How to start out (using mates rates)

Discussion in 'Investment Strategy' started by fernergan, 30th Jul, 2020.

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  1. fernergan

    fernergan Member

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    Hi there

    I am a young 20yo Electrician on $40k annual wage w/ $90k savings living at home rent free and would love to hear your input on an investment property strategy. My current borrowing power is $240k for a PPOR & $330k for an IP + my deposit. Let me know if you would like me to provide any further details.
    My longterm goal is to become financially free, enabling me options to choose whatever occupation I like (without money as a concern), travel, have time for friends and family and be able to volunteer my time & money to hunger/poverty & environmental organisations that I am passionate about.

    Two scenarios I am currently considering:

    1. Buy an investment-grade property looking interstate (borderless investor), targeting capital growth on a 500m2 + block with side access to build a granny flat - therefore increasing yield (at the possible expense of some CG) and with the intention of holding for 20years + . My max purchase price would be approx $400k and was looking at the Redcliffe peninsula in Brisbane (I am from Sydney)

    2. Utilising the governments first home buyer and ppor incentives and purchasing an ugly duckling (worst house on the best street) 3bed,1bath house and renovating + adding 1bed, 1bath. This is an active strategy and an equity play. I live in Wollongong and would be looking at the regional city-centre of Nowra with a max purchase price of $300k. The labour would be cheap as I am an electrician and have mates in every other trade. I would live in this property for the first year (renting out rooms to flatmates once reno is complete) to qualify for the Stamp Duty Concession, First Home Super Savers Scheme, First Home Loan Deposit Scheme (use a 10% deposit with the government paying the LMI). After the first year I would then move back home but continue to have the property listed as my main residence whilst renting it out as an income-producing asset and sell within 6 years to be eligible for the capital gains exemption. I would then use this equity gain to purchase property in investment-grade areas (syd, melb, bris etc)

    I am currently leaning towards option 2 but I may have misunderstood my eligibility for some of the schemes and specific rules that apply so I would appreciate if you can point anything out.

    Gracias,
    fernergan
     
  2. wombat777

    wombat777 Well-Known Member Premium Member

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    With mates in the construction industry ...

    You could buy something zoned "Urban Neighbourhood" or "Next Gen Neighbourhood" in Moreton Bay council area. Initially rent for cashflow, then when numbers stack up do a townhouse or unit block development.

    You can find sites with yield in the 4% to 6% range, so rent essentially land-banking until numbers stack up for development.

    In Urban Neighbourhood zone you can do Units or Townhouses
    In Next Generation Neighbourhood area you can do Townhouses

    Things to look for:
    • frontage or block width > about 13m (better for car parking turning radius), or
    • corner block (good for townhouses)
    I have a 455 sqm site in Urban Neighbourhood zone in Petrie and on this could do 4 townhouses or 8 units.

    I have a 607 sqm site in Urban Neighbourhood zone in Deception Bay and on this could probably do 5 townhouses or 10-12 units.

    Find a good site and think outside the box.

    This isn't my property but an example of what can be done with the right zoning:

    Deception Bay Gentrification / Development Thread

    Screen Shot 2020-07-30 at 6.38.28 pm.png
    See also

    MBRC Planning Scheme
     
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  3. MTR

    MTR Material Girl Premium Member

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    Dont disregard Perth

    You will be buying at a low base, rents are now rising and we are now seeing interstate investors jumping in
    Demand is starting to pick up

    If interested search Perth threads, lots of good information here
     
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  4. fernergan

    fernergan Member

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    Thanks for your response @wombat777 but I'm based in Wollongong and do not have any mates in the Brisbane area who work in construction. What is the minimum price range for these type of properties? I may not have connections there yet but this could work as a longer-term play.

    Thanks again
     
  5. wombat777

    wombat777 Well-Known Member Premium Member

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    If you cast your net wide - across all of Moreton Bay Council area you could probably find some good sites in the $300k to $450k ballpark.

    Again, think outside the box on what you can put where in the right zoning. Frontage / access is key.

    Get town planning advice as part of due diligence ( a simple assessment can be done in a few days ).

    This isn't Moreton Bay but an example of what can be done because many queensland houses are on piers.

    The house was moved and then a small unit/townhouse development done alongside.

    Screen Shot 2020-07-30 at 7.07.31 pm.png

    Screen Shot 2020-07-30 at 7.12.38 pm.png
     
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  6. fernergan

    fernergan Member

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    @wombat777 Great insight, is your plan to partly sell, sell or hold this type of development?
     
  7. fernergan

    fernergan Member

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    Does anyone have any advice on my 2nd strategy, utilising my various mate's trade skills to extend and renovate the house and then rent out for a couple years (still listed as my main residence) before selling, exempt from capital gains?
     
  8. wombat777

    wombat777 Well-Known Member Premium Member

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    I have a number of potential strategies for my two properties:
    1. Hold for land-banking (currently holding both at a yield of just over 5%), I could just keep doing this since the yield is reasonable and vacancy rates are very low.
    2. Sell with concept plans (subject to approval)
    3. Sell with DA (builder will just need the building approval)
    4. Develop townhouses and sell
    5. Develop townhouses and hold for rental income
    6. Develop units ( I don't think I would want to take on this level of complexity / cost / risk myself )
    Medians need to move up for me to develop myself. I would need to absorb builder's margin and my own margin would need to stack up for it to be worth the time / risk / cost / bother.

    In 5 to 10 years though, suburb medians could move up to a level where I would consider developing myself, but I am not a builder so development cost would be higher for me than people in the building industry.

    You work in the building industry so could probably take on some of the development work yourself or at least do much of it at lower cost, particularly for simpler townhouse style construction.

    I'm pondering if property markets could get a boost / boom once a vaccine is developed in which case options #2 and #3 above could be straightforward options for me. I would need to see signs of life in the market, particularly if going to cost / trouble of getting a DA.

    The advantage of selling with a DA is it creates a "shovel-ready" project that a builder-developer might want to buy (as the risk of attaining the DA has already been mitigated). It also reduces their holding costs since they can almost immediately start construction, complete the sale and then move onto the next project.
     
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  9. wombat777

    wombat777 Well-Known Member Premium Member

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    Another thing to keep in mind is that newer modular methods of constructions mean that the build can potentially be done quite quickly, so for a small townhouse development under 6 months for construction / fit out. That reduces finance holding costs.
    A thought on your second strategy, look for a property where you are able to build a secondary dwelling under the SEPP.

    https://hia.com.au/-/media/HIA-Webs...mentApprovals/DA1705-Secondary-Dwellings.ashx

    That basically means a granny flat. I think the best way (at least from a privacy perspective for tenants) is for it to be completely separated from the main dwelling. This can be done by building as a separate dwelling or placing the granny flat above a detached double garage ( so you could look for a house that doesn't have a double garage but has room for one - this also makes the house more attractive as a rental because it then has a garage ).

    So instead of doing the renovation first, build the secondary dwelling using mates rates to reduce the cost. You then rent this out. You could then continue living in and renovating the main dwelling, whilst renting out the secondary dwelling.

    Just look in the area to check that there is demand for people renting granny flats.

    If looking at this scenario, you may want to split a loan into two - one for the overall house purchase and one for the granny flat construction. The reason for this is so the interest payments associated with the granny flat construction are completely separate from the interest payments for the main loan.

    Surerly, surely, surely with mates rates you could do a granny flat for $50 to $75k.

    The other way of doing this is to do the renovation first, then move out after the first year and build the granny flat some time later. At this point you will be deriving a rental income and be able to better afford adding the granny flat.

    You should really talk to an accountant and a mortgage broker on how to set it up and what the tax implications are.
     
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  10. craigc

    craigc Well-Known Member

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    This for plan no.2.
    Also you don’t have to sell, consider an equity extract for next step at this time rather than sell.

    Read Terry’s tax tips as after 6 years you only start paying a pro-rata portion of CGT and don’t lose the benefit of 6 year absence rule (if applicable / eligible).
     
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  11. fernergan

    fernergan Member

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    Appreciate your response Craig, I think a granny flat is a great option to increase yield for a longterm buy and hold strategy - however if I was to sell after 6 years the ROI for a granny flat would personally not be worth it compared to renovations/extensions as a value add strategy.

    The reason I planned to sell within the first 6 years is due to the area I can currently afford not being optimal for capital growth (Nowra - regional city) versus capital cities etc. Therefore I was planning to realise the equity gain and re-invest in more suitable investment-grade areas targeting capital growth.
     
  12. craigc

    craigc Well-Known Member

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    Use your trade skills & contacts to tidy up an ugly duckling is usually a great idea.
    Good luck!