Dual Occs vs cheap high yield IPs as a vehicle to build a portfolio

I’ve just finished reading all of @euro73 ’s posts about dual occs and i feel i’m in the category of people that fit in his strategy. within the $100k plus income, 2 dependents with ppor and i probably can only purchase 1 IP now and maybe 5 years for the next one considering minimal or no change in my income.

Before i’ve come across euro73’s post i’ve been researching into high hield $350k-$400k properties.
As my long term goal is to replace my income and live off rent. I don’t lime to rely purely on growth as no one can predict the future so if there’s growth then it’s a bonus for me. And also equity has no use if you can’t borrow anymore, unless invest it in other asset class.

Euro’s strategy seems attractive to me but then one concern is that the risk that the property will be undervalued on completion. heard stories about people having shortfall on settlement.
I can see in euro’s facebook page that his deals have actually achieved good growth but then is it because of the market were in now? what if on completion the market starts to go down?
Is this still the case? or can we have a valuation or finance clause on the contract?

I just thought if I go with existing properties with high yield, average I can get probably around $5k net compared to euro’s deals $16k net pa. It will take me a long time to reduce my ppor debt let alone borrow and buy more.

so seems like dual occs are really good deals based on my goals assuming there’s a valuation or finance clause on the contract.

This is what i love in this form as businesses are being argued and given the chance to prove their business model and it’s up to new investors like me to make an informed decision.

 

How do the numbers compare at the same interest rate, same location , brand new dual occ v/s single old house?

 

To get to $100k pa gross income you would need about $1m equity to borrow against and a $2.2m commercial portfolio.
So based on a net yield of 7.5% so .
Net rental $165k
Borrow $2.2m @2.95% $$65k
So net profit of $100k

 

we don’t sell completed properties . You buy the land and we build - so you get your finance ( including valuations ) done before hand …. In the event a valuer came up short on either the land or the fixed price build component , you would not have exchanged yet so you have no risk , so to speak . But it’s never happened in many years and hundreds of builds so I’m confident what we do is on the money .

 

sorry can you pls explain further on the process?

I thought once you sign on the contract you start paying interest or repayments start?

 

In the past you would be provided with two contracts;
1. Land - from agent X,Y or Z ( ray white, elders, raine and horne, etc)
2. Build - from us

You would take those to your bank or broker and get finance approved .You will likely require 2 loans ;
1. A loan for deposit and stamp duty - typically secured using the equity in another property ( unless you are using cash , which doesn’t seem likely given your posts above ) this might be 20% plus stamp duty for example
2. A loan for the land / construction . Secured by the house and land . This might be the other 80% for example.
These loans may or may not be with the same lender/bank . They don't need to be, as they are secured by two different securities, but sometimes for convenience your broker will organise it so that they are. They should NEVER be cross collateralised though.

An example of how that might look...
Let's say the land costs 200K and the build costs 550K for example. Price 750K.
And let's say stamp duty on 200K land is $5500 and legals are $1500 . Total cost 757K In this situation 20% of the total price (150K) plus stamp duty (5500) plus legals (1500) is approximately $157,000.
So for Loan 1 ( the initial 20% plus costs) you'd extract @160K from equity to cover that. And for Loan 2 ( the other 80% ) you'd require the balance of @ 600K.

AFTER finance is in place...
You would exchange on both contracts with10% towards each contract.
So from the $160,000 loan (Loan 1) you would pay 20K deposit towards the land and 55K deposit towards the build
This means you would have used 75K of the 160K (Loan 1) at this point . 85K would be left untouched/available at this point.
It would also mean you now owe 180K on the land and 495K on the build.

Settlement of land
You have already paid 20K towards the land so you would owe 180K at settlement of the land. You also owe stamp duty and legals. total of @187K required to settle

This is where Loan 2 joins the party. You have 600K sitting there , approved.
There is 495K owing to the builder so your bank will retain that so they can pay the builder as progress payment invoices are sent.
This means the bank will make 105K of the 600K available to use towards the land settlement. Obviously this isnt quite enough as you need 187K. So there is an 82K shortfall. But there is 85K sitting in Loan 1 which hasnt been used yet. So you transfer that money across to your solicitors trust account a day before settlement and voila! Between Loan 1 and Loan 2, job done.

The build
You owe the builder 495K . Your bank is holding on to 495K ( Loan 2 )
As the builder sends you progress payment invoices, you send them to your bank and they pay the builder .



The current way to do it is ... we don't issue build contracts until you own the land. Construction prices are too volatile to be issuing fixed price contracts weeks and months prior to settlement of the land, so you buy the land first , then approach us after you have completed the purchase and we will organise a build contract for you at that point .

In this situation you would still organise for your bank/broker to extract equity from your home in order to purchase the land , but it would change the mechanics of the loan set up a little. Still very straightforward. Your broker can organise it for you easily

 

Growth is important when your strategy is to sell and take profit, there are many discussions here about Capital Growth Vs Cashflow and many arguments for one or the other, ideally both.

Loan repayments do not begin until the loan settles, not before.
In a land and build scenario the land loan settles first and your start paying interest on that loan portion, then as each stage of the build progresses you pay interest on the drawn amount of the construction loan.

 

Thanks for the detailed response @euro73

Just some clarification, based on your example there's $495k in the bank to be paid to the builder during construction, so does this mean the bank has already finalized the valuation? Or the bank still need to do another valuation on completion so this is where the risk that the bank might fall short and I have to pay for the shortfall?

 

You get your valuation done BEFORE you get your construction loan approved, you can't get finance approval without a valuation being completed, standard practice for any lender.
They send a valuer out at certain stages of construction but that's only to ensure the build is being completed as per the contract, not to re-value the property.

 

so this is different to off the plan arrangement where i hear stories houses are under valued on completion?

 

No, the valuation type is called an 'on-completion' valuation or Construction Valuation.
The bank values what the property will be worth on completion but it's completed prior to finance approval or any construction commencing.

If the valuation comes in lower than the total build cost you have options, either put in the shortfall using cash/equity in another property or not proceed with the construction loan.

People get stuck when they sign a contract to buy land that is unregistered and doesn't register for many months after the contract is signed. By the time they can get a valuation completed the finance clauses are lapsed and they've gone unconditional on the contract and put down 10% deposit, so if the valuation comes in low, they're essentially stuck and their deposit is at risk, unless they can come up with the shortfall.

 

thanks Lindsay, that i guess covered what i'm worried about going with this deal

Do you do this kind of loans? can you pm me your website?

@euro73, the package at the moment for your deals is $530k is that correct or it's higher now?

 

I've done many of these yes, will send you a PM.

 

See Lindsay's response above

Build price at the moment is @ 550K , plus whatever you spend on land. Typically that will sit around 200K ... so total price would be @ 750K at the moment , plus stamp duty and legals

We don't do off the plan builds as a general rule.... We would need to own the land to do that. And it would cost you more as you'd be paying stamp duty on 750K instead of 200K ...just silly for us to try and do it that way - costs you more. eats up borrowing capacity. ties up our capital on land. Seems plain silly to me to do this, although I admit it doesn't seem to stop lots of other companies doing it . The only exception to this is for SMSF's where we have no choice but to deliver under a single contract .... ( construction loans and SMSF are a different subject for another day) in that situation we have to buy the land and build the property for you on an OTP basis . That is a function of the SIS Act though, not our business model.
In simple terms, where anyone other than an SMSF is the purchaser , they buy the land first and use construction funding to pay the builder in stages, so there is no risk of a valuation shortfall happening after you have committed, as you secure all loan approvals beforehand.

 

Explore Joseph's Gate Riverside in 3D

Dropbox - 12 Colvin Rd.mp4 - Simplify your life

 

Dual keys work great for cashflow i have one that i built and rented out the last 2 or so years on the sunshine coast qld. Costed me 530k to do & its 1700$ passive income a month already & has made 300k equity (real estate valuation to sell its 600+ equity) im in two minds about wether to do another one as i would like to diversify my portfolio but i will see, i might go
For another as they are great cashflow, you could retire quite easily doing a few of these if you set them up right

 

Explore 17 Colvin Place, Goulburn in 3D

 

Explore 17A Colvin Place, Goulburn in 3D

 

Looking good!

How are you managing the rising construction costs @euro73? Have you seen much of an affect on your projects or not so much, or are increases already factored in at the time of quoting?