I’ve gotta admit, this one was a little fun…
I’m looking at a 12 bedroom house at 44 Arthur Street, in Bundoora VIC. Who could possibly need 12 bedrooms, you ask? Students, of course! What I love is that we can expect fairly constant demand for student accommodation, particularly in this area, which is home to 2 large universities.
Like many properties going to auction lately, this one has no price attached. But after a bit of research, I’ve found out that the agent’s expected range for the auction is $670k – $720k, and if Melbourne’s recent auctions are any indication, the property will probably go for a little higher than that.
So with this one, we’re going to work out the max price where the deal still makes sense from a cashflow perspective. Using the same assumptions for our hypothetical investor that we always do (with one or two twists that we’ll get to in a moment), how high can we bid before it’s no longer positively geared?
With impressive rental income of $4441 pcm (gross yield of 7.4% on $720k purchase), and after all your average deductions (depreciation, council rates, etc.), the property is likely to return a decent amount before interest. Do note I’ve assumed a higher amount than usual for maintenance, and a higher vacancy rate for empty rooms over the summer. Leaves a little bit of room for error.
Also, in my workings, I haven’t included property management fees. This is because, in my opinion, self-management is probably a better strategy when it comes to student accommodation. This DIY approach also seems to be favoured amongst our clients who rent to students, as property managers can get quite expensive in these scenarios and tenants are easily found with the universities just around the corner. Being a little more hands on does require more effort, of course, but also offers more control, which is helpful when dealing with your average bunch of rowdy students… Like me!
There are many risks with student accommodation, but that’s not to say that the risk necessarily outweighs the potential for profit in this situation. I’ve seen quite a few of our clients using variations of the ‘student accommodation’ strategy, and the one thing they all have in common is a fairly healthy profit.
So anyway, what I’ve done here is analysed the likely expenses and current rental income, and if our hypothetical investor was looking for positive cashflow from day one, I wouldn’t recommend going over $790,000 on auction day. This price will have him sitting at a relatively cashflow neutral position, so the further below that figure he is, the better off he’ll be. The cashflow analysis shouldn’t ever be the only factor in nominating a bidding limit, but still, that $790,000 benchmark is not so unrealistic.
So what do you reckon? A viable deal? Click that comment button just below and let me know your thoughts.
Hi Danny
This series has been well done. Thank you for your efforts
Agreed, great work Danny. I’m enjoying seeing what you can come up with every fortnight to show the many different ways to make money (instead of losing it!) with real estate.
Keep it up, mate.
Oh, and remind me on Monday to look up the sales database. I’m curious to see what happens with the auction on this place over the weekend…
Thanks Dale and James, good to hear your enjoying the series 🙂
Got quite a few interesting things planned for future analyses, so make sure you stay tuned!
It’ll be very interesting to see the results of that auction James, I’ll make sure you check it out.
Thanks again for reading 😀
Very interesting reading Danny.
I’d love to see a property analysis using a lower income (say 40k’ish) hypothetical investor with loads of existing equity.
That’s definitely something I’ve got planned for the new year, so make sure you keep reading to see what I can come up with.
It’ll certainly require a different approach and some creative thinking, but I’m always up for a challenge!
Sold at auction for $605k – sounds like a good buy.
Danny, you’re smarter than I am – what do you think the yield and cashflow on this place would be like now?
Definitely a great buy! I’d be very confident if I was this buyer..
Using the figures from the original analysis, but adding in the purchase price, we’ve got a net yield of about 7.28%, with a very impressive $130 in positive cashflow pocketed each week!
Remember, those figures will only increase along with the property value and equity. Our hypothetical investor would definitely be sitting pretty in this situation.
Sounds like a good buy on the onset. But if you consider the prospect of the new student accommodation regulations coming in Early 2010 and getting the property conforming to these new regulations it would be interesting on the yield of this particular property.
Although the advert states the potential rental return. The property would be unregistered and it would be interesting to see if this property comes back to the market as a register student accommodation with 12 rooms.
Yes, Pete, you make a good point there. While the numbers might all add up, there are always other issues to consider as well.
So, whilst this house appears to be specifically renovated with student accommodation in mind; like all others, it will still need to conform to the guidelines once introduced.
Thorough research and due diligence is *always* a good idea.