How small a house is too small?

Discussion in 'Investment Strategy' started by Zhenhua, 7th Feb, 2017.

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  1. Zhenhua

    Zhenhua Member

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    Hi All,

    I wanted to get some advice on how small a house is too small as an investment property?

    Is an entry level property (small land + small house) going to work well in expensive suburbs?

    How small a house can be before it will be regarded as too small, to avoid the capital growth ceiling due to its small size?

    I know it is a general question, but any advice will be appreciated.
     
  2. spludgey

    spludgey Well-Known Member

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    Less than 50m2 is too small as the banks tend not to like them.
     
  3. Zhenhua

    Zhenhua Member

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    Thanks... I meant for a detached house...

    If the townhouses in the area are around 20SQ - 22SQ, should we avoid building a house that is less than 20SQ in the area, even though the land component is a bit larger than that of the townhouses?
     
  4. ashish1137

    ashish1137 Well-Known Member

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    14 squares 3 bed 2 bath single garage.
    Still seems good.

    Regards
     
  5. Phase2

    Phase2 Well-Known Member

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    You have to suit the market that you're in. Basic finished homes (entry level) in expensive suburbs doesn't really work.. It's not so much the size, but the quality of finish (high ceilings, stone benchtops, fully tiled bathrooms etc. I wouldn't consider anything less than 85sq.m, preferably 100sq.m min..
     
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  6. Phase2

    Phase2 Well-Known Member

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    If you're looking to build and hold (revalue draw equity etc), then build in a similar vein to what is on the market.

    If you're looking to build and sell, then you can always try and build for a target market, e.g single story for retirees, but generally you're still better off building similar to what is already on offer. (hint developers have already twigged what types of properties are in demand).
     
  7. Zhenhua

    Zhenhua Member

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    Yes, build and hold..

    Quality of the finishes will be same as the new townhouses or other houses. But it's the size that most concerns me, as the townhouses in the area are 20SQ-22SQ, making me wonder if we are not supposed to build a detached house below 20SQ..
     
  8. Magnet

    Magnet Well-Known Member

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    We used to live in a 2 bed unit that was 84sqm. I wouldn't buy a detached house under 120sqm. Even that is small for a family.
     
  9. Phase2

    Phase2 Well-Known Member

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    As you're planning to build and hold, and you've more land than the THs, I wouldn't build any smaller than them. Valuations aren't likely to be favourable if you do.
     
  10. spludgey

    spludgey Well-Known Member

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    Many of my IPs are below 120m2 for freestanding houses. I certainly wouldn't want to live in a house that small, but there are a great many people out there that either want to or have to.
     
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  11. gman65

    gman65 Well-Known Member

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    Would imagine it depends on what similar stock exists in the area.. Some would be perfectly fine to settle for a smaller house in a desirable suburb just to be well located. It might not suit a full sized family, but there are plenty that prefer something detached and the freedom of no body corporate restrictions. Couples moving out for the first time, well heeled singles, etc.

    At the end of the day valuations will be done on the land size for the most part, but as long as the purchase price is reflective of that.
     
  12. Perthguy

    Perthguy Well-Known Member

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    What is existing in the area is a bit irrelevant. I would speak to some local leasing agents and find out what people want but can't find. Then investigate if it is feasible to build that

    What if the target market is not a family?
     
  13. Zhenhua

    Zhenhua Member

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    When we talk about sqm, do we mean sqm including garage and alfresco, or not?
     
  14. Zhenhua

    Zhenhua Member

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    Thanks. The thing is as the block is small (larger blocks are also much more expensive), single storey can only be max 18-19SQ (including double garage and alfresco). If I were to build no smaller than the THs (20-22SQ), I would have to build a double storey which would be much more expensive.. That's the issue I'm facing at the moment..
     
  15. Phase2

    Phase2 Well-Known Member

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    Will that improve the property valuation when it comes to draw equity? The strategy is to build and hold, not build and sell. Valuations are easier when there's similar comps..
     
  16. Perthguy

    Perthguy Well-Known Member

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    True. It does depend what you are ddoing and where you are doing it. In Balga and Nollamara, 3x2 villas are oversupplied, so end values are very low. Then would you build 3x2 villas to make valuing easier because there are comps? ;)

    If the market demand is for single bedroom dwellings it could be better to build 2 of those rather than an oversupplied 4x2, for example. I think @Westminster did this somewhere in Perth, maybe Gwelup?

    Either way, if a product is oversupplied, it is rarely a good idea to add to the supply.

    Equally, if there is no demand, there is no point building that product.

    Land Tax in WA
     
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  17. Phase2

    Phase2 Well-Known Member

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    So your size question is already answered.. 180-190sq.m is plenty big enough, the real question is "do you need to build 2-storey?".

    What's available in your suburb a decent mix of single vs double storey? If so then single will be fine...

    If all new-builds are 2-storey I'd be going down that path?

    Is there a possibility you might want to move into this investment property in the future? If so and you don't want to spend on a 2-storey now, you could do a custom design single, based on a 2-storey house. That way, all your footings, walls and roof beams will be strong enough to not need the upgrade in future, your piping and electrical can be routed around the "2nd floor", and the room for the staircase will already exist. If you ever want to build the 2nd storey later you can. It will cost more than doing it all at once, but it's one way to get a 2-storey place in an expensive suburb, if that's what you really want.

    The other way is to go 2-story right away, and get the sizing / layout that you want and do a cheaper fit-out. Live with the fact that your rents and valuation will be lower than your neighbours, but when you're ready to renovate, it's pure cosmetics..
     
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  18. Phase2

    Phase2 Well-Known Member

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    Fair point, but OP has a block in an expensive suburb, hard to see how building something smaller than the competitors is going to be a winner, given a larger land parcel. Banks will then say, sorry there's nothing to compare it to, so we're going to value it conservatively.
     
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  19. Perthguy

    Perthguy Well-Known Member

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    Much due diligence is required! :)

    EDIT: Median house price in Gwelup is $835,000 and the single bedroom dwellings went well there. It can be done but a lot of work is required to investigate the feasibility and implications.
     
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  20. Magnet

    Magnet Well-Known Member

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    Good point about talking to the agents and finding out what tenants want. I wouldn't restrict my market to the one tenant type though. You want to appeal to the broadest market possible.
     
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