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$450 to $2,500 Rent - Interesting Make Over!

7 August 2019

 

$450 to $2,500 Rent - Interesting Make Over!

 

 



 

 

 

 

 

 

 




Recently, in a property forum, I saw a post about an investor who had increased rent from $450 per week to $2,500!

It had me interested, so I thought I would go through it and look at the different options and how the numbers could work. I don't have all the information, but the ideas are very interesting!




1. Original purchase as a rental

The property cost $580,000, pretty standard two storey house with garage downstairs. 260m2 split over the two levels, 5 bedrooms upstairs.

Rent $450 per week or Gross Yield of 4%.

Even at 3.8% interest, I work it out to be a $9,394 loss with 100% loan! WOW, that is terrible!



2. Easy option to improve

Is the rent at fair market value? My guess is that the property was being under rented. So increasing the rent would help a tiny bit.

$500 per week would be a 4.48% Gross Yield, but still a $7,018 loss each year, with a 100% loan at 3.8%.



3. Another easy option to improve

Can you renovate the property to improve the rent and cashflow?

Quite often you can spend $20,000 to $30,000 to improve the rent and make it more desirable for tenants.

If you could spend $25,000 to get an extra $50 per week, that improves the Gross Yield to 4.73%, but still a $5,593 loss with a 100% loan at 3.8%.




Now for the more complicated options.



​4. Turn downstairs into a legal, separate house

In Hamilton, the downstairs can become a separate property/duplex. You might spend;

  • $50,000 on subdivision / unit title / Resource Consent costs, and council contributions.
  • Fully do up downstairs, separate entrance, take away stairs and access to above, fire rate. Add Kitchen, Bathrooms. Maybe $150,000.
  • Landscaping and parking requirements . Maybe $25,000.


If you combined options 3 and 4. Total cost $580k, plus $25k, plus $150k, plus $25k, plus $50k = $830,000.

Rent, maybe $550 upstairs and $475 downstairs (Note: I’m not a rent expert!) = $1,025.

Now 6.42% Gross Yield and making $8,427 cashflow per year, before tax!

Most likely at least a $100,000 equity gain as well!



​5. $2,500 rent per week??

The poster on the forum went a step further. They made into 9 rooms with kitchenettes, bathrooms, and semi furnished. Rent by the room at $260 to $300 per room.

  • $580,000 purchase.
  • $50,000 subdivision etc.
  • $25,000 Landscaping and parking.
  • Turn upstairs into 5 apartments. Add Kitchenettes, some bathroom etc. Plus general renovation. Maybe $100,000.
  • Turn downstairs into 4 apartments. Add Kitchenettes, some bathrooms etc. Plus initial transformation from Garage. Probably not a lot more than option 4 as starting with blank canvas. $190,000.
  • Furniture maybe $60,000, to a high level, included beds, TV’s, some kitchen items, common furniture etc.
  • Total $1,005,000.


I worked on 46 weeks being rented, so have allowed for a lot of vacancy for the rent by room.

11.44% Gross Yield
$21,993 cashflow based on 3.8% interest, borrowing 100%, 12.5% plus GST mgmt., some power, internet, common cleaning etc.




ISSUES / POSSIBLE PROBLEMS


Would the property be worth $1 million or more?

It is possible that idea 5 would be great for cashflow, but might not add any equity.

Also managing Rent by Room rentals can be a hassle, with many property managers not wanting to take them on.




Hopefully this blog has given you a few different ideas on how a property could be transformed to improve cashflow.



Kind regards
Ross Barnett

 
 
 
 

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