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An Exception To The Rule

An Exception To The Rule
January 23, 2015 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

This property is an exception to one of Propertyology’s golden rules. But, only because it was an exceptional investment opportunity. So much so that we wanted to share this interesting story with you…

We do not encourage investing in ‘specialised’ properties such as studio apartments, dual income properties, or properties which form part of a defence housing association (DHA) scheme. Longer term capital growth potential of these properties is restricted because the specialised nature of them means there is a restricted resale market.

For those who don’t know, DHA properties are conventional properties that are built to provide accommodation to Australia’s army, navy and air force personnel. DHA properties are often promoted to property investors with benefits which include long-term leases with the DHA for terms of up to 15 years; the rental income is guarantee although property management fees are 16.5%.

This particular property was listed for sale back in August 2014. In regards to street location, property style, and general condition the property itself fitted perfectly within Propertyology’s selection criteria.

With a price guide of ‘OFFERS OVER $380,000’ the property wasn’t attracting much buyer interest because the existing DHA lease in place deemed it inappropriate to all owner-occupiers (75% of Australian households). This is a classic example of what Propertyology means by ‘restricted resale market’.

With Propertyology’s knowledge of how DHA leases are structured, Bryan sniffed a wonderful investment opportunity for one of our lucky clients.

Bryan confirmed that the DHA lease was in fact due to expire in December 2014 and the vendors were eager to sell. DHA leases usually have a provision in them for the DHA to carry out restoration works at the end of the lease. After requesting a copy of the official documentation, Bryan confirmed that DHA had to pay for the property to be fully repainted (internally and externally) and to replace all floor coverings.

Bryan had initially appraised the property at $375,000 however the restoration works would possibly drag this up to $400,000.

Bryan continued to negotiate and was eventually successful in buying this fully repainted, 3-bedroom, 1-bathroom, low maintenance house on 721m2 flat block for only $369,000. Rent has been appraised at $380 per week. What a fantastic outcome!

At the time of our offer being accepted the DHA lease still had several weeks to run plus they needed to complete the restoration works. To protect our client’s best interests, Bryan took extra care to negotiate longer due diligence and settlement clauses to ensure that DHA fulfilled their obligations.

Over a period of a few weeks, Bryan had used initiative and a lot of skill to spot an opportunity, think outside the square, and exploit a situation for our client’s benefit.  That’s exactly what clients should expect from any true professional.

Well done Tim and Natalie on adding this property to your investment portfolio!