Today, I asked the mortgage broker to process an application for a loan to buy this section we've found. We've made an offer on a small crossleased back half section in Otahuhu. Capital value (CV) is $175000, asking price was $179000, we offered $150000; final sale price settled on = $157000. Seems like a good deal. We've found a 3 bedroom relocatable house to put on the section that will cost $49000. Seems all good and cheap so far, right?
Well, property values in Otahuhu are dropping. It's one of the cheapest suburbs in the Auckland City Council. Our calculations suggest that all up, getting the house up to Code of Compliance and redecorated a bit could end up costing us $250000. Today in Otahuhu you can buy 2 bedroom units for $250000 and as low as $150000. There are some 3 bedroom houses for sale around the $260000 range, though they probably need another $40000 spent on redecoration to get them rentable again.
Still, there's a big risk that we could easily over-capitalise. The mortgage broker thinks it's not a wise investment - he thinks we should borrow more to buy in a better suburb where the property will appreciate faster. Spend $1 today somewhere where it's going to be worth $2 tomorrow. He thinks we should buy an existing dwelling. We like the challenge the relocatable project offers. There's a potential to produce a reasonable quality rental property for under what it will value at when completed.
What swayed me really was the chance to keep the overall cost down, borrow less, have the rent cover the properties costs and with such a low mortgage - we could get the property freehold in a much shorter period. We can also get started on this project before selling our home. More costly opportunities, mean we need to try and sell first - mainly because we don't want to have a huge amount of mortgage debt hanging over us.
I'm with Robert Kiyosaki on this one - going for positive cashflow. Our mortgage broker says, 'If you want positive cashflow, go for an apartment. But then you won't have something that's going to appreciate in value... It's the land underneath the dwelling that's going to appreciate.' In other words: buy land, go for capital gain. Yes, that's what we're proposing to do: buy a piece of land and put a house on it. Of course we'd like to see it appreciate in value over time.
Other downer today - the lawyer wanted us to be aware of the potential problems and hidden costs that could arise because this is a crosslease section. The owners of the other half, have to approve the house we want to put on. We have to apparently pay their lawyers fees! What? Hmm that could get costly. If the other owners are difficult to get a hold of, or decide to be difficult, then they could cause delays. Delays cost. Lawyer ends by saying, you'd be better to buy an existing house.
I'm feeling a slight rebellious tonight - like I've been challenged, dared to do it. I feel like proving them wrong. But, even Robert advices, you've got to listen to your team.
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