First Purchase. Active strategy advice

Discussion in 'Investment Strategy' started by DJS, 6th Jun, 2019.

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  1. DJS

    DJS Member

    Joined:
    10th Oct, 2017
    Posts:
    10
    Location:
    Melbourne
    Hi all

    Long time lurker finally in a position for our first purchase and seeking a bit of guidance. Pre-approval has just come in, we have a broad idea but never hurts to bounce off others who have gone before. A thankyou in advance - I trawl this forum regularly and its a phenomenal resource.

    Background
    - My background is in tier 1 architecture/construction, PM, now a developer in the commercial space (CBD towers). I've also project managed a few mid-scale reno's for others as a side gig when time permits and love getting my hands dirty. I've renovated half our rental house just for fun (needless to say, the landlord loves us).
    - Partner is an architect, plus many of our friends (handy!)
    - Brother 1 is an engineer (also handy!)
    - Brother 2 is a town planner (tick!)
    - Best mate is a planner/property lawyer (double tick!) with connections to anyone else we may need.
    - Big complement of friends and professional contacts in design, construction, shopfitting and the like.
    - We're in Melbourne.

    We have taken our time to build up a decent capital buffer so when we (finally) get started, we can take on an active strategy.

    Intentions (for comment)
    - House purchase possibly inner west to either renovate, subdivide or develop (subject to what finances will allow, possibly all three, staged)

    - Live there for 12months (stamp duty savings requirement) then move back to Port Melbourne which is home (we will maintain the lease at our current place - it costs us next to nothing anyhow). Absolutely no intent leaving Port permanently at this stage. Lifestyle choice.
    - During the 12months work through the renovation or similar, refinance and draw the equity to a ~90% LVR and move forward to project #2. Once to a decent standard we will rent out the rooms to assist with the cashflow (we live in a sharehouse of professionals already - again, lifestyle choice) and continue with the exterior over time if needed, for example.
    - Aware of the CGT issues if it's on the books.
    - Once move out, convert to IP, continue rent by the room and move on.

    Budget:
    - $650k purchase, approved to $670k. Preference to stick to $650 to take advantage of stamp duty reductions and maintain capital.
    - $50k budget for initial work/applications as relevant.
    - Bear in mind between family and friends we don't need to pay (in cash at least!) for the majority of consultants and can leverage our networks for cost materials/labor if needed. Handy.
    - Note: Have an option for a no deposit/LMI loan with a higher interest repayment (approx ~$50k more capital to play with this way), but feel it's a touch too risky and will have us right on our repayment limit to maintain our lifestyle, which is pretty frugal as it is.

    The question is, and mindful it depends on the specific property/suburb, is what makes the most sense high level strategy-wise. Purchase an undervalued property with renovation potential closer in, or a larger block further out with subdivision/build potential, in a way which we can use the equity to move forward in a reasonable timeframe.

    Long term my personal aim is to have a few small developments on the go (I do this all day, but on a much larger scale), but need to start somewhere :).

    Any and all comments, suggestions or criticisms very welcome.
     
  2. David Shih

    David Shih Mortgage Broker Business Member

    Joined:
    21st Jun, 2015
    Posts:
    1,034
    Location:
    Sydney
    My 2 cents...

    With your background, experience and people around you I think it'll make more sense to find a subdividable block than going down the cosmetic reno path. It'll be higher risk but higher return type of strategy and careful/thorough due diligence required.

    It's usually riskier with subdivision/development and you need to have relatively deep pockets/buffer but I think if you can utilize the skillset of people around you as part of detailed DD then you should be able to mitigate the risks quite well.

    Depending on your risk appetite, you can also just subdivide and sell without building if you don't want to take on the risk of building. Cut off the block and sell - so knowing your profit at different exit points is important.

    Unfortunately I don't know Melbourne well enough to be able to comment on suburbs but I'm sure other people on this forum can help.

    Cheers,
    David
     
  3. Cate Bell

    Cate Bell Well-Known Member

    Joined:
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    Location:
    Australia
    I am sure you have a network of talent to do a reno or subdivision etc and would know more than most. But I don't know about renting by the room, raises many issues. I would be investigating any legislative requirements around this, is this a boarding house, insurance, property management (these types of properties are usually time consuming), is there a demand for rent by the room in the area, who is going to be responsible for damage to common areas, will there be a naïve head tenant on the lease, will the electricity and internet be included in the rent? I don't know, I have never had one of these types of properties, but they sound like a real hassle. I like smaller renos in a good area, can be more profitable, quicker and less hassle than a development, but with that talent I would probably go the
     
  4. MyPropertyPro

    MyPropertyPro REBAA Buyer's Agents Sutherland Shire & Surrounds Business Member

    Joined:
    1st Jul, 2015
    Posts:
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    Location:
    Australia
    Sounds like a great team/resources you have access to and in all honesty, either/or would work as it appears you've done your planning. My only suggestion would be to ensure that those friends and family you have listed with professional expertise as willing and able to assist as and when you need them to. You don't want to get stuck waiting for plans, drawings, help, etc. when you need to keep moving with your strategy. Using contacts is fantastic but I've seen time pressures turn into relationship pressures, particularly when big dollars are involved.

    - Andrew
     
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  5. David Shih

    David Shih Mortgage Broker Business Member

    Joined:
    21st Jun, 2015
    Posts:
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    Location:
    Sydney
    Actually that's a really good point Andrew. I remember listening to a podcast the other day and one of the things I picked up is how family/relatives can also be the point of failure due to them helping you on an ad-hoc basis i.e. only get to your project when they have time

    So @DJS if you are going to engage your family & friends it might be worthwhile to consider engaging their help/services on a more formal term (with quotes etc).

    Cheers,
    David
     
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  6. DJS

    DJS Member

    Joined:
    10th Oct, 2017
    Posts:
    10
    Location:
    Melbourne
    Thanks Andrew/David

    Agreed and fully aware. Fortunately our group are close both personally and professionally and help each other regularly (i'm the 'fix problems' guy when things go south or builders don't play ball), but note the advice :).

    Meeting BA tomorrow morning to firm up strategy based on the above options but still very open to suggestions.

    Also attended a few auctions over the weekend to get a feel for the market we're considering. No surprises either way which was a good sign in my mind.
     
    David Shih likes this.
  7. MWI

    MWI Well-Known Member

    Joined:
    17th Jul, 2017
    Posts:
    2,287
    Location:
    Lower North Sydney NSW
    I would start small and then progress. Theory and experience are two cups of tea, especially when your finances play a role. Project feasibility or management are just some of the issues at play but so is the time management and costs of funding, maintaining till completion of the
    project.
    Best of luck and keep us posted, read some posts here on developments as they may help too.
     
  8. NHG

    NHG Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    640
    Location:
    Sydney NSW
    My 2 cents.

    1. Using friends/family shoots red flags. Unless they are the best engineer/town planner. Saving $2k, and losing $100k by not maximising development use, is not a winning strategy. Nor will they be quick to respond. May also create resentment if you are kicking goals, and they are passing on subsidised advice. Professionals are small piece of a large puzzle that should be easy to replace to ensure momentum.

    2. Developing for a tier 1, and developing for yourself are worlds apart. There are an insane amounts of unseen safety nets at tier ones to prevent an oversight bringing down an entire project. I too am in a similar network as you. I've seen it go south more times than those who did break even. Need to do some deep reflection and make sure you're willing to pay the price to succeed.

    3. As above, if you're starting from scratch, probably best to learn subdivisions. More relevant skill set to what you do personally. More brain and admin than management trade skills required.

    4. Exit strategies. Start from the end and work backwards. Will the next move you take impact the 3 moves after that to get you where you want to go.

    5. I am predominantly rent by room. I do well from it
    You will get mostly negative feedback on this forum about this as most here don't know how it actually works. That stated It is a lot of additional work. You're buying yourself a job unless you can grow it large enough to hire staff. So imagine you in 5 years doing 3 jobs (PayG, renovations, room rentsls) + other life commitments. Is it worth it?

    This is a long term, gruelling commitment if you wish to generate lifestyle changing results. Asking the questions is a great start. However only jumping in and doing it will really teach you what you need to know.
     
    Last edited: 23rd Jun, 2019
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