Advice about development and looking after investment

firstly thank you to those that take the time out to read and comment on this.

I’m in a pretty fortunate position but need some advice on what to do property wise.

I have a property in Newcastle that is mortgage free bringing in $350 per week. Issue is my tenant has been there 16 years (20 will cause me some serious issues with protected tenancy so needing to look at options now). The tenant has smoked in my property against my wishes and no matter which way I’m going to have to repaint and renovate it.

I am considering some options and have spoken to an agent who’s advised obviously moving out the tenant and have a few options

1. renovate as discussed above and get approx $420-$450 per week for the 3 bedder.

2. Put a granny flat at approve $120k out the back and get $300 for granny and $400 for house

3. Rebuild at $700-$800k a duplex which would return $550 per week each.

4. Sell as is ‍♀️

Would love somebody to give me some suggestions, feedback, experiences.
Kris

 

Thank you Wylie,

I’m being told that renovating for new bathroom, new kitchen and painting the inside is approx $20-$40k depending on standard. It has timber floorings in good condition so it may just be the bathroom tiling in the renovation. It’s a smaller 3 bedroom 1 bathroom home on a 526sq mtr block. I’ve rented the place privately for the 16 years so the tenant has had a good deal (I put the rent up twice!) so apparently $400 in the condition now and $420-450 with renovations.

I rarely trust agents so a little hesitant with what they have told me. Apparently the area in Newcastle given it’s close to university and shopping complex renting it out wouldn’t be a problem. I know personally I wouldn’t want to live in the house in front and I think that’s where my concerns are.

The duplex would be better for rent long term/resale but yes a big outlay. I was quoted $650k two years ago and that included knock down and rebuild but a new quote this year same builder came in over $800k.

I don’t want to sell as CGT on this property works out to be over $150k so holding makes More sense however, I’m trying to work out how to make it work more for me given I really want to settle down and buy a little flat for myself to live in (in Sydney) so hence Looking for advice on options.

I really appreciate it.

 

Hey @Kris_AU with the objective of moving down to Sydney have you done the numbers on what you're going to require? For instance, would you be able to service the new and existing loans under options 1-3?

I don't like option 2 because on the projects we've looked at personally, I don't see a positive return on capital from building a granny flat. E.g. Spend $120K and the value of the property does not go up by $120K. That is my personal experience though, so others might have had better outcomes.

I like option 3, provided again the numbers stack up. The only thing would be to focus on if the numbers stack up and there is enough margin in doing a development. You would be looking for a market premium on what you spend to build, and in some areas at the moment due to the soft market for finished product this no longer exists. This can be a long road to go down if you don't have experience in this sort of stuff too.

And if option 3 is the most commercial option, I wouldn't be spending a significant amount of money on the existing residence if the long term is to sell or build. You'll find you don't get an ROI on that money over the long term.

 

Thanks Morgs,

I moved to Sydney 10 years ago so it’s just finding a flat for me so not renting.

I purchased my place in Newcastle for $118k 18 years ago.

I have the cash for renovations set aside so can easily do that as well as service a loan if needed on a granny flat, it would be ok even on approx $700k but it ties up any ability to lend for a flat in Sydney (I’m looking in $600-$700k range)

I read a post on here earlier that mentioned granny flats can reduce the property value and that’s not what I want to happen.

I’m shocked how varied the prices have been on a duplex build and wonder if this willl change anytime soon now that their is a market downturn. What do you mean soft market? Product no longer exists? Sorry just to clairify

 

And yeah to clarify i wouldn’t be able to service a loan in Sydney and a duplex loan in Newcastle so hence the dilemma

 

Option 1, not a full reno, just a tidy up.
Use borrowed funds for best tax deduction.
Keep looking for your own place (with your funds in bank)

 

Build prices may vary significantly depending on the builder & finishes - I'm not sure what it is like in Newcastle at the moment but if it is anything like Sydney most of the trades/subcontractors have been absorbed by the construction boom so that adds upward pressure to the price of a build. I'd expect this to drop over the short term though as construction pipeline dries up.

The reason the construction pipeline is drying up is that the market in Sydney has entered a downturn, and as such it isn't commercially viable for developers to start new projects. For instance, a finished duplex may have been worth $1.5m previously but now it is more like $1.2m. Again I don't know the market up in Newcastle but I suspect there may be similar issues albeit not as pronounced.