Hold, sell or develop

I’m trying to weigh up some options for a property we own.
The backstory - a family member needed somewhere to live. My husband and I decided to buy a property for them to live in. We wanted a property that we could subdivide so we could sell the land (or the house and build a new house) to reduce the mortgage as FIL could afford only a very small amount of rent. The location was a bit of a comprise between what we thought would be an ok investment vs where family member wanted to live.

In the end we purchased a small house on a very large block (over 4000m2) with residential zoning in a low socio economic area in northern Brisbane. We did a nice renovation on the property and the plan was for family member to live in the renovated property for ~4-5 years while we saved up cash to do the subdivision (into 3-5 blocks, retaining the original house) and then would build them a new house on one of the blocks. We would then sell the original house and other blocks with the aim of having a very small or no mortgage so the financial issue would be negotiable for us with the family member paying very little rent. Unfortunately the family member passed away very unexpectedly 2 years after we purchased the house....

And now I’m not sure what to do. The options I think are:
Sell now
Rent and sell later
Rent and subdivide later

The obvious thing to do would be to rent it out and then spent the next 12 months figuring out what to do. But I’m concerned about renting out a very nicely renovated home in this area. It’s not the location that attracts great tenants and if we sell I’d want to sell now so it doesn’t get messed up. I don’t want to leave the house vacant as I’m concerned about vandals / squatters. But selling up seems like a wasted opportunity although I’m not sure my heart is really in it anymore to do the development. It is early though so maybe I’ll feel different about this as time goes by. Also reading more about subdividing I think maybe we have bitten off more than we can chew?! It would be especially difficult without someone on the ground (this was going to be the family member ). Our employment income is also not as secure as it used to be (thanks COVID) (but still pretty decent money) but we would need a bit of extra time to save more cash as I wouldn’t feel as comfortable without a large contingency/buffer.

I guess I’m hoping someone with a level head can provide some advice? I think I’m too emotional to think from a financial point of view.

 

I’m sorry for your loss.

It seems like a bad time to make a big financial decision.

I would find the best property manager in the area, shop around because this is important, explain to them that you are worried about the house being damaged bad tenant etc and that you just want the absolute best tenant.

Your family member was paying minimal rent so you don’t need top dollar just someone who will look after the property.

I’m sure even in a rough area you can find a great tenant offering under market rent.

This buys you time to do nothing for a little while then really look into subdivision and the risks/rewards.

In 12months time you might find you’re happy with the tenant staying in there and you can develop later on, you might be sick of it and just want it gone or you might be refreshed and confident with developing. Which ever you choose you’ve had 12months to really consider and not make an emotional decision.

Tenant selection is absolutely key! But you can definitely get great tenants in low socio areas.

 

Sorry for your loss

if you dont have funds to develop and never developed before I would not consider this as an option today

the only way moving forward is to find out -

first what the value of the property is today?

Market conditions, is it a sellers market? or will it be hard to sell

Once you establish this then you can make a decision whether to sell or hold

Hope this makes sense

 

These are all good questions. It’s not a booming area but vacant land in the less desirable suburb next door reasonably well for around $220-$260k (mainly to first home buyers and investors who want to build a new property - it’s a high yield / low CG area). However selling the property as is I don’t know, there isn’t anything really comparable in terms of land size and zoning, it’s quite a unique property. There are some other large blocks that have sold recently but these were not sub dividable. At a guess we would break even if we sold now.

I don’t expect the area to boom in the near future (unless Brisbane goes crazy like Sydney / Melbourne did), our strategy for making money was the subdivision.

In terms of experience, this is bit of an issue. We would def need to hire an experienced project manager. We should have really got something that only needed splitting into two, but we saw this property and thought wow, 3-5 blocks will make more money but with that comes more drama! I have the quotes and DA paperwork that the previous owner had for the 3 block subdivision so have a reasonable idea of the costs involved and know that a 3 block scenario will def work (their DA was approved but has since lapsed).

We have enough cash now to do the sub division but would be left with no buffer to live on should we lose our jobs hence wanting to save up a bit more. Or maybe we could borrow for the subdivision..?

Anyway I think I’m just rambling now, there are so many things to think about.

Thanks for your insight

 

Now it becomes more complicated, financing for this number will be very difficult for construction, and with no experience just makes it harder

Will holding this property impact on servicing for further buys??

 

N

We don’t plan to buy more property in the near or medium term. Cash flow isn’t an issue as we have well paid jobs (so long as we keep them!) so holding a negatively geared property is feasible.

 

Thats good, sounds like renting may be the way to go for now

If it were my property I would also be looking at the numbers today

this requires lots of homework. One step at a time.

To start with I would Contact some local builders may be cheapest option for now??? Can give you some idea on costs of build per sqm

 

I guess the change is that our goal was to end up with a ‘free’ (or very cheap) house for our family member to live in that would eventually be sold when they passed, we assumed that would be much further down the track (they were only in their 60s). So yeah we would have made money eventually but the aim was more to have a stable and suitable place for them to live that wouldn’t cost us much to hold. Hence we picked a cheap suburb.

The aim now I guess would be to make money? If this is what we had planned originally I would have picked a suburb with a better demographic. Or I wouldn’t have brought a property at all - just stuck to putting money into super. I don’t think we would want to build on the blocks, just sell them and the original house. A high yield / low CG property wouldn’t really suit as the rental income will get eaten by our high marginal tax rate. And we own another IP already so once we do the split will be up for land tax if we keep more than 1-2 of the blocks.

I think maybe the best thing to do is rent it out for 12 months and do some serious number crunching and get some good tax and town planning advice.

 

Yes, this exactly.

 

mind sharing the suburb

low socio economy + qld is usually a no-no for subdividing land (also the fact the previous owner did not subdivide after a da). The numbers may no stack or if they did the extent on selling vacant land or new houses might take a long time

 

Makes sense

My property is about 12 km from Perth, its not lower socio. I dont want to share the area as its very difficult to source and I am looking for another site

My nephew built the same product (3 villas) in same area. All sold within 1 week, I wish I could post link

I also know his numbers, his made around $350k net, this was cost plus. Requires more work.

I will not do this so my profit will not be as much. I prefer this, less stress

 

what do you mean by "cost plus" ?

 

This explains it

Cost Plus Contracts - What are they and when should they be used? - Morrissey Law + Advisory

 

The suburb is [deleted for privacy]. There is very little (no) vacant land there so I’ve based the potential sale price of nearby [deleted]. Houses take ages to sell and have no desire to build so would def just sell the vacant land. It’s near the beach (if you can call Brisbane beaches that) and backs onto a park. It’s actually quite a nice spot if someone wanted to be somewhere quiet and didn’t have a big budget. Not my cup of tea though! I got the impression the previous owners wanted to sell two small parcels of land and keep one very large block for them to build their retirement home and have enough room for fruit trees, chickens, etc. The numbers are much better though for splitting into 5 parcels of land.

 

This is a very good point. My husband and I are still far off retiring though so the CGT won’t change much whether we sell it all in one year vs. spread over a few years, it will almost all be charged at the highest tax bracket anyway. (Unless we become unemployed, I bloody hope not).

 

I might be the one to say it but you might do better selling it as a lot. Im not really familiar with the area but looks more isolated/beach lifestyle suburb than low socio economic (thought all of them would prefer being in Caboolture). You might actually do better selling it as one considering its a huge block and you've spent a lot on the house someone with lifestyle choices may want. Could always advertise as subdivision potential and for someone that likes the property style may utilise it if it ever becomes economically viable

Main issue with QLD is the close to 30k contribution per lot which would probably eat into your profits. Plus the tax side but if you plan ahead you should be fine

 

Infrastructure costs a killer in Qld, why u need high end values

How is @Sackie going with his Qld developments