Strong cashflow AND capital growth – My own experience

Maroubra beach 4

Pristine white sand of Maroubra beach, Sydney

I bought a 1-bedroom apartment located about 800m from Maroubra beach in Sydney through an auction on 22 April 2009. On its first anniversary today, I am happy this little gem of an investment has lived up to all my expectations of both strong rental return AND good capital growth.

The scenario in April 2009

Maroubra beach

Strolling at Maroubra bay, Sydney

Looking back, April 2009 was in the midst of the Global Financial Crisis where interest rates hit a 49-year low of 3.00%. I remember the sentiment of the market was weak where many property investors were uncertain about the future and how long the GFC would continue to affect the global economy. Many were tipping house prices and  interest rates to fall further, thus delaying their decision to enter the market.

I believe there were 5 registered bidders at the auction and I was eventually successful in purchasing the property for $345,000, outbidding the second bidder by $1,500.

At the time, I felt the fair value for the property was approximately $335,000. However, I gave this property a 2-3% premium based on its location, public amenities and lifestyle choice. As Michael Yardney says, sometimes, you need to consider paying a little more than fair value for a high growth location which appeals to both owners and tenants alike. In the long run, the stronger capital growth will more than compensate for the initial small premium.

The results in April 2010

One year on today, rental income for 10 months to March 2010 was $17,650. The projected first year rental will be $21,210 based on the current rental rate of $410 per week. This first year rental yield is 6.15%.

The bank has confirmed the apartment is valued at $385,000 for refinance purposes through a desk-top valuation on 21 April 2010. Therefore, first year capital growth is 11.6%, giving an overall return of 17.65%.

This is despite a recent sale of a unit within the same block with identical internal floor plans for $400,000.

Lounge and kitchen

Galley style kitchen, timber floorboards

I believe the strong performance of this property is due to the following factors:

1. The location is within walking distance to Maroubra beach and is attractive to young professional couples who value proximity to the beach. There have been 2 different tenants since day one and both were young couples looking to live the beach and surf lifestyle. The apartment is located off the main Fitzgerald road and has a quiet and private feel.

Moreover, it is merely 1.5 km or 5-minute drive to Pacific Square Shopping Centre in Maroubra junction.

2. Public transport – There is a bus stop directly in front of the apartment where commuters catch a  bus route directly into the CBD and Circular Quay.

3. The apartment has a galley style kitchen with European appliances and gas cooktop and gas ducting to the balcony for the BBQ. It is located on the top level of a 2-storey boutique block of only 14 units.

It offers a secured underground car space and storage cage, which is vital to alleviate clutter within the living areas. The bedroom is a good size with built-in wardrobes and en-suite with its own Juliet-style balcony.

The main living areas open to a separate balcony for entertaining.

Despite the recent surge in property prices in major capital cities in Australia, I believe investors can still find properties that can show both strong cashflow as well as above average capital growth in locations which is in high demand from both owners and tenants, good public amenities and entering the market at a strategic time within the upward cycle. This involves researching suburbs in strategic locations which may be undervalued compared to its neighbours.

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Maroubra bay 8

Maroubra bay, Sydney

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