Develop or sell

Discussion in 'Development' started by Azabu, 17th Aug, 2019.

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  1. Azabu

    Azabu Member

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    Hi everyone, my first post. I'm located in the ACT. I'm looking for some advice about development, having never built or developed previously.

    The situation

    I have a 4br house that I bought in 2007 @ $740,000, probably worth around $1.1-1.2m now. It is in a good area, currently tenanted at $700/wk. But it is old and rundown. I owe nothing on it.

    To improve the return, I need to put some money into it - which made me think I might redevelop it given the likely cost of renovation. Alternatively I could sell, get my capital back and take profit and re-invest elsewhere.

    The block

    The block is RZ2 zoned, i.e. I can subdivide, or else I can look at building a duplex.

    The downside is I'm dealing with trapezoid block about 41m long that narrows from front (width 22m and facing north) to back (width 15m) with an slight upwards incline. There is one large tree at the front which will impact how far forward I can build, and it might be hard to move the driveway. There is also easements on one side and at the rear of the block.

    Finance

    I have to work out if I can finance it. I already have another investment property (returning $950/wk; $1m IO loan and a PPOR (435K owing).

    I wanted ask what actions/information I should take or put together to make an informed decision about either developing or selling and in what order?

    Thank you in advance.
     
  2. thatbum

    thatbum Well-Known Member

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    You seem to be missing the obvious - whether or not you'll actually make enough (or any) money developing it!
     
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  3. Azabu

    Azabu Member

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    Sorry, I guess that was implicit in my question. But thank you for pointing it out - I am trying to work out if I'd make money via the development.
     
  4. thatbum

    thatbum Well-Known Member

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    So some of the starting points with this would be figuring out:

    1. What you can build;
    2. How much it would cost to build/develop;
    3. What can you sell the end product for.

    Generally speaking, I'd be surprised if it was worth your time and money if you don't have any prior experience or relevant skills. Property development for profit can be a hard thing to do.
     
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  5. willair

    willair Well-Known Member Premium Member

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    Maybe have a talk to the Accountant you employ and work out the tax side if you sell the property as it is ,that's after you have the property valued ..imho..
     
  6. Azabu

    Azabu Member

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    I am concerned that it could go badly wrong, hence why I wanted to carefully put together the pros and cons and the financials. For the points you've suggested:

    - What can I build and how much it would cost - Should I start with a builder or designer/architect to get the estimate?

    - What I can sell the duplex for - I guess I should talk to a real estate agent? Just looking at what is for sale, new duplexes are around $1.2m -$1.6m.
     
  7. Azabu

    Azabu Member

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    I'm OK to work out the CGT myself.
     
  8. 11907

    11907 New Member

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    What ever you decide it sounds like you would be better to refinance and get your equity against your ppor. Borrow against the investment for tax reasons
     
  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Deductibility of interest depends on the use, security of the loan doesn't change the tax outcome.
     
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  10. Paul@PAS

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

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    If its your main residence and sold as-is then that could be $0. Demo the house and sell and it may be vastly different.
     
  11. Paul Mete

    Paul Mete Well-Known Member

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    You sound in a good position.

    Establish exactly what your goals are.

    One option is to improve your position by getting a development Permit yourself.

    Another option is to discuss joint ventures with builders.
    We are developers and we have entered into joint ventures with land holders on many occasions with differring agreements.
    Our latest in Cheltenham in Victoria is just completed. We built two Duplex SIDE by SIDE homes keeping one as payment with the land owner keeping the other and getting a large sum of money. The final amount will depend on the sale price of our dwelling.
    The motivation for the landowner was to improve his home and have some spending money.
    So it does depend on your aims.
     
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  12. Azabu

    Azabu Member

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    Thank you that is a very useful suggestion. I've recently contacted a real estate agent who suggested something similar. He is going to take a look at my site and see if he might refer me onto someone who might be interested and also potentially talk to some designers.
     
  13. Sackie

    Sackie Well-Known Member

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    Need to work out as accurately as you can end sale value for your specific location. Look at recent sales and talk to agents in the area.

    When you have a good idea of sale value, apply a per sqm construction cost and add in a 5 to 10% contingency. Add another 60k to costs. If your gross return on total development costs at this point shows 25% or more then it may be worth doing a more detailed feasibility. You could be sitting on a profitable development site. But you need to run the numbers.
     
  14. Azabu

    Azabu Member

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    Thank you - really valuable to get a rough metric to consider. I wasn't sure what was going to be threshold to put money into a detailed feasibility study or design.
     
  15. Azabu

    Azabu Member

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    Spoke to a building company yesterday about what we could put on our block. The guy said they've done JVs with people and said he'd look into it for me.

    I was wondering if you might be able to provide some more information on the different types of agreements?
     
  16. Paul Mete

    Paul Mete Well-Known Member

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    We customise agreements to suit the particular situation so no two are alike. Current market conditions also effect any proposal.
    Start with what is the best way to develop my property. Is it multi-units or is it two family homes? If two family homes is it a duplex?

    If you are developing the hope is that there is a large pool of equity created. Some should be given away to any partner but you should be left with a significant improvement on your current situation or it is not worth it.

    Developing yourself is a higher risk but should yield more profit.
     
  17. Azabu

    Azabu Member

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    Bit of an update. Spoke to real estate agent who basically said probably not worth it unless you have 2 blocks.

    Builder came back and said they'd consider a JV but wants me to stump up a half share in costs for a land survey and plans to be drawn up, presumably to look at feasability ($5,500 - total costs $11,000). And then if both parties are happy to proceed, then we'd for some sort of JV entity.

    I don't have a problem sharing costs but I'm wondering if the amount is legit?
     
  18. Paul Mete

    Paul Mete Well-Known Member

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    Hi Azabu

    Your question pertaining to the $5,500 costs should depend on what you get for this money and what further money will be required of you.

    We usually ask for a smaller deposit just for designs only. THEN we offer a fair amount of certainty on what happens next based on those sketches in the form of a basic contract.
    Basically after some initial sketches your JV partner (the industry expert) should be able to provide a real outline of what is proposed and what the numbers look like.
    Costs like Surveys and the like should come after fairly solid agreements are in place.

    Of course there are no guarantees with this type of thing but a solid outline should be available very early in the process.

    If you feel the same way then we suggest you verbalize your desire for clarity to your potential JV Partner. After all, you are bringing the real estate equity to the table they should be bringing the "know how".

    We hope this helps
    PAUL
     
  19. Paul@PAS

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

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    What can be built ? What is in high demand ? Talk to a local town planner with a site drawing. They will know what can be built and what cant. Just a consult. I often see people race to build 3 bedroom villas and invariably the lot is too small. Yet 3 smaller 2 bedders in NSW may fall under the stamp duty and first home buyer concessions and be in demand. Just depends.
     
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  20. Leslie

    Leslie Well-Known Member

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    If I were in this situation, I will sell the property as it is and pay off the PPOR loan first. Then I will buy something else with PPOR as security. This property has too many restrictions and easements and not easy to develop especially if you don't have any knowledge.
     
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