Making Money on House & Land Packages

thanks Sash and other for a great thread - I really appreciate your effort. I am a little confused however - what is the end game with this strategy ? assuming you could keep getting loans, building, pulling equity (most of your deposit back) then going again. You end up with a heap of estate houses, the estate houses (outside of sydney) I have seen all seem stabile at 450 - 500K - then what ? with your entrance and exit costs you would break even. How would you generate enough passive income to retire on ?

As a strategy to buy lots of new houses it sounds great and one I had considered in the past - I just can't see how the end game would work ??

 

Do you think in 10 years the property will still be worth $450-500k there.

If I can end up owning 20 properties in Pakenham Cranbourne and Officer and they go up by only 4% each year. Then given they are costing me nothing to own. The end game would be sell down to a debt free position and live off rent.

 

Well it depends on your strategy.

But the numbers work....here is an one of my recent examples

Land for 99k (only 210 sqm)
House cost fully complete (13 sq) 3x1x1 for 158k
Rent is 330pw
Stamps and legals 3k
So you are in the deal for 260k
Assuming 4.4% interest
End vals 320k

Income from rent is 17,000
Council/Water $2,200
Mgmt Fee 1200
Insurance $800
Miscellaneous $300
Interest Costs 11,500

So you are $1k positive.
Depreciation (assuming 40% marginal) - add another 4k after tax

So next positive is 5k.

Assuming 5% growth...in 10 years this property will be worth 364k

Rent in 10 yrs (assuming 4% rental growth) would be $510pw at which point you would be CF positive to tune of $7k per property.

If you did 10 of these in 5 years. After 15 years...you would have CF+ amount of 70k.

Assuming inflation is 3%....which would be the equivalent of 40k positive income in today's dollars.

Also you would have equity of around (with say 10 deposits) $2.7m in equity. Better than sitting on your hands I guess.

 

If you owned 20 properties based on my calculations that should give you $140k income ..or 81k in today's dollars. So very good.

 

My back of envelope numbers show me selling 10 and holding ten debt free that net $150k per annum in today's dollars as I haven't even escalated the rent. I will have an avg of $380pw rents for my H&L as they are 4/2/2.

That's also assuming I stop at 20 and need to sell 10.

But my basic goal is to generate between $150-200kp.a and own a nice PPoR without debt.

 

@sash if inflation is 3% avg over the next 15 years, then i anticipate a low interest rate environment would be maintained and I would expect melbournes growth areas to expand making areas like officer receive a greater CG than 5% (2% real growth). What are your thoughts here?

In any case though your debt is reducing due to CF+ albeit slightly and so your CG on the debt even at only 2% is good.

 

Yes..you are probably correct..I am being ultra conservative.

If am using the rule of 72 which says if you divide the % growth into 72 it will tell you how long it will take to double.

real estate grows at 7% (longer term average) plus so average growth is 7.2%...it will take 10 years for an asset to double. So 260k will be 520k.

If you use the inverse than it will also tell you the time decay of money. So if inflation is 3%...in 10 years. Money would have decay to about 62 cent on the dollar so 100k would be worth 62k in today's dollars.

 

Thanks @sash and @Cactus for showing your workings. No critisms of your theory, just very interested in fully understanding others strategies and trying them on for size
How would you keep financing to get to 20 or even 10 ? I have a readonably high income but can see the end of the line in terms of my serviceability after 3 or so more ips.

 

Yes, one thing i also like about the SE is that even the the new housing estates are further out from the city than say the West. Eg, Officer. If you follow the Monash towards the city, you actually pass a lot of affluent, established and 'cafe latte' style suburbs, major shopping centres (chadstone), industrial areas (jobs) and an abundance of infrastructure.
So it's not just proximity to the city that counts, but also what's easy to get to on the way there.

 

@sash Land for 99k (only 210 sqm)

that too for an IP this seems real deal. Can you share if it's in new estate or old ?
would you mind sharing the suburb as well ...

Contributing to this thread. I was also offered a H&L package in brisbane , Redbank Plains but my limited research tells me it's good for a cashflow strategy but seems CG will be not as good .. any view ?

it's being developed by lendlease .. land between 150k to 200k and H&L -- 200K-320 K
Fernbrooke Ridge Real Estate - House & Land Packages from Lendlease
Any ideas on this site ?

 

Including the neighbouring suburb Nerwick which is quite affluent.

 

The trick is too put the H&L together yourself with the cheapest past you can for the type of product you want to rent I.e 3/1/1, 3/2/1, 3/2/2, 4/2/2. But still delivering enough higher spec things to make it enjoyable for tenants and a valuer to put a higher price on the package. It's all about bang for buck.

Arguably CG won't be as good due to the less finite supply. However typically due to inefficiency in the planning system supply doesn't meet the demand coupled with strong net migration in Melbourne.

It is also about timing Pakenham is nearly full. Officer is an infill suburb that will be full in 3-5 years. Cranbourne will be full in 3-5 years too. If it's still got 10 years of supply it's pretty hard to get the CG. Other drivers though for CG are cost of delivery. Taxes are always making this higher which helps.

 

I have a reasonably high income which I plan to couple with development income in my own business. This should help give bank confidence that I am a business not a mum and dad customer. Then once I have exhausted the banks there is pepper Liberty Rams Lo doc 80:20 accountants letter stuff.

 

Well if you have about a 80k income...I can't see why you can't get to 6 plus if you were doing things right.

No offence taken....it looks like it works for people like Melbournian, Catus, Connor, Observer, and others..

 

As i posted earlier...getting the CG and yield in Brisbane is harder. Not targeting H&L land there yet.

As for the estate...can't post yet...will share at some stage once all is sorted.

 

I agree with this assessment below.

The trouble is we have too many people with vested interests saying buy in closer to town when they don't look at the facts:

1. Despite land being released the land is increasing in in price by 10-30k per annum
2. Infrastructure planned for some of these suburbs is huge just look how fast the gap in land prices between the West and Southeast has closed
3. The culture of Melbourne is very receptive to new house and land packages.
4. Melbourne has a high rate if immigrants from China, India, Asia who like new properties are used to travelling distances. They also like to be near rail.

 

Nice post @sash

This is my experience with L&H packages, these work very well in rising markets, I was building 4 pa in Perth market on completion there was at least 25% profit, I flicked a few and held a few. When the market turned there was way too much stock and too much available land. Did it effect growth??? of course it did because growth is dependent on supply vs demand. Not only did if effect growth it actually went backwards and some areas in these estates in Perth have still not totally recovered from 2007.

If you are looking at sash's strategy as a buy and hold and access equity on completion of the build then this stragegy may work very well, as its lower entry level, and you have depreciation.

If you are worried about future growth then perhaps this is not the strategy for you.

I don't have a crystal ball, this is my personal experience for what it is worth

MTR

 

@MTR thanks. I think Melbourne growth will not mirror that of Sydney's growth but certainly from what I learned, there's capacity for growth. When you talk about supply v demand are you also distinguishing units v detached houses? The talk of oversupply in Melbourne seems confined to units.

 

Yes correct....the land side of it has hit its straps...estates are falling behind in bringing land to the market as they can't find the resources to do it.

There is a silver lining for developers and shortly the builders will get in the act is due to labor shortages they will both put prices up till equilibrium is achieved.

As for holding over the longer term....I personally think this is the way to go....the depreciation and other benefits out weight selling a paying tax. The better way to do it is to minimize income prior to selling to minimize CGT liability


The other thing is the proudct needs to be under 450k to market it attractive.

 

It depends what price point you got into the estates.

I got into Butler for just under 400sqm block for 179k...and into Wellard for 140k for a block...and then into Lakelands for 130k...the build costs were 172, 170k, and 175k respectively...so I have not gone back by much

As the estates now cost 260k, 180k, and 155k to get into...and the minimum build cost is now more like 185k.