Every week we receive at least two or three calls from prospective investors asking if we have any properties with garages that can be converted into accommodation. Usually I answer the question with a question; why do you want to do that? The person on the other end of the phone puts on that particular voice adults use when explaining obvious things to small children. “Beecaauuse that way I can rent what is otherwise a three bedroom house out as a five bedroom house thus increasing my rent and so my yield”. At this point I’m written off as an idiot agent who knows nothing and they hang up never to give me benefit of their custom ever again.
That’s most of them, but not all. Sometimes there is a pause as they process my question. Then comes the next question; “Why, Kerry, did you ask me that?” Now we enter into what I hope is an intelligent dialog about the pros and cons on certain investment models.
At this point I had better state that neither Mr. Thompson or Mr. Barfoot have engaged my services as a solicitor or any other person whose role it is to dish out legal advice on the Interweb or Blogasphere. So we will not delve into the legality or otherwise of turning a home for a car into a sleeping space for children. If any lawyers or council staff read this, I would really welcome their professional input.
About half of Fiona and my business is investment property and as result we constantly work with our vendors/buyers rental managers. Just about all, but with a few exceptions, hate having to deal with illegal garage conversions. From their perspective they are usually nothing but trouble. As I said forget for a moment the legal and moral problems these things cause your rental manger and concern yourselves with practical issues.
Prospective investors read books and attend seminars were gurus explain to them how to get rich in property in five minutes and with no effort. These bright eyed souls are the ones who then race around South Auckland seeking to jam as may people as possible into the cheapest property they can find. But what works perfectly in a power point presentation on stage isn’t always what works in real life.
Typically the victim is a perfectly good full site, road front, and three bedroom home with a double garage. Right now any rental manager with breath in their body could let that property for $380-400 per week. Assuming you paid something like $270-290,000 then you come out with a 7.5 % gross yield. I’ve been in this game awhile now and investment agents will tell you seven and a half has been the average yield for many years. Rents move as the market moves. This property has the widest possible tenant pool and any owner can have their pick of the very best tenants. Moreover, when you go to cash in your investment you likewise have biggest buyer pool, including home owners, from which to realise your capital gain.
However, you have just read chapter four of “Unlock Your Destiny and Riches Through South Auckland Property Investment” . It has been revealed to you that is was perfectly fine to whack up some internal walls and throw down some discount carpet and bingo-go what was a 2.1 stud, galvanised shed is now perfectly suitable accommodation for a family. With your destiny well and truly unlocked you can call it five bedrooms and get a whooping $540 plus per week. Imagine how wonderful it will be to tell all your mates about your ten percent plus yield investment property.
And who pray tell will pay you money for this palace? Will it be the working family of five who would have rented the house before you went nuts with the Black n Decker? Hell no. Who actually wants to live in your shed? People who are in stable jobs, long records of good tenancy, people who care about were and how they live? Are you going to get the pick of the tenant crop? Just about any rental manager will tell you that the vacancy rate on these exotics is way above any average home. Plus you have eight or more people using one bathroom and one kitchen; the maintenance and damage costs go through the roof. What on paper is a perfect ten plus yielder is in reality a knocked around, half empty millstone that after costs is not even cracking six percent.
Stick with the basic three/four bedroom renter. Wealth in property by its very nature is a time in market game. Wear the seven percent this year with the expectation that next year it will be eight or more. Within five years it is at ten or better and you still have a perfectly saleable home with tenants who have been with you from the start.
Well that my five cents worth. I put down the keyboard and await the Tsunami of outrage and indignation that my ill informed uttering will no doubt cause.