in May were investment loans, the highest figure for more than a year, according to the latest AFG Mortgage Index.

This is just below the proportion of investment loans processed in Victoria (38.8%) and NSW (37.9%)

Mark Hewitt, general manager of sales and operations at AFG, tells Property Observer the Queensland market has reached a point where house prices have come down in past 12 months, meaning investors are seeing value in the market.

“We are not anticipating a massive rush, but there are positive signs in both Queensland and WA,” Hewitt says. “That there is a lot of stock available, especially on the Gold Coast. Looking at the overall market, Hewitt says property investment has remained at consistent levels throughout the ups and downs of the property cycle, but strengthened significntly in May. It is certainly a buyer’s market right now, and investors looking at rising yields are probably better insulated from the impact of rising interest rates than other types of buyers.”

Property Observer

The Mood In Brisbane

I have spoken to a number of agents and bankers lately in Brisbane. It seems that the mood in changing, and properties are starting to sell, especially in the $400,000 to $550,000 price range. Buyers, including investors, are buying where the price is right (typically 5% to 10% below the peak), and sellers are accepting offers. Bankers are back in sales mode and appear to be willing to lend. Vacancy rates are low and rents are good.

For example, at the Ray White auction today, a relatively new two bedroom apartment at Indooroopilly (113 sqm in total) sold for $400,000 under the hammer, where the rent is $500 per week. Another 2 bed apartment of similar size in a different complex with river views also in Indooroopilly recently sold after only a few weeks on the market for $485,000.

Good quality two bedroom apartments in the downtown area are renting for $650 per week unfurnished.

But this more confident mood is not the same everywhere. The top end apartment market is very dead. For some apartments over a million, no buyers are calling at all. On the Gold Coast, things are very slow. Juniper's Soul development has been slowed down, with the first batch of settlements being delayed until the second half of this year and there are less construction workers on site. I wonder why?

In short, the mood is picking up in Brisbane for well priced investor apartments.

High Rises

In a post below, I mention that the May edition of Australian Property Investor had a good story about the oversupply of inner city Melbourne high rise, titled "High on High-rises" (page 86, May 2011 edition). Some quotes about the Melbourne apartment market:

• "What we have sitting out there is a potential tsunami of apartments. They're all high-rises and a lot of them are aimed at the investor market."
• "They're missing the point altogether, building high-rises and thinking this will solve the housing dilemma. These places have poor facilities, with a lack of shops and where people don't get a chance to mix in a community."
• "High-rise apartments are largely marketed to investors because developers are under pressure to sell a certain percentage off the plan before they can build. You're buying brand new, so obviously paying a premium for the 'wow' appeal."
• "The majority of this construction will also be relatively small one and two-bedroom apartments aimed at investors, and 50 to 70% populated by students. The initial vacancy rate is likely to be high, taking significant time to absorb the necessary demand."
• The Age recently reported 88% of the 4,155 apartment sales in the first half of 2010 were in investment focused buildings.
• "My concern is that with a high-rise there are so many of them and they're all the same. There's no point of difference."
• "Because so many come on the market at once, they get let very quickly to anybody that comes along. Before you know it they look like slums."
• "Investors should try and buy two-bedroom properties [rather than one-bedrooms] if they can afford it."
• "In a high-rise, you're buying a carbon copy of 100 or 200 other units. Your until will be completely dictated by what the last unit sold for."
• "Poor property struggles in the market for years."

HTW Month in Review - March 2011

The HTW Month in Review for March 2011 has the following advice:

"In Brisbane it means check your pricepoints, shore up your rental base and see if you can value add. One sector that achieves all three is near city second hand units. These little treasure chests are normally in a three storey walk up design with a couple of bedrooms and a garage or two. This is all within an easy stroll of the really desirable stuff like shops and restaurants. Think Paddington, Auchenflower, Ascot, New Farm, West End and so on. In fact, draw a line around the CBD at about the 5km mark and start hunting. If you can feed off demand from a nearby university or hospital, all the better. If you can also get close to the café centres then you’re on a winner. It is still possible to land yourself in one of these gems for sub $400,000 and it’s amazing what a lick of paint and some new carpets can do for such little cost. If your dollar is a bit tighter try the same sector further out but close to shops and transport. All in all these units give you plenty of long term upside with capital growth and rental return pretty much a sure thing."

"And now, the caveat. We are witnessing a few eager beavers leaping onto flood affected property in the hopes of landing a bargain. We at Herron Todd White Brisbane have been considering discount rates of approximately 10% to 20% for the new wetlands but it must be remembered that there is now a whole heap of potential purchasers who will take years (if ever) to come back to flood effected property. If the 1974 example is set to repeat, there may need to be a generational change in buyers before the market returns to former glories relative to the non flood bricks and mortar. Make your investment a wise one when you start to consider the long term grow."

Gold Coast:

"Prudent buyers are seeking out prime beachside locations and purchasing both units and dwellings at prices up to 50% discount from there peak in late 2007.

The ‘Buyers Market’ which has been created by and oversupply properties has seen a steady decline in value levels throughout late 2010 and into 2011 with Iocal agents reporting buyers are willing to purchase if they feel a large enough discount has been given. This is very evident with local agents advising cash contracts being offered at open homes which are not subject to finance."

Real Estate Agents Say Ideal Conditions for Investors

The real estate agents industry lobby group, REIQ, issued a press release today, putting a positive spin on apartment sales in Queensland:

"Reduced demand for investment properties is providing ideal conditions for buyers, according to the Real Estate Institute of Queensland (REIQ).

Over the September quarter, median unit and townhouse prices held steady in most areas of the state, while demand for properties usually targeted by investors and first home buyers reduced markedly as economic conditions and higher interest rates sidelined buyers.

Preliminary sales in the $350,000 to $500,000 price bracket across the State fell more than 20 per cent compared to the June quarter while sales in all other price brackets held their ground.

“The number of first home buyers has fallen since their high of last year, however, we anticipate demand from first-timers to continue to gradually increase next year,” REIQ managing director Dan Molloy said.

“Investors have also been sitting on the sidelines, with investment demand currently half of what it is was during 2007.

“Investors and first home buyers are usually competing for the same affordably-priced properties but the current lack of competition between these two buyer types has created ideal buying conditions, especially for investors.”

US News

"LOOKING for a deal in a down market? As winter sets in, the fruits of desperation — foreclosure sales, short sales, auction sales and deep discounts — are appearing in bountiful number, if anyone out there is hungry for a bargain."

NYTimes

TWO-BEDROOM apartments have long been the workhorse of the New York City real estate market, accounting year after year for the largest percentage of apartments sold.

When the recession hit, buyers fled the market and prices fell across the board. After things stabilized in late 2009, the market share for two-bedrooms had dropped from a typical 40 percent to as low as 25 percent, because more people had found that they could afford three-bedrooms, which took sales away from two-bedrooms.

Now, after a lull that has lasted for more than a year, two-bedrooms are back.

NYTimes

Real Estate Investors Look to the Future, and See Signs to Buy Apartment Towers

NYTimes

FOR some New Yorkers on the hunt for an apartment, the must-have item in the search is nothing as prosaic as a walk-in closet or a second bathroom. It is a number — a lucky number.

NYTimes

"Chinese love the Sunshine State"

Story from the AFR on Friday last week -- "Chinese love the Sunshine State". The article states: "Half a dozen significant high-rise properties on the Gold Coast and Brisbane, which are believed to have secured a significant proportion of foreign investors, are due to settle in the next 12 months."

See also Gold Coast Bulliten