Knock down & develop or put that money into another property

Discussion in 'Investment Strategy' started by trapcode starglow, 22nd Sep, 2020.

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  1. trapcode starglow

    trapcode starglow Member

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    spotswood vic
    Hey guys,
    I'm new here, lots of good info floating around. Wondering if any of you out there have been in a similar situation.

    I recently purchased my neighbours house and after a quick renovation am renting it out to a family. So I own my place (PPOR) and next door, totalling 1200 sqm land in inner west Melbourne. Couple of decent sized blocks right next to each other. It's a good spot and was told we could fit 5 - 6 number mix of 2 - 3 bedroom two storey units/townhouse development on the land.

    My questions is, do I put my money into the redevelopment and build of these townhouses straight away, or sit on it and just purchase another investment property? Next door is happily rented to a family and I live in the house right next to that.

    What would you do?

    Some advice or thoughts would be greatly appreciated!
     
    trapcode starglow, 22nd Sep, 2020
    #1
  2. Kent Cliffe

    Kent Cliffe Well-Known Member

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    I'd take the following steps in no particular order:
    • Confirm with a finance broker if you can complete a development... AND what scale. Four + crosses into commercial funding which is different from resi lending.
    • Speak to a planner / council to confirm the actual density. The "was told we could fit..." sounds like it was advice from an agent?
    • Conduct a feasibility on a couple of different scenarios. (i.e. max density with sales, max density you can hold, reain the houses and build behind, land subby and re-sale to a developer)
    Once you know these three important things, you can work out if it is worth considering a development. I'd be mindful that the Melb market is hard to gauge as you guys have had the brunt of COVID lockdown.
     
    Kent Cliffe, 22nd Sep, 2020
    #2
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  3. Stoffo

    Stoffo Well-Known Member

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    What about the property on the other side :rolleyes:
     
    Stoffo, 23rd Sep, 2020
    #3
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    As guidance, you will need to have deep pockets, because the end val will be haircut by 20 to 25 %, unless u have separate titles at commencement of build

    Recent duplex dev in Melb for a client as an example.

    ta
    rolf

    VALUATION RATIONALE:
    In the absence of further of comparable sales of “Duplex or Multi-Unit”, style properties we have had regard to sales of
    dwellings/units on small lots with their own individual title to arrive at a gross realisation of the individual units (assuming
    individually-titled) and then deducted an acceptable profit and risk factor, sub-division costs, holding and selling costs to
    arrive at our valuation.
    Our secondary method of valuation is the capitalisation of market indicated fully leased gross annual income at an
    appropriate capitalisation rate.
    PRIMARY "HYPOTHETICAL SUBDIVISION" APPROACH:
    The market value for the units is :
    Townhouse 1 $1,400,000
    Townhouse 2 $1,400,000
    Gross Realisation $2,800,000
    Less GST $254,545
    Selling costs 2.2% $61,600
    Net realisation $2,483,855
    Less profit and risk 6% $140,596
    Less holding, interest
    and subdivision costs $60,818
    Less acquisition costs $136,946
    VALUATION $2,145,495
    ADOPT $2,150,000
    In accordance with our instructions we have valued the units, "As if Complete" and "in one line" assuming both are on one lot
    and held on one title.
    COMMENTS REGARDING "In One Line" BASIS: The calculations and deductions below reflect an (approx.) 23% discount
    on the individual value of the units if they were separately titled.
    The inline value reflects the purchase price a prudent developer or investor would pay for the dwellings on one title in order to
    then subdivide and sell the dwellings individually with separate titles at a profit. Therefore, our valuation is less than what
    would be achieved if the dwellings were already subdivided, had separate titles and were valued individually
     
    Rolf Latham, 23rd Sep, 2020
    #4
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  5. trapcode starglow

    trapcode starglow Member

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    spotswood vic
    @Rolf what was the cost of construction for the 2 townhouses, was it a knock down & subdivision? I understand you must take into account those overheads which is roughly a 23% discount. I feel like it'd be worth it if you had 6 units, depending on construction costs.

    @Stoffo the other side of the house is council land, a little park area. Maybe I can buy a few extra metres past my fence line from them? :p

    @Kent I got a preliminary development report from a developer, it was based on their experience in the area but yeah, haven't talked to council yet. They said they'd be interested in going in on it together, having a contract where they fund the build and keep a % of the units. Ever heard of these kind of deals go down?

    Interesting point re: resi funding vs commercial funding on bigger scale devs.
     
    trapcode starglow, 23rd Sep, 2020
    #5
  6. Archaon

    Archaon Well-Known Member

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    What's the frontage across the two properties?
    What's the minimum lot size?
    What LGA?
     
    Archaon, 23rd Sep, 2020
    #6
  7. trapcode starglow

    trapcode starglow Member

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    It's 40 metres across the front from one side to the other, main road frontage. Maribyrnong council. Not sure about the minimum lot size, would this be dictated by council?
     
    trapcode starglow, 23rd Sep, 2020
    #7
  8. Archaon

    Archaon Well-Known Member

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    Do you know what Zone it is in? I think this will determine what size lots you will be able to subdivide, but you MAY be able to subdivide into 4x 300m2 lots with 10m frontage each, they will be individually titled possibly and therefore finance to build would be easier than townhouses.
    You really need to get a gun Townplanner on your side.
    @Shahin_Afarin might have some contacts down that way.

    You may be better off getting a DA approved over both the lots and holding on to then sell to a developer or develop when funds can be secured more easily, DA will have a few years to complete once approved etc
     
    Archaon, 23rd Sep, 2020
    #8
  9. trapcode starglow

    trapcode starglow Member

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    Thanks for that info Archaon. It seems the Zone for both properties are General Residential, (GRZ) & (GRZ1).

    "You may be better off getting a DA approved over both the lots and holding on to then sell to a developer " - Is this because you are more likely to sell or the properties are worth more if they come DA Approved?
     
    trapcode starglow, 29th Sep, 2020
    #9
  10. Archaon

    Archaon Well-Known Member

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    Well, it will come down to risk appetite, access to funds etc.

    DA with the right advise in design/spec/style/size over both lots advertised to a developer would potentially give a good return.

    Where as securing finance and building yourself may very well offer a better return, but you take on the risk of market falls, demand drops, budget blow outs, cost overruns, excess holding costs, excess interest for commercial loans, needing pre-sales to satisfy banks so on and so forth.
     
    Archaon, 29th Sep, 2020
    #10