Investment Property Purchase Case Study #1: Cairns
In late 2018, we started seeing an opportunity for a property purchase in the suburbs of Cairns. The economy is relatively diversified for a regional economy with major drivers including tourism, hospitality, agriculture, mining, aquaculture, navy, and healthcare.
Macro themes targeted:
- Vacancy rates were ~1% over the last few years
- Rents were steadily increasing 3% p.a. and rental yields had increased from 5% in 2010 to 6%
- Building completions and approvals were low and staying there
- Population growth was high
- Tourism and agriculture was picking up as the AUD fell
- Investor demand was low as prices had not increased for 11 years (following a mega boom where prices went up 150% in a few years)
- Strong population growth of 1-1.5%
- Strong affordability
The target was to buy a 4 bedroom house in the suburb 7-10 minutes from the CBD with median prices of ~$350k for this type of property. I found a property that was badly advertised (terrible photos and a disengaged agent) that was being sold by an investor from Perth who bought the property 12 years earlier as a house and land package for $350k. The property was in a relatively decent condition but had been a rental the entire period so had additional cosmetic wear.
The property was listed for $300k and wasn’t gaining and any traction. I put in an offer for $260k which was rejected. The owner asked for something in the $280’s. I left them be. The property was being rented for $350 per week which implied a 6.5% yield vs avg of 6% for the suburb.
A few months later the property was still unsold. I contacted the agent and presented them with a cash offer subject to building and pest. By this stage, the investor was over it and wanted out. My offer was raised to ~$265k after some negotiation. I then conducted a building and pest inspection and found some issues. I actually hadn’t seen the property so I was relying on the report.
We negotiated a $3k discount for the damages which included some water leakage from an air conditioning unit.
In the end, we closed at $262k, 5 months after my first offer.
Upon completion, the current tenant’s lease was expiring. I wasn’t concerned as the vacancy rate was low and multiple agents provided a rental appraisal $10-$40 higher. I was able to get a $10 per week rent increase upon completion. The rent was actually still lower than market.
__June 2020 update __ The property has performed quite well. The median price has been stable since purchasing, but the bank has revalued the property to $320k which is 22% higher than when I purchased it! Furthermore, the old tenant moved out during COVID-19 but the property was re-let for $390 a week implying a rental yield of 7.7% on the purchase price. The maintenance has been quite low ~ $200 for air conditioning servicing.
On top of this, I’m still claiming depreciation for the next 25 years.
Unfortunately, COVID-19 will have a disproportionately larger impact on the Cairns economy but the fundamentals still remain strong. Because vacancy rates, supply are low, prices and rents have actually held up really well.
Lessons learned:
- Be patient if you want a bargain - this was the lowest price for a house in the area for a few years. Probably bought 10-15% under market value
- Fundamentals are important! Buy when others are fearful. The investors who bought property when Cairns was going gangbusters in 2002-2006, didn’t see growth for 13 years
- I’m getting strong yields but eventually, prices will have to rise as housing remains extremely tight. Prices would still be affordable even if prices rose 50% and yields would be very fair at 5%