What would you do ???

[kiwi kid]

About two years ago I sold my share in the business I'd worked in for 16 years... (the owners were selling up); and was also in the position of being made redundant. In short I ended up with a mortgage free home (Val @ $400k), and around $200k in the bank. I was over 8-5 (with lots of international travel thrown in), & wanted to work solely for myself... No partners etc etc (other than the bank!)... And of course improve family time quality etc.
I spent some time looking for a business, and eventually found a 9 unit concrete block motel... Wait, it's not as bad as it sounds... For a start, It cost < $1 mil.
I live in New Zealand... A small 'city' of around 100 000, popular tourist destination and a lot of seasonal employment in fishing and agriculture.
The building is located 1 block from the main street.... Everything is walking distance, it is located on the riverbank, so great outlook etc... The zoning is city fringe, allowing me to build to 4 levels (currently one block with 6 units is two levels, the other, with two units is single level).
Im not running a motel, not the lifestyle for me!, and have just got through the last of the bookings that were there at takeover...
Given their location etc the units are very rentable long term... To the point where when I've advertised online, I have had to withdraw the ad after 3-4 hrs as I'm swamped with enquiries!.
I'm in the process of doing some minor building work to develop another studio unit in what was a 4 car internal garage... (60m2... 600 sq ft)... (this is in a 2 level building on the site).
There is also the opportunity to do this in the other (single level) building, taking this from 2x (2bdrm) units to three units....
Currently rental income is $8400 per month, and will increase to $10300 per month when the other units are completed... Outgoings are $5750 (mortgage)... And around $2000 for taxes, some energy costs, mantainance etc.
Being mortgage free, with one spouse and one dependent, no car or credit card loans/debts and with my wife earning $2500 per month for part time work, we can live pretty comfortably (in fact were about to head off on a two month trip through Asia)...
Here's the rub -
The single level building is solid concrete block and as city planning allows for it, I have been talking with my planner and architect about building on another two levels and developing 4 x 75m2 (750 sq ft) apartments. This will cost around $500k (the bank have said no problem... Do it)... each apartment is likely to be worth @ $225k on completion.
In short I will then have $1.15mil debt (up from $650k now).... $8500/mth repayments, say $2500/mth sundry outgoings ($11000 total) v's $15000 gross rental income ($4000 gross surplus).
So we're in our early 40's (our son is 9yrs)
The mortgage is over 15 years, so by mid 50's it's paid back and our income increases to today's equavilent of around $150k per annum (gross... I've assumed my wife stops working). Given its rental income it's pretty much inflation proofed.
Given all the planning and consenting process I'm going to go through, should I go the 'whole hog' and have the (now) 14 dwellings placed on separate ownership titles, and sell down say half of them and eliminate the debt ?... If I sold the developed block for example, I'd end up with say $200-$300k in the bank; rental income of $7000 per mth (gross), say $1500 outgoings.
There is no capital gains tax on property in NZ, though there is a goods and services tax, however on the development I'll be both paying and claiming, so I've factored this in.
Mortgage intest rates currently 5% in NZ...
So 'in summary' - $250k in the bank and $5500/mth (gross) or $4000 gross and $1.15mil of debt... With the carrot of $12500/mth in 15 yrs.
Our 'gearing' will be less than 45%, excluding the family home, but I still don't know if I want debt > $1mil.
I'm tempted to sell off some units, get some cash and develop another business... While having the safety of the fixed income of $5500 per month, from the units I keep... Looking after apartments might get boring (I do some consultancy, but it is a bit sporadic; I could of course put more effort into looking for opportunities in this field, but then I don't want to get stuck with major commitments to others again!)...
Be interested in others thoughts.
Thanks

[gooki]

What area are you in? Plenty of property developers in NZ go belly up because of high interest rates and they over extend, and under diversify.

If it was me, I'd continue down your renovation path and stop there. Maximize what you have but don't throw any more money into building a second story.

[kiwi kid]

I'm in Nelson.... You don't think gearing of sub 45% is safe enough?... (actually our debt less than 33% of our total assets)... But I hear ya! Plenty overextended and hit the wall in 09/10...
I can add the extra 2 units from cash flow and sourcing what I need on trademe (like Craigslist)...
The other 4 units (2nd level) would cost $500k to construct and have a completed value of $900k... You don't think that would be a good investment ?... Cheers

[gooki]

Adding the two extra units through renovation is what I'd do.

As for the second story build, What's you worst case scenario plans? Build goes over budget, you loose a few renters because of disruption, earthquake makes all units uninhabitable? Could you service the debt from your current income, would you re-enter the workforce?

I'd hate to see you get in a situation where you end up loosing what is already a solid income stream by being forced to short sell. Basically I don't see you needing to take the risk of building that second story of units.

But if you do do it, definitely sell off some of the units, and diversify your investments ASAP after the build is complete, and even try and pre sell some off them.

[kiwi kid]

Yea, tks for that... I did think about selling off the plans, and actually have someone interested in one unit (just in passing conversation)...
I could re-enter the work force if I had to, and I have earthquake insurance...
I get the feeling (from renting the initial units) that I will not be short of tenants. I actually try to encourage student tenants as it is near the polytechnic, and they only want late Feb to early December... I then rent as holiday apartments over Xmas, so can boost the annual revenue on each unit by the equivalent of about another 3 mths rent (letting on a weekly basis)...
I would tender the build so I had a 'fixed' contract price, and probably use a quantity surveyor to ensure this... BUT... Can I service the debt from current income (excluding rental income)... No, I can't.
That is the risk element I'm an really looking for mustachian advice on; that and diversification... Though I am pretty comfortable with property as a long term bet.
Thanks for your thoughts gooki.

[nz]

Hi there, I'm in New Plymouth and my circumstances are not dissimilar to yours...but I'm a few more years down the track.

I think financially you're  on the right track ...but my only concern(and this is based on my experiences)........is the human factor of being a landlord.
 Dealing with people who are often less than honorable, and sometimes downright dishonest(not to mention dirty)
 I found to be very draining and my plans 15 years ago of retiring young by being a hands on landlord was short lived. Not all tenants are like that of course but it only takes one to leave a bad taste in your mouth
Most of my money these days is tied up in commercial real estate ( a share of a motel and a provincial shopping centre) which I have found to be very steady, very reliable and best of all virtually stress-free.
Anyway you seem like a kindred soul with plenty of energy and nous, I'm sure you'll be right what ever you do.Interest rates are low and builders are hungry. The key thing is that Nelson's a great city and it has a great future.

My youngest leaves home later this year and then early retirement will really kick in...aged 48 ... and all the time in the world!

[gooki]

I could re-enter the work force if I had to, and I have earthquake insurance...

Just be aware it can be 2 to 3 years after the event until you receive any payout from earthquake insurance, which puts a lot of landlords under great pressure. It's low risk, but when it happens I'd want to be damn well diversified - we have friends who've had their net worth wiped out (forced to short sell their home, and their investment property to meet mortgage commitments).

As this investment appears to be your only major asset and source of income, and you couldn't service the debt of the additional construction by returning to the workforce, I strongly stand by my recommendation to sell down approx 30% of your total units as soon as construction is complete.

[kiwi kid]

NZ can I ask what sort of yields you get from this commercial stuff ?... Gross or net ?... Thing is that this investment yields in the low teens and a $500k investment in the additional (new build) units would be in the same 13% ballpark (before any capital gain).
I can cope with the tenants and don't see commercial getting anywhere near that! The syndicated crap around NZ at the moment might dangle 10%, but they seem to be hoping 4% of that is capital gain!.
Gooki, I ain't going to worry about earthquake risk (or a nuclear holicost); I would have to diversify geographically to reduce that risk, and that comes with its own risks.

[nz]

The motel I have had for about 8 years and the 5 of us who own it have taken very little out, so we started with a 8% yield and 50% equity. We now have very little mortgage and my initial $300k investment should start to produce $60k a year from next year when we are debt free.
The shopping centre has 2 key national tenants and both had very short term leases so we bought with a 12%yield. The leases have since been renewed and I guess we have a paper capital gain , but I'm happy with 12%.

Don't write off property syndication...ask questions ...there's a lot of stuff that never gets to the media...and works really well

[grantmeaname]

I ain't going to worry about earthquake risk (or a nuclear holicost); I would have to diversify geographically to reduce that risk, and that comes with its own risks.

Or, you could not expand your real estate holdings any further and start to invest in stocks and bonds. That would ameliorate your sector bias, too, so if real estate doesn't perform as well as other sectors of the economy you aren't left behind.

[kiwi kid]

Actually NZ, I thought about syndicating my property!
I like the idea of some stocks (utilities) in my portfolio 'grantmeaname'.

[Mr Mark]

Sometimes, no matter how good the investment opportunity sounds, you have to consider diversification.

Spreading your equity around has an intrinsic lowering of volatiity - less ' risk' - and better long term returns.