Buying next door to an existing investment property

Hi All,

Looking for some advice. What would you do in this situation and what would you consider?
I own an investment property in chipping norton, NSW (near Liverpool). The property next door is on sale (needs a bit of work). The agent called me today and said that the area is zoned as R3 (need to validate this) and therefore if I purchase the property next door, I can in future build townhouses. The total combined land size will be 1326 m2 for the two houses. I am considering the following things:

Potential negatives
1. Not a good time to buy as Sydney is in a declining market
2. Chipping norton hasn't done as well as a lot of the other suburbs buying another property here may not be a wise decision
2. I have a principle place of residence in Sydney as well so if I purchase another property, everything will be in Sydney
3. I will be paying land tax after buying the next property
4. There are probably a lot of other considerations before I can build townhouses - need to do my research

Potential positives

1. Increase in capital growth as a result of the new airport
2. Ability to build townhouses or sell to a developer in future

I plan to hold on to all my properties for a while. Thanks in advance.

 

I wouldn't buy next door basically unless 1+1=3 or more basically in development terms.

Even then, I wouldn't buy next door until I had a very good idea of what I was able to develop in the future so that the purchase had considerable synergy with my existing property to offset the downsides you mentioned.

I don't think its good enough to just have a general idea of what you can build - what if it isn't feasible?

 

Hi Andrew
Welcome to PC!
It may not be a good time to purchase in Sydney, but it is not every day that a zoned property, that too next door to yours would comes up for sale.
Personally, I would consider purchasing it, keeping in mind the supply of land in the area, and upcoming infrastructure.

 

What is existing property worth now, add in cost of stamp duty, cos of new property and cost demolition and of town houses and holding costs (interest). What can you sell the townhouses for now? is this profit worth it?

Then run the numbers again with the townhouses selling for 10% less (minimum fall from now IMHO), 15% less (AMP base case) and 25%/40% less from now (higher falls), 50% worst case falls

 

It’s only worth what is possible with 2 blocks. Never assume because you have 2 blocks it means more townhouses because it simply may not be the case.
I would go have a long discussion with council and also check for precedence. Obviously the biggest benefit of dual blocks in the ability to run a driveway down the center basically saving a lot of wasted land which will ultimately become the backwards for the rear 4 townhouses (assuming 6 in the development).

But also consider that if doing 6 your now basically in the commercial al space and things may start to get harder.

 

All excellent suggestions above - I would suggest you to do further DD on:
1. How much would the next door IP cost you to purchase & hold for x number of years. Keep in mind if the agent is contacting you proactively he may want to sell it to you at a higher price than the market price as he knows you have incentive to purchase
2. The challenges/roadblocks you will need to address (i.e. what could go wrong) + cost associated before you can develop. I would want to reach out to someone who has done this before to pick their brains.
3. Total cost of the development project and estimated profit that you can make from it. Again run through someone who has done this before so you're not flying in the dark
4. When would you have the available fund/equity to be able to develop

I'm no expert in development, but these would be a couple of DDs that I would do in order to get to a more informed decision.

I recalled @wombat777 has done a lot of number crunching for his proposed development work around Petrie. So he may be able to give you some advice here on how to approach the DD.

Cheers,
David

 

Yes, my DD / number crunching was primarily to generally understand development potential of my two existing sites (in different suburbs). I already owned them as buy/hold investments. The first site was a lucky buy ( good-sized block ) and the zoning changed 3 weeks after purchase. A year or 2 later I paid for a town planner to give me a quick assessment of potential for the first property. That gave me much better understanding of development codes and with that knowledge I bought my second property in Petrie with the same zoning ( also as a buy-hold investment due to the yield ).

The feasibility numbers gave me understanding of what the second property might potentially be worth to a developer and a whole range of scenarios and costs for developing it myself. I had some concepts done ( to understand what could fit ) to help with greater precision on numbers. Development is still a long-term goal for one or both of my sites in Moreton Bay.

@Andrew Hari - you could talk to a town planner to get some opinions of what is possible. They may be able to do a quick assessment for you. You just need to weigh up future potenial against extra holding costs such as land tax. Also - will you get respectable yields?

 

Thanks everyone for your great suggestions. I'll continue with my research. Lots to think about and consider.

 

In these scenarios it is purely a numbers game

If you're buying it at market value, then you'll likely be able to capitalize

If you pay a premium (and make no mistake agents will try to make this happen) then less likely

Just make sure you do your due diligence around what synergy exists with two blocks together vs. the single holding