Non-commercial BTR property development?

Discussion in 'Development' started by Oilwho, 28th Mar, 2020.

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  1. Oilwho

    Oilwho Member

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    Not commercial just small scale residential. Has/is anyone out there doing it?

    I've run the numbers with as much information as i can get which isnt everything and it seems too good to be true. Perhaps i could lay a few things out and you guys can poke holes in the plan or identify errors/weak points or even something ive completely missed.

    Im building a PPOR on a 500m2 block with some basic covenants. Its a 2 story 190m2 structure that has two independent (private entrance) units with their own kitchen and bathroom each about 21m2 total. The rooms will have a permanently blocked doorway for compliance.

    Total cost of land+build: 650k

    Mortgage: $2600
    Desktop rental appraisal of both units: $2400 (less associated insurance, agency fees etc).
    The primary living space appraised: $1800

    The first question i have is that if this rental income is deemed as income, that you pay tax on would that not increase serviceability to replicate this process immediately? Does the second home loan application for an investment have to go through any additional obstacles that reduce serviceability?


    M.
     
  2. Trainee

    Trainee Well-Known Member

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    Dont understand the numbers. Is that a month?

    are those units actually legal multiple occupancy?
     
  3. Oilwho

    Oilwho Member

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    Yes per month sorry, ill edit.
    Edit* Cant edit.. lol
     
  4. Trainee

    Trainee Well-Known Member

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    300pw on a 21sqm grannyflat?
     
  5. Oilwho

    Oilwho Member

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  6. Oilwho

    Oilwho Member

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    They will be sub leased legally.
     
  7. thatbum

    thatbum Well-Known Member

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    I would caution the point of developing to rent if you don't end up with a considerable equity gain commiserate with the costs and risks involved.

    Otherwise all you're doing is spending money to pay yourself a "yield" afterwards.
     
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  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    whats the value?
     
  9. Oilwho

    Oilwho Member

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    Hey thanks for the reply. May i ask why does there need to be forced equity gain? The value of the property will be the value of the build plus the purchase price of the land as any lazy valuer will do? I dont plan on selling or making money from equity, just adding income which im guessing turns into increase serviceability?
     
  10. Oilwho

    Oilwho Member

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    The value of what sorry?
     
  11. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

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    The completed house.
     
  12. thatbum

    thatbum Well-Known Member

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    Because otherwise you might as well just buy something established. What's the point of taking on the extra costs and risks?

    Btw, the value of the property is rarely just the value of the build plus purchase price of the land - is that just what you're assuming?
     
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  13. Oilwho

    Oilwho Member

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    Look at the images i posted above in my media. There is literally nothing on the market that has 3 independent living spaces with their own bathrooms, kitchens, entrances and carports. Im building for this very reason.
    What extra costs and risks specifically? The builder and i will have a contract for him to deliver exactly what is contained within the contract, he bears those risks and costs if things dont go to his plan.

    I've heard the opposite from almost every builder ive spoken to? They all say that a new build is simply the cost of land plus the cost of construction and why would it be any different? This is for the lender, the actual true value will be a little less when its moved into and you take away the premiums of building new. However, i wont be revaluing it and i dont plan to sell so thats irrelevant in the short term. The land value will increase over time offset by the depreciation of the structure... all normal?
     
  14. thatbum

    thatbum Well-Known Member

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    Then what's the point of building anything at all? Why not just buy the land and then pay yourself a small % each year out of what would have been your construction budget.

    Because that's pretty much what you're doing if you waste equity by building something weird just purely for yield. Despite what your builder reckons, you will almost certainly lose money/equity on the value if you build something like that purely for yield.

    I'm all for developing for yield (I've done it myself), but not at the cost of equity or capital growth. Otherwise all you're doing is throwing away money to pretend to yourself you have a great yield.
     
  15. Oilwho

    Oilwho Member

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    650k? The land + construction.
     
  16. Username86

    Username86 Well-Known Member

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    Could be less.. A valuer will be looking at market value not what it costs
     
  17. Oilwho

    Oilwho Member

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    I'm extremely confused by your reasoning..

    It sounds like you think that the unique design/purpose of the house is going to devalue it in some strange way? I clarify, it will be a 3 bed, 3 bath, 3 kitchen double garage with a large deck. Not too dissimilar from a normal house other than two of the bedrooms can have a permanently locked door to isolate them. The point of building is because this does not exist on the open market as i said earlier.

    I will definitely lose some equity because of building new but the unique design has just as much of a chance to increase its value as it does to decrease it. Irrespective, equity growth is not my aim which opposes the traditional model.

    So equity and capitol growth is so good that it trumps BTR in all situations? Did you have a bad experience? I would love to hear more. Throwing away money to pretend to have yield... you mean spend money to actually have yield? The property will generate double the P&I mortgage repayments if i dont occupy it and if i put a double studio out the back it will be triple. Thats legitimate yield.

    What am i missing here? Do you guys only like cookie cutter that appeals to the masses?
     
  18. Oilwho

    Oilwho Member

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    Could be, what difference does it make if i dont plan to sell anytime soon?
     
  19. thatbum

    thatbum Well-Known Member

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    This is what you're missing. Don't develop to lose money. You don't even know what the value is of your end product! You're just guessing. That's insane.

    If you develop and then end up with something worth 100k less than it cost you... how long would it take for your 'increased yield' to even make up that $100k? And that's just to break even. Does that make sense?
     
  20. Trainee

    Trainee Well-Known Member

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    So if its legal to build and legally ok to rent out separately etc, WHY doesnt this sort of product exist in the market?