Saturday, May 12, 2007

New Property Purchase (1) - Provisional Contract Signed

Well, that was quick.

We signed the provisional agreement to sell one property (our smallest) on Thursday and I have signed the the agreement to purchase another property today.

The new property is larger than the one sold. The projected ungeared yield will be between 4.1 and 4.6% if I do minimal repair and redecoration work and 5.6 and 6.2% if I do a high quality fit out. Yields are calculated using gross costs and net rental income and are, therefore, real net yields.

The yield should be at or slightly above the target yield from properties in my retirement plan (4%) depending on the actual rental and the vacancy rate.

The building has several features which make it attractive:

1. very efficient floor plan;

2. the building is currently undergoing a refurbishment of the common areas. The lobby has been done and work has started on the very modest club house (a couple of mah jong rooms, a small recreation room and a small pool) and is expected to extend to the exterior of the building later this year. At least 3 or 4 other flats in the building have recently been purchased and are being (or will soon be) renovated by the new owners;

3. close to good transport links, good schools and shops;

4. above average size. I will be writing a post on the rise of the middle class in emerging markets and explaining why mid size and larger flats have more potential for growth than smaller ones.

The downside is that I will be putting down the minimum deposit (being cash poor is a necessary consequence of trying to be fully invested at all times). Even after I get the property rented out it will have a negative cash flow on a 20 year mortgage if I go with the basic fit out option (although income will still exceed expenses by a meaningful margin). Also, the portfolio as a whole will have close to break even cash flow. Put differently, any vacancy will result in negative cash flow on the properties.

As a final point, the net rental income on the portfolio as a whole will now meet the revised contribution to our retirement income. Going forward, purchasing properties becomes "optional" and I could, should I wish, concentrate on building up the equity portfolio (funds) required and/or pay down some of the mortgages to improve the cash flow.

No comments: