first time developement -need help

Have some relevant questions i like to ask .In addition to the construction cost ,I was advised to allocate funds just in case for the following
1. Drainage -$20K
2. Town planning -$25K
3.driveway for both front and back -$20K ,even though builder provides 60sqm concrete driveway
4.additional car port -15K which can be negotiated because the original spec home has double garage ,I only want a single garage .
5. traffic management -15K ( not required I guess )
I will be approaching lenders shortly to obtain conditional pre approval . Do lenders require before they grant pre approval
thanks

 

I doubt TP will be anywhere near 25k and traffic management 15k...

 

TP includes ,plans &permits ,working drawings ,building permit

 

Just a quick question, what is your end plan?
Do the feaso on every scenario? keeping, selling 1, selling both, rental returns if you keep 1, sell 1 etc.

Are you sure you can source finance?

Don't forget holding costs during the build period

You said the market is soft?

Just being devils advocate...….There is a third option, do nothing and wait if the numbers are too tight

 

The end game is
1. This is my retirement income/ to supp my super ,when I retire in about 8 to 10 years .

2 .existing property positively geared currently ,if I borrow $300 k to $340K P&I at 7% repayments approx $2250/mth .Rent for a new 3bv town house ,currently $500K =$25K ,shortfall $2K + holding cost $5k . depreciation @4% will give me a refund from the ATO

3.Labor win the next election and anticipating rents to trend higher ,especially for new properties

I thought about buying an existing investment property ,instead of all the hassles of construction ,purchasing something for $350k + $20K stamp duty ,i will have to buy 2hrs from the city and the loss from rental income will be $10k ,not sustainable currently .

hence the reason I want to subdivide ,better opportunity cost

 

It's all too messy for my liking.

You need to determine your return on total development costs to see if the risk is worth the benefit . You need a basic feaso first to see where you stand . At least thats how I'd be going about it.

 

I'm not sure it would be enough information for a lender to offer pre-approval but it might be. Even so between now and when you get DA and can go for construction finance approval their policies or appetite may change and it might no longer be valid. I think preapprovals only last 90 days??

However going with a builder who does duplexes is probably the way to go in my mind if you don't have a complicated site. If it's a simple side by side arrangement there should be some plans that the builder has which can be modified and they know how much it is to build and is an easy way to work to a known budget.

 

Exactly, numbers first

Also, cant presume rents always rise, they also
Fall dependent on supply vs demand

 

For me the equity/profit gain just has to make sense. Otherwise risk is not really being taken into account . Maybe I'm too conservative but I'm always obsessed with the risks so i wanna be as sure as i can that my return will be worth the risk im taking . And like you said, " numbers first". Really development is all about the numbers . Alot more so than 'the numbers ' of buying an IP.

 

Crunching the numbers once again
The current mortgage on the existing property is 240k .The repayments on that/yr is $16k
I plan to borrow only $340,k .The max cost for the project is $360k worse case scenario
Repayments on $580k will be $43k +10k holding cost/yr
For those who dont know seaford well its premium location in Melbourne 500m from the beach ,amenities ,highly sought after rental ,vacany rate 2%.
Rent for 2 properties once completed $450k &500 k respectively
Loss aporox 6k / yr .+ CG as the market appreciates
Cant see ,how that is not a good return

 

Have a look.

 

I actually can't follow your numbers
Are you saying that it will be a loss of $6000 per annum?
When you say rent is $450k and $500k do you mean $450 per week not "k" or are you actually talking about end values? as I'm sure a street front two storey dwelling would be around $650,000-750,000.
I'm not sure I'd call Seaford a premium location but it's a lot better than Frankston

 

Your numbers seem to be missing the most important part - the end values!

You can't just compare rental income to a build cost - what land are you building it on???

 

Apologise rental is $450/wk and $500/wk .There are markets within markets ,This pocket of seaford 500M from nepean hwy and the beach ,3bv town house sell for $600k,houses $800k to $900k

 

Rental loss of$6000/yr that can be offset against other income

 

Need to make sure your comparable end value stock is actually comparable to yours. Your putting one at the back of your house. So land may be smaller than what your comparing with, among other factors as well. Just make sure your comparing Apples with apples.

 

I don't understand why you would have a rental loss?
Won't there be rent from 2 houses?
The way you are explaining this is very confusing.
You need to do a proper feasibility and that will help you determine

1. retain and sell rear block
2. retain and put single level house in rear
3. retain and put double level house in the rear
4. demolish and create 2 side by side lots
5. demolish and sell one side by side lot and build on other
6. demolish and build 2 side by side

All of these can be influenced on if this is your PPOR site or always been an IP.

 

Hi frank,

Good on you for having a crack!

Some advice from me as you progress:
* Builder Due Diligence!!! - the biggest risk to your development is your builder going under. Ask how they intend to fund your project. Ask for references. Ask to see how much cash they have in their bank account etc.
* Insurance - make sure you get Domestic Builders Warranty Insurance for each property in your name. This is insurance of absolute last resort for if you builder dies, disappears, goes insolvent, you get a VCAT order against them. Do not rely upon this as it is exceptionally tough to make a claim.
* Contingency - this is going to sound a bit scary... But when my development went sour (builder ran out of money, no license etc) I needed 30% contingency to be able to complete with subsequent builder. I was fortunate I could fund with cash.
* Variations - your contract with the builder will cover this. However, variations in general are on you. Builder encounters unexpected rock when doing foundations, that is on you. You change your tile choice, that is on you. They will add 10-15% builder margin on any variation.

Best of luck.

 

Thanks.picket fence .,my concern is the unknowns that i need cash for .i am planning on borrowing $330 to $340k
$280/$290k construction
I was informed i need
$20k for driveway,$10k landscape,30k design & documentation, $10k drainage etc

 

One item a lot miss is if the power pole location needs to be reset ,if it's inside the properties foot-print then it ok..Just another item to look at if the block been split....imho..