Opinions and advice on our development (mis)adventure

Hi All,

My wife and I are in the middle of a development (mis)adventure that we started over a year ago. This is our first attempt and we had done what we thought was decent due diligence and feasibility calculations. The plan is/was to build three town houses on the back of an existing property and hold them all or sell the front place only (to avoid GST issues) and just keep the three new ones.

Our original rental and valuation estimate on our feso had us being positively geared to the tun of 10-14k on the rentals and making around 20% margin if the bank values them at what we had advise on what they would return.

After going through a long drawn out DA approval process and building contract negotiations we have run into cost blow outs with sewer and drainage costs in the order of @80k above what we where originally quoted and about the same on build costs. In addition as we get closer to pulling the trigger to start building, real estate agents are pulling back there rental and valuations estimates from when we first did our feso. Based on what I am seeing in the market I don't disagree with them however the market is a bit all over the map so difficult to confident on valuations.

So based on the additional costs plus the estimates we have today we should make about 7-8% margin and after depreciation we will have a positive cash flow of around 5-8k after tax. Both are less than half what we originally thought they would be.

So now we are getting cold feet because the reward no longer seems to justify the risk of borrowing another million dollars or so dollars. And I think I can potentially get better returns with less risk by just buying a couple of places and renting them out.

So the way I see it is that we have few options at this stage;

1. Stick with the original plan, take the risk, keep powering on and learn from the experience and benefit in the long term.
2. Hold onto it but do up the front place ( it needs works) and develop if and when the market improves (I image it will still be negatively geared by quite a margin even with a reno).
3. Sell the front place and keep the subdivision and develop later.
4. Give-up. Cut our losses and move onto something else.

I know there are a million variables but keen to get peoples thoughts.

Thanks.

 

Sell whole site with DA, plans etc and dont turn earth yourselves ?

Discuss options with agent to maximise opportunities.

Doing a dev is a quick way to make OR lose money and sound financial planning needs to confirm profits. Often when taxes (GST and loss of CGT discounts) and marginal rates of tax come into it there isnt a whole lot of profit for the outlay and the 12-18mth risks.
- Whats the best that will occur ? v's
- What the worst that may occur

A sense of maturity in monitoring these things is determining when to go hard or when to go home. Perhaps a lesser profit was more realistic anyway ? $80k for sewer to 4 TH's at $20K may well be typical ? IMO ignore taxes on profit and work out the return on investment. Treat tax like its inevitable - The bigger the profit the more tax. Focus on the profit v's outlay and look at your return on investment. Then risk assess what could change - Rates up, rents down...Go conservative, pessimistic and optimistic (reality also).

 

Yeah it's an option but I am not sure would make out money back as the market is a little soft and we probably paid overs for the property in hindsight.

Best case - for me would be to do the development. Sell the front to pay down non-deductible debt and refinance the other three. Keep them and sell some or all of them them in 5-10.

Worst case - We finish the development, it take ages to rent them and the bank doesn't value them to what we need them on completion. This won't kill us as we are both on very good wages and have good serviceability but it will put us back quite a few years with family plans.

 

Sell with DA in place. Hopefuly you at least break even.

When it comes to building, something profitable can turn break even but something that is barely break even is unlikely to become profitable. Always costs more and takes longer than you think.

 

Murphys law of family planning suggests that is exactly when pregnancy will occur