If a Rental Doesn’t Pass This “Test,” Don’t Buy It
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What is the cautionary Wellington flip story and why does it matter?
Hello and welcome along to the Proper Academy podcast by Ober Spartners. I'm your host, Steve McKnight. And this is the show that helps Kiwis go from zero to five investment properties so you could be financially free and stick around for the next 15 minutes because you're gonna learn if a rental doesn't pass this test, don't buy it. The real story is about property deals that didn't go to plan, and the number one thing investors miss, and look, it's not what you think. Because there was a property investor in Wellington who I met recently, and he was doing a Renovation down in Wellington. The plan was to sell it as a flip property. So he's going to buy it, renovate it, sell it really quickly. Now there's a bit of an issue.
The neighbors didn't want the property sold. It wasn't in a a very nice area. It was a cheap property on what could be kindly described as not the best street, but the neighbors really wanted this property to still be empty. Maybe so they didn't have any. any like neighbours complaining about them. So what happens during the open homes where this poor investor's trying to sell the property is the neighbors pointed a boom box at the house, started blasting music, the dogs were barking. They actually dumped piles of tires on the property. The investor paid to remove those tires, and then all of a sudden more appeared. And then there was a break-in. During the night, the appliances went missing. And when I say went missing, I mean they were stolen.
And none of that was in the property investors spreadsheet. And I tell this story, not to say don't go ahead and flip houses, but just to say that property comes with risk. And sometimes we don't account for all of those in our best case scenario spreadsheet. And so what is that test that you've got to pass before?
How did the neighbour sabotage the Wellington property and what risks does it illustrate?
before you buy an investment property.
So I call this the what if I'm wrong test. And this is to say, well, with property investing, everything looks good on a spreadsheet potentially, but life isn't as perfect as a spreadsheet, and you need to be compensating for the fact that life puts spanners in the work. So you don't want to have a property deal where it's just scraping by and you can talk yourself into it and then you have just a something derail you slightly and narrow the sudden it's not a good investment at all. So sometimes I say to investors, well, what if you're wrong by 10% on this? Does the deal still work? And that's the what if I'm wrong test.
So, how might that work in practice? Well, let's say you had a property that was $600,000. It was renting for $600 a week. That's a pretty good yield, 5.2%. And if you borrow all of the money to buy it, so you don't you haven't saved up $120,000 to put in as the deposit, you borrow that against your own house. That's what we call the no cash needed method. Let's say It runs at about $10,000 a year in negative cash flow because these days the rent from the properties, especially if you borrow all of the money, might not be enough to cover all of the costs. So it might be negatively geared by $200 a week. That's what you've got to use to top up the property itself to make sure all of those costs are covered.
Now, what you've got to then ask yourself is: well, what could you be wrong about? I mean, give me an example in that situation.
Let's go with rent to begin with, because obviously that has a major impact on your cash flow. So let's say what you budgeted for was $600 a week rent coming in. And the property was going to cost you $200 a week to top up because you've borrowed 100% and you want to cover all those things up, property management rates, insurance, et cetera. Now, if your rent that comes in is 10% lower than what you've budgeted for, so $540 a week, that's a pretty drastic discount, $60 a week discount to the rent.
What is the “What‑If‑I’m‑Wrong” test and why should every investor use it?
That means your cash flow is going to cost you $244 a week, not $200 a week. Now you might be thinking, hang on, rent's gone down by $60. Well, how come my contribution's only gone up by $44? Well, that's because there's a difference in the amount of property management that you're going to have to pay.
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Chapters
8 chapters
1
What is the cautionary Wellington flip story and why does it matter?
0:08–1:55
2
How did the neighbour sabotage the Wellington property and what risks does it illustrate?
1:55–3:52
3
What is the “What‑If‑I’m‑Wrong” test and why should every investor use it?
3:52–5:36
4
How does a 10% drop in rental income affect cash flow and expenses?
5:36–8:10
5
Why should you base rent forecasts on the low end of the appraisal range?
8:10–9:55
6
How would a half‑percent rise in interest rates change your mortgage costs?
9:55–11:50
7
What happens if house price growth stalls for several years?
11:50–13:18
8
How can adding 10‑20% contingency to renovation budgets protect you?
13:18–14:46
Speakers
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