Here’s a teeny weeny deal me and my business partner did, which to me makes a mockery of the overused real estate mantra ‘Location, location, location’.
In 2003 we brought the worst house in the worst street in a regional town just outside New Zealand’s largest city Auckland. The owners before us had paid 98k in the late 90’s. We had it conditionally signed up at 100k. A last minute negotiation at the lawyers office got it down to 98k plus an early access clause before settlement.
During the settlement period we did a quick renovation ourselves – my partner project manager and me laborer and general dogs body. The house was transformed to the best house on the worst street.
We signed up a tenant before closing at a higher rent and had it revalued (twice actually as the first valuer did not know the fast rising market!). When it came to closing we settled in cash using family money, then had the bank lend 80% on valuation shortly after. This allowed us to repay the family money, paying our renovation costs (5k) and left us without having to put a cent into the deal.
I didn’t visit that house or do any further laboring duties for almost ten years. I had one point of contact where after the stove elements had to be replaced twice I told the property manager their role was to collect the rent and if there were maintenance requests the tenant could contact me directly. I never got a phone call.
Ten years later the tenant’s government subsidy ran out and the tenant could no longer afford to live there. The tenant was a pig. In fact I actually uncovered the carcasses of at least 3 pigs in my landscaping duties, one of them conveniently intertwined with shellfish shells and a metal wire clothesline. Admittedly our absenteeism landlord approach didn’t help the cause, but the tenant had successfully turned the house back into the worst house on the worst street.
So we had a decision to fix and rent again or to fix and sell. We decided to fix and then figure out to sell or rent later. For the second time my business partner was project manager and I was the dogs body. This time we did a proper renovation, completely rebuilding the bathroom and kitchen and pretty much completely overhauling every internal finish. I estimate every cent we spent (40k) we only recovered 50% on sale. The problem was we were forced to fix everything as the house was is such a bad condition.
A few months later (actually it took us ages as we lost interest a number of times during the process) we had turned the property back into the best house on the worst street.
When we were close to finishing we decided to sell. About a week before we listed the government put a Loan-to-Value restriction on banks in New Zealand. Real estate agents told us first home buyers for this low end property pretty much dried up. That made us drop our asking price a bit. However, within a couple of weeks an ‘investor’ emerged and we settled on $265k.
With no money down, rent just covering expenses throughout the ten year period and a number of annoyingly difficult weekends laboring we cleared $120k. Despite it being at the low end dollar wise that’s not a bad return – just try and divide $120,000 by zero.
And guess what, it was nothing to do with location. In fact you can’t get a much worse location. We cut holding out on price on the sale negotiation pretty quickly when one morning doing the final touch-ups a patched gang decided to have a gathering across the road – the alcohol started at 9am. I think we would have pretty much taken any figure at that point.
It was also nothing to do with our expertise. We simply lucked out on the purchase timing, lucked out with an always paying government subsidising this tenant, kept expenses and income close to zero and ignored the property for almost ten years. While the tenant, her family and her dogs fouled up every internal finish we waited it out.
For residential investment property I contend time in the market is more important than location. Unless you have ESP to predict booms and busts or an innate ability to predict the next hot spot that all the trendy people are going to move into (or out of) from a % total return point of view, location doesn’t really matter.
I can hear the but’s…..