Any advice welcome....very welcome.

Discussion in 'Development' started by NOTAM, 11th Feb, 2017.

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  1. NOTAM

    NOTAM Member

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    Hello good people of Australia.
    I'm a fist time developer and I'm getting close to signing a contract and it's scaring the crap out of me.
    I was thinking that I would simply write where I'm at and what my plan is in the hope that a few of you fine people may offer some words of wisdom. Any comments are very welcome.

    I bought a house in a Western Vic country town a few years ago. I've been dumping as much as I can in the offset account and I now have the same amount in offset as I owe the bank on that property.
    The property is a 1090m2 corner block in the middle of town, zone general residential. Nice and flat, crying out for development.
    I've been speaking to a local project builder and I have a fixed price quote of $241,000 for a 182m2 brick vaneer 3,2,2 house with raised ceilings and a few basic cosmetic and structural upgrades, driveway, split system and dishwasher. Nothing too snazzy.

    Slab upgrade was $8000, connection to sewer, power pit and mains water are about $20,000. No other significant site works.

    The project includes planning for subdivision but we are not subdividing at this time. We have approval for a clause 55 build (2 dwellings on one lot)
    We plan to keep them both indefinitely as rentals. We can easily (hopefully) divide them in the future if we really need to.

    The original house is obviously cash flow positive (being effectively payed off). The new build will rent for $320 a week which will cover interest on $250,000 plus all holding costs, so will be positively geared from the start. It will not quite cover principal AND interest payments plus all holding costs though, so it won't quite be set-and-forget until I've built up the offset a little.

    In terms of capital value, the new build ($250,000) will be worth $295,000-$324,500 at handover according to our evaluation.
    My guess is closer to the $295,000 side of things.
    I'm not sure about how much our original house will be de-valued by chopping 363m2 off the back of it.

    One thing that concerns me a little: Land appreciates, buildings depreciate right? I'm a bit concerned that I'm spending $250,000 yet not getting any new land, just a building that will be worth zero (on paper) in 30 years.
    $250,000 buys a reasonable little house on a block in this particular town.

    To fund it, I am considering just getting a $250,000 extension on the loan from property 1. As property 2 will be on the same lot (that the bank still own).
    I guess I could 'close' the loan on property 1 by forfeiting my redraw account.
    That way I could apply for a second loan for property 2 if there is an advantage to that?
    Another alternative, I could rob $100,000 from my offset so that I only need to extend my loan by $150,000 but I guess that's just robbing my left pocket to pay my right pocket?

    If you've read this far, thank you.
    If there are any alarm bells or ideas that spring to your minds, please let me know.
    Thank you all.
     
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  2. Blacky

    Blacky Well-Known Member

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    Though I would like to know the total end position before starting it looks like you are spending $250k on something which will be worth $300k once it's built.

    Need to do a complete feaso to get the full picture though (taking into account current market valuations)

    Not sure why you wouldn't subdivide now, rather than having two houses on a single title? I see no value in waiting.

    Without more detail it's hard to answer the finance query. However my initial reaction would be to set up a seperate loan to keep everything clearly seperate.

    Blacky
     
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  3. lightbulbmoment

    lightbulbmoment Well-Known Member

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    Your playing with very smalll numbers go for it....
     
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  4. Hodgo

    Hodgo Well-Known Member

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    Agree with Blacky, subdivide immediately and reap the rewards now with better finance options. You can always build one house at a time if you like, but you'll get better rates from the builder if you do both at the same time.
     
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  5. NOTAM

    NOTAM Member

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    Thank you both.
    The idea of clause 55 was suggested to us by the build company in the early planning stage.
    We were advised that it would save us some coin and we just ran with it.
    As I said, we're newbies.
    We have no intention of selling either of the properties but it would be reassuring to know that we could if we ever came into strife.
     
  6. NOTAM

    NOTAM Member

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    Sorry, I didn't make it clear.
    The original property remains tenanted and untouched. I'm only building the one new one out the back.
     
  7. Hodgo

    Hodgo Well-Known Member

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    I'd be using funds from my offset verses paying off any loan, gives you greater flexibility. But it all depends on your serviceability for loans.
     
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  8. Connor

    Connor Well-Known Member

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    Hi @NOTAM welcome to the forum.

    The first thing I'd do from here is double check the end values of both the old and proposed dwelling.
    Even without knowing the market you're in, based on what you've said I think your end figures may not stack up.
    For example you're anticipating a 40k equity position on the new build. But in doing so what does that make the original property worth? Are you devaluing it by 20k, 40k, 60k??
    You really need to clarify this as you may end up spending more than the end values of the 2 properties combined.
    If this is the case, it may not be feasible to build a second dwelling.

    If you can spend 250k in this town and get a house on its own block that may be a better way to go.

    Please don't take this as criticism, just trying to give you a different perspective on the project.
     
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  9. lixas4

    lixas4 Well-Known Member

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    Agree with Hodgo and Blacky, subdividing at a later time many years down the track mean the services authorities (elec/water/gas/sewer/telstra/nbn/drainage) get another go at giving approval to your development. And if their requirements have increased you may have to comply, which could mean increased costs. A recent client (my parents) had to spend 20k to comply with service authorities requirements for subdividing two existing dwellings built 20 years ago.
     
    Last edited: 12th Feb, 2017
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  10. lixas4

    lixas4 Well-Known Member

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    Interested to know what savings your builder was suggesting. It poses a good question, what savings are there from not subdividing? As i see it these could be the savings:
    - surveying costs associated with the sub
    - some savings at titles office
    - conveyancing fees
    - assuming all the services will be individually connected to the dwellings so no savings there
    - would there be a decreased land valuation meaning smaller land tax payable?
    - maybe same as above with council rates?

    Does anyone know the answers to the above, interested to know
     
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  11. NOTAM

    NOTAM Member

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    Thank you all. What an awesome bunch of minds!
    I'd much rather hear your thoughts than pay dearly for it by screwing it all up, so thanks again.

    In terms of devaluing house 1, I will study this more and seek professional advise. My thought is that the capital impact will be relatively minor. The impact on its rental income will be zero. I'll get some official numbers.

    I could buy a $250k house in this town (complete with a block) instead, but the yield would not be as good as it is with the new build. (Maybe $240/wk compared to $320/wk.
    This town (Ararat) is not really much of a growth town. I'm mostly chasing income. Having said that, I am not going to go ahead with the build if I find that it brings my equity backwards.

    Has anybody found that a brand new house slips in value as it ceases to be new over the first couple of years?
    I know that a house depreciates but I'm wondering if it's 'newness' falsely inflates its value initially?

    I'm also very keen to hear what 'savings' a clause 55 development brings. I'm assuming just a few administrative dollars but I'm hoping that our rates (extortionate in Ararat) may benefit too.
    All services are separate.
     
  12. Tufan Chakir

    Tufan Chakir Well-Known Member

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    First the $250k build for a project home seems a little high. Secondly if you proceed with this, and plan to keep it, take out the extras (high ceilings etc) to reduce build cost - I suspect they won't make any difference to end value. Check end value of new house on 364sqm lot - could be lower than you think ih houses on full blocks go for around $250k. Consider the option - subdivided nd keep the land as vacant - increasing asset value, use the $250k to buy elsewhere and see if you can repeat the exercise, building up a land bank for future sale or development as desired.
     
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  13. NOTAM

    NOTAM Member

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    Thank you. I'll give that some thought.
     
  14. The Y-man

    The Y-man Moderator Staff Member

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    The value doesn't necessarily slip, but your rent may stagnate if other newer, shinier IP's appear.

    The Y-man
     
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  15. wylie

    wylie Moderator Staff Member

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    I was told by a couple of agents (when researching townhouses) that selling brand new would get us a premium. Holding and renting would mean about five years to "catch up" to other newish (but not brand new, never lived in) similar properties.

    People pay a premium for absolutely brand new.

    Sounds similar to brand new vs slightly used vehicles.
     
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  16. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Allowing for selling costs, GST, income tax on profit (if any) and the like there may be very little profit left in it.
     
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  17. NOTAM

    NOTAM Member

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    Thankyou Tufan.
    I was a little disappointed with a $250k turnkey cost. A large lump of that was connection to services, re route sewer from house 1 etc.
    The base price on this build was $189k from the project builder, though obviously nobody ever gets the base price in their contract!
    -site costs, slab upgrade etc.

    The high ceilings were part of a promotion ()
    The options were high ceilings, snazzy oven and cook top, or a split system. The ceilings seemed, to be the best bang for buck, even though I'm sure I've paid for them somewhere else in the site costing etc. You're probably right, I probably should have gone for the cooler and negotiated harder on a discount.

    I assume that if I subdivide and keep the block, as you suggested, I'd still be up for the hefty costs of connecting to services as part of the sub process?

    It sounds to me like this is clearly not a build to split and sell project from what I am reading. I'm sure that Ararat will never be that kind of place. (Unless gold rush part 2 occurs )

    I am still quite tempted by the prospect of building it and having a positive geared asset from handover. It's technically free right?

    Any on-paper equity gain would be good for borrowing for the next one, but I agree that this
    Is not a seller. At least not this decade, or probably next.

    I could put my $250k in a rundown 1970s place in Ararat, still not see too much growth, AND run it at a rental loss, or I could look elsewhere.

    I must admit, the idea of building excites me. I think that I would learn a lot from it.

    I dunno, you guys must all have nerves of steel!
     
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  18. Perthguy

    Perthguy Well-Known Member

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    I am doing a similar thing in Perth. I have a negatively geared potential development site and I am building out the back. The house I build will be positively geared from day one, which is good, but end values are low, so it's not worth too much at this stage. I am also building as self development to learn the process and turn a negative site to positive.

    Nerves of steel? Hardly. More like having a nervous breakdown! ;) :)
     
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  19. Tufan Chakir

    Tufan Chakir Well-Known Member

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    Planning permit application - get a permit for the subdivision. Creates value. Lasts for 5 years with being renewed, usually can be renewed at least once easily. Planning application relatively low cost against the certainty of subdivision being "available" when you want to trigger it. Do nothing. Put the $250k into another site, repeat. Then as equity builds pick one and subdivide either build on or sell
     
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  20. nrl

    nrl New Member

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    I am a town planner based in Western Victoria and yes you can over capitalise easily in rural towns. I always suggest to my clients to speak to at least 2 real estate selling in the area for two reasons to see what the market is looking for and also to get an idea of the financial return. If i can be of assistance let me know
     
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