Following on from Danny’s article the other day, I’d like to briefly explain what happens when you decide that one of your investment properties is a little too nice for tenants to live in, and you decide to move in there yourself.

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Today I’m going to have a look at a particular scenario that can be tricky but also very beneficial if executed correctly, and with reliable advice.

You might have done it, or considered it, before; converting your principal place of residence (PPOR) to an investment property. There are a few things to remember if you’re going to take this path.

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You might have heard of Nathan Birch, the self-made investor who created a million-dollar-networth by age 21 and now at 25 years old has well over twenty properties. If you haven’t already, check out his website or his Facebook page. Anyway, this guy actually bought his first property at age 18, back in 2003, and that’s the deal we’re going to be looking at.

Now, I don’t have all the figures, but here’s what I’ve worked with…

It’s a renovation job, so it might just be similar to this hypothetical analysis I did a while back. Nathan was off to a good start, negotiating the property down from an asking price of $280,000 to $248,000. At that point he was looking at rental income of only $190 per week which in anyone’s terms, is going to be negatively geared.

This is where Nathan’s two separate renovation projects come in, costing $7,000 and $30,000 respectively. He’s improved the existing house and then converted it to a duplex, which as we’ve seen from my previous analyses, is a favourable situation to be in. The dual income should have him heavily in positive cashflow by this point.

This project increased the rental income to a combined amount of $550 a week. On a purchase price of $248k, plus stamps and legals of say 9k, and total reno cost of 37k, Nathan’s total entry price was about $294,000. $550pw return on this works out to about 9.7% yield – now we’re talking!

Of course there are things I don’t know about the whole deal that could swing that figure out either way, but we can still see he’s very likely to be in the black regardless.

Since then, Nathan’s achieved some great stuff, so make sure you check him out.

Take this as inspiration, too, if you like. If Nathan could do this at age 18, then surely with the right attitude and perhaps a helpful community of investors on your side, you can achieve your goals too.

Alrighty, I’m heading to the capital for this one.

This is a nice property at 56 Longerenong Street in Farrer ACT, with two self contained units; a two storey setup receiving two different weekly rental payments. We’ve covered this sort of thing before, so we know that two streams of income is a great starting point.

We’ve been given amounts for rates and land tax of $1,282 and $2,268 respectively, and I’ll put in the usual rental expenses that we’ve come to know are all too common, and often predictable. With a combined (quoted) rent of $670 per week, we’re improving our situation bit by bit.

Now, you might have noticed this property is being sold at auction. So, for the sake of this analysis, I’ve estimated a purchase price of $560,000 plus purchase costs. The agent has confirmed this as realistic, and I wouldn’t want to go too far over this amount or else the end result may not be as pretty.

Working with all these figures, we can now see that dual income properties don’t always stack up so well! Here, the investor is in fact losing about $53 per week in that first year! Ouch!

Stress less, though. There’s one more benefit to be taken advantage of.

Stamp duty is slightly different in ACT, in that the full amount is claimable as a tax deduction in the first year of the investment, rather than it being treated as a capital expense at the time of sale. ACT property is sold on leasehold, not freehold, and this makes all the difference. It’s also where Parliament sits, but make of that what you will…

So now this means that in the first year, we’re switching that $53 weekly loss over to an annualised cashflow profit of $5,500. Much better! However, the second year will still be at a slight loss as the stamp duty benefit is a once-off deduction.

Obviously, a lower purchase price would also push that figure further into being positively geared.

Not a bad position to be in, and this just confirms that it’s always good to know the different tax laws and benefits applicable to each state. An investor wanting to excel in the property market must have a strong understanding of these laws, or at least, have a smart accountant who can help you out ;)

Woooo! Analysis number 10! I’ll try and make it a good one.

So this week, I’ll be sticking with the off-the-plan theme, but looking at an inner-city apartment. This one has a little twist though. Whilst we’re reaping the usual benefits of an OTP purchase, investigated in last fortnight’s post, we can also aim for significant cashflow benefits if we use this property as a holiday rental.

Turns out this OTP property in Adelaide is centrally located, with agent estimates of rental income looking quite attractive. I’ve worked on the following figures for rental income:

• $450 a night for peak period (6 weeks), at 70% occupancy rate;
• $250 a night for shoulder period (4 weeks), at 70% occupancy; and,
• $180 a night for off-peak period (42 weeks), at 50% occupancy.

Had a chat to the agent about those estimates and they’ve been confirmed as realistic, based on their general holiday rental data for Adelaide, and taking into account the prime position of the real estate and the 3 night minimum stay (or 7 nights for peak period).

So, the combined benefits of the OTP purchase (almost no stamp duty, depreciation benefits) and the holiday rental setup (excessive rental income) neatly cover the rental expenses. When you also consider the additional depreciation for a furnished property, my figure shows that our investor might average an extra $85 in the pocket per week from positive cashflow; about $4,400 for the year.

It’s certainly a nice setup, but as usual, I should point out the risks.

Those agent estimates appear to be pretty reliable, but there are so many factors that could affect either the occupancy rate, or the nightly rent. One of these in particular, is how active you (or your agent) is with managing the property and getting tenants on board. In my opinion, you should make sure that you’re conservative with your estimates and factor in higher costs than you might expect. I’ve increased the cleaning, maintenance, body corporate payments and property management fees, as well as the interest rate we’ve found that many lenders won’t offer the standard variable rates for higher-risk properties like this one.

Also, you’ll get a much broader range of tenants coming in and out of the property. This is unfortunately increasing your chances of, at some point or another, renting the property out to that tenant that we all dread; leaving the apartment an absolute mess, late rental payments, even skipping town without payment!

While there are things we can do to minimise the chances of this happening, such as requiring a deposit upon booking, there’s still an element of risk there. Make sure you’re comfortable with that before you jump into a deal like this. And while the average rental income is positive, you can expect long periods where you are behind the eight-ball due to the seasonal nature of the income.

So, have you had any holiday rental experiences, or known someone who has? I’m very curious about this one, so I’d love to hear from you if you’ve got anything to share.