How do you justify a low yield? (and is this acceptable)

It's a derelict house, just waiting for rezoning to pass and then full systems go. In the meantime it costs us holding costs (rates, insurance, interest) etc. We've owned it 18mths.

 

In your case I guess you were not planning to hold anything long term before development?

In my case, I am not confident yet with my knowledge in re-development. Site I purchased is commercial 2 level building. 3km from CBD (South Yarra). Just land-banking at the moment, until I have enough capital as well as knowledge (and guts) to develop. Land component is 240m2. The proposed building will be 1 retail (65m2) + 8 apt (582m2+113m2 balcony+ 96m2 lobby) with 8 car-space (semi-automated car stacker). Knowing the local council, they would expect a high-end finish. Now I'm wondering what all this is going to cost me.

 

Pretty scary you have no idea of costs of the development. How do you know its a viable purchase from start to finish without doing the numbers at the front end? I understand you have a recent 5x5 lease on this premises - this will affect your ability to chose when you can do this development.

I find it pretty hard to swallow that someone has purchased a low yielding property, with proposed plans for development. It appears a big bite of the cherry has already been taken......by the recent Vendor.


pinkboy

 

@Adele - seconded what @pinkboy said.

Add to that- when does the da expire? It may be useless if it only has 6 months left & you are not in position to build for 3 years due to lease expiries.

Engage with a QS to get you a ballpark figure for the cost of the project to determine if it is viable based on entering a cooling market, rising interest rates and an oversupply of units coming on the market.

 

What I don't know is future cost. I actually did a rough costing of how much it would cost to build, based on figures people mentioned on this forum. As I was not planning to construct just yet, I did not get real quotes, so the figures might not be accurate.

Factoring in that the market might be cooling+my inexperience+new apartment construction across, I prefer to wait and lease it out until I am ready.(And when nothing like it will be available on the market, I did not want to compete with another new construction). Although the yield is on the low side, it is actually one of the higher yielding property that have changed hands recently. It did not come with DA, just drawings. (I checked zoning online to see if it complies+new construction across the road)

@pinkboy ,
sometimes I question myself too. This was one of the properties which sold for 'logical' price. A lot of the prime ones we have seen change hands recently I could not fathom.

 

@Adele what is your current yield? Even Melbourne resi yield is never terribly high so you might be comparing yourself harshly by reading on here.
If your CIP is paying for itself and some additional income and in a good area with future potential then maybe it's not as bad as you worry.
In 5yrs time you can get that DA and either sell with actual permits or develop it yourself. Its going to need a lot of $$$ to do that development though.

 

Hi @Westminster ,

It's yielding 4.6% in an area which is yielding 2.75-5%. A lot of them not with any development potential.

Reading that a lot of people have theirs with very high yields has been a reality check for me. The reasons for buying it was personal and circumstantial. The main reason being that I was buying its potential.

 

The yield is not necessarily relevant.

I've bought in the 4s, 5s. And they've doubled in value and could probably triple in value if I can be bothered getting a permit. If it goes vacant which they have I get around 10 rental offers in a week to lease it off me and people bidding against each other to lease.

My worst commercial buy was actually a 8% yield place that is vacant, hard to lease out, and is probably only up 40%. Terrible investment. Been vacant for 14 months.

 

Certainly hope the CG will make up for it too.

 

19-21 Toorak Rd was 336sq of land. Land value alone in that part of Sth Yarra would be close to the selling price of $3.3m - so 2.7% yield not bad. That would be about $9k/sqm
I'd pick this over the higher yield but smaller land property at 78 Toorak Rd which is only 150sqm.

 

As an example if you head around the corner to Ralston St there are 2x old homes(395sqm land total) selling for >2.5m (not sure of exact asking price). That would be over $6k/sqm.

I have a slightly larger block in SY with plans and permits for 2 large townhouses - that would be worth $2m-$2.3m or $5k/sqm to $6k/sqm

 

@Adele same reason as you, some of my past and current deals have low yeilds due to the development potential and or plans. Usually the negative cashow is just calculated as part of holding costs so it's not really an issue, just gets viewed as a business expense. Thats one of the great things with developments, if you get it right then you don't have to rely on CG to build equity, rather you know from the start your going to be profitable.

I wouldn't get a very low yeilding property with the hopes of great CG though.