Developing large unit blocks to rent out, not sell

A question for the large unit block developers out there... yet another unit block has gone up nearby recently but I was intrigued that none of the units were offered for sale. Instead, they're renting them out as brand new units.

The site in question is 71 Gray St, Kogarah.

Is this something that other developers are starting to do as well? You'd never be able to sell later as new units since they'll have been lived in but I guess if the rent yield is sufficiently high then a return is a return.

Thoughts?

Cheers,
Dave

 

Ralan, Meriton and others do it.

If you don't sell and realise the development profit then your cost base is about 2/3 of whatever everyone else is paying at market.

So if MV is $1m and cost base is $700k you would still get the same rent as the punter who paid $1m, say 4% or $40k. So your return is $40k/$700k or 5.7% (about 40% more than the retail buyer's return).

Instant positive geared (possibly).

 

That's how meriton owner Harry Triguboff is the richest man in oz !

 

I've always built/will build to rent. Have done it on very small sites where I just added a few units/apartments. Planning to do it on a bigger one with 20 or so units.

Family has a few big holdings somewhere which are probably a multi level high rise development. At one point dad wanted to build apartments and sell... Talked him out of it, not before wasting money on schemes though. I've always been against developing any of them if we can't hold the end product.

 

The plus sides of holding your development (really of any size) are:
1. Hold for more than 5yrs and you don't pay GST on the build (but you also can't claim it either)
2. You get the benefit of depreciation in it's highest stage (ie brand new) to offset/reduce income and therefore tax
3. You control the strata and body corporate. Depending on the size your first meeting may be to dissolve any such need.
4. Your rental return should pay for the mortgage as you have a 'wholesale' or cost base debt not the market value debt
5. You don't need to give the ATO a big chunk of the selling profits
6. You don't have to pay a REA a commission to sell them

It comes down to your strategy and if had a requirement for presales to get the bank to fund it. If we are talking a 10+ apartment complex then a bank would generally always need presales and that dilutes their risk but also ensure that it's unlikely that the bank would be over committed to one development, ie owning all 10 at the end.

 

For a 4-townhouse feasibility in SEQ I am looking at a net yield of 2.5% on Development Cost and 3.9% on amount financed. For this scenario its $35.5k pa net cashflow before income tax ( that cashflow has already taken into account PM fees, insurance, strata, interest and depreciation ).

My way of creating a cashcow. Immediate problem is pulling together the capital required for soft costs and construction deposit.

 

What would you say are the main cons?

Also, in what context should you build to hold and when does it make more sense to build to sell?

@Westminster @Omnidragon

 

In my opinion the cons would be

1. All your portfolio might be tied up in one suburb, ie not diversified
2. Your debt level isn't reduced with a chunk like selling can
3. If rental values go down then all your development goes down
4. If vacancy rates go up then your whole development is affected
5. If market values go down for your suburb then again the whole development is affected

The context for holdings vs selling isn't about making sense but more about your strategy, structure and risk management/appetite.

At the moment in Perth it is a buyers market with competitive construction costs so there is a school of thought (and yes I'm one of them) that is pro building to hold until the market picks up then sell.

 

What are people's view of developing say 3 and keeping 2, or developing 4 and keeping 3?

That way you still control strata but can reduce debt levels for risk management ?

Or better to try and keep all to minimize strata cost to $0?

 

That other owner may be more trouble than it is worth. Sure, you control the body corporate, but you are still under legal obligations to each unit owner.

That single owner can complain to statutory bodies if feeling hard done by. You simply cannot ignore or vote down any genuine issue.

Strata costs can't be $0. Insurance, maintenance, common area upkeep, electricity etc all have to be paid.

Legally you would have to contribute to a sinking fund to provide for future maintenance. You can't keep all the units for 15 years then sell with zero in the sinking fund and repairs looming.
Marg

 

Do people understand what strata costs are?

Bleeding every cent out of an asset is false economy as maintenance will need to be funded at some point and returns will be reduced on a depreciated asset until the work is completed.

No need for a strata manager if not strata or a single title/one owner but as @Marg4000 notes there are still costs or risks to mitigate.

 

I know someone who owns a unit block outright. It is probably 40 years old, no Sinking Fund. To me it's a nice position to be in. Looking at super cities in other countries, and looking at our population growth, some day most of us will live in a strata.
IMHO best to the planning done right, esp the financial structure. You may want to have different entity doing different role. You might even be able to utilise SMSF. These tasks are boring and tedious, but essential. And any mistake can be quite serious. Next question is where to find a really good Accountant who understands property and strata......