Post Project Review Of 1 Into 2 Subdivision

Discussion in 'Development' started by Brisbane_reader, 13th May, 2020.

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  1. Brisbane_reader

    Brisbane_reader Well-Known Member

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    Hi all,

    We've almost completed our first 1 into 2 splitter block subdivision and I thought I'd share the process on here in a series of posts. The two things I'd like to get out of the thread are furthering the learning of others (so feel free to ask questions) and getting feedback from others in terms of where the process could have been improved. We haven't settled yet so I won't disclose too much on some topics but will try to be as forthcoming as possible. I'll probably spread the posts covering the various stages over a couple of weeks due to time constraints.

    The Summary

    Where: Brisbane Southside, average area, 400m2 blocks sell for around 380-400
    Purchase Price: 597,000
    When: June 2019, then rented it out for 6 months while we got everything in order
    Why: 1,000m2 block in an area we knew well, very easy subdivide straight down the middle so a good one for our first time
    Previous experience: we built our own home, and have build, held then sold a dual occ but wanted to move into more value add opportunities to supplement our full time jobs
    How we found it: although we had looked at a few options through our project manager, we actually just came across this one on realestate.com
    Where we're at now: at the time of posting we've completed all works and are just waiting for plans to be sealed
     
  2. thatbum

    thatbum Well-Known Member

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    You haven't settled yet? What are you projected figures?
     
  3. Archaon

    Archaon Well-Known Member

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    Got a quick BOE feaso you could share?
     
  4. Brisbane_reader

    Brisbane_reader Well-Known Member

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    We haven't settled on the vacant lots for sale but naturally have settled on the original property that we subdivided.

    When we did the feasibility on the deal going into it we were using these approximate numbers:

    Sale: 400k x2 lots post REA commission
    Purchase: 600k including insurance & end to end legals
    Stamp Duty: 17k
    Subdivision Costs: 120k (large bucket I'll break down in later posts as we move through the project in more detail, includes rates etc)
    Interest Expense: 23k
    Rent Received: 10k
    Profit: 50k

    We should get around 40k in the end with an underground water leak and additional civil engineering costs being the key blowouts.
     
  5. Brisbane_reader

    Brisbane_reader Well-Known Member

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    When it came to the purchase of the property here's the first area I'd love some advice on. It was listed for 620k (we were alerted to it very soon after listing), the numbers stacked up and we had been outbid on the last few like this. We offered 620k subject to due diligence of 10 weeks and the DA being approved, and were explicit that our offer would likely be reduced somewhat once due diligence was completed.

    Post due diligence we revised our offer to 590k and negotiated up to 597k. There were a few extra costs involved but really we just wanted a better deal once more detailed analysis showed a DA should be easy to get. Offering 620k did get us in the door in terms of exclusivity but could have given the seller leverage around that original price point.

    When you lock in deals that come up, how to you balance getting that all important exclusivity while not overpaying? Do you think we should follow our approach above for the next purchase?

    As an aside for those interested, in our 10 weeks we got an itemised breakdown of costs from our project manager (we have a finance/legal background so need professional help with many of the development aspects), got pre approval from the bank, got our solicitor across the contract and conditions and got the DA approved by council via our project manager.
     
  6. Archaon

    Archaon Well-Known Member

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    Have you entered into contracts for the vacant lots with buyers yet?

    How long did the whole process take?
     
  7. Danieljk101

    Danieljk101 Well-Known Member

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    Hi, what about CGT and the GST component of it? Carrying out land Subdivision incurs GST I think.

    But from what I hear most first time developers play ignorant and get away with not paying it... :)
     
  8. Brisbane_reader

    Brisbane_reader Well-Known Member

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    We've got contracts over the vacant lots which will go unconditional upon registration. The whole process will have been 12 months but it could have been quicker had we not rented out the property for the first 6 months while we got all of our ducks in a row.
     
  9. Brisbane_reader

    Brisbane_reader Well-Known Member

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    No CGT since it's purchased through a company so gains that are taxable income. Ditto on the GST, company is registered therefore everything will be by the book.
     
  10. Archaon

    Archaon Well-Known Member

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    Did you undertake the subdivision with a view of 50k profit?
    Or did alot of unforeseen circumstances reduce that number?
     
  11. Brisbane_reader

    Brisbane_reader Well-Known Member

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    50k was what we were targeting. Anytime we targeted more than this we got outbid, likely by people who do this as a full time job and can do some of the work themselves, reducing their cost base.
     
  12. Brisbane_reader

    Brisbane_reader Well-Known Member

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    Once we'd settled and had the DA we rented it out for around $360/m for 6 months. It was an old but liveable place with average tenants. During this time we got quotes on all the components and started work on all the surveys, electrical and telephone connections. We had a project manager liaising with a surveyor and electrical provider to achieve this. This part was a very low touch and the operating cash flow should have been about break even with rent offsetting loan interest.

    During this period we had a couple of slip ups. One, an underground water leak at the property was identified too late so QUU wouldn't cover the (very) large water/plumber bill that followed. Two, the tenants did a runner and while the bond covered some of the missing rent, there was some left unpaid. Three, a water heater on the property broke and through a series of tradie events the bill came closer to $1,000.

    In hindsight the breathing space that 6 months renting brought us was great as it allowed us to not feel rushed but it did leave us out of pocket more than we thought.
     
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  13. Archaon

    Archaon Well-Known Member

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    how old was the house? was there any renovations to the house in the last 40 years?
    You might be able to claim some depreciation for the 12months.

    If you were looking to retain one of the blocks and build an investment property, you also might've been able to 'scrap' the house for any residual depreciation and offset the profits with the amount.
     
  14. Brisbane_reader

    Brisbane_reader Well-Known Member

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    It was a 40 year old brick house with no obvious renovations so I'm not sure how much depreciation there is. If you're selling it in the same financial year as the depreciation would be claimable then is there a tax benefit?

    We had originally planned to build on one of the blocks but sold the second block as soon as COVID looked like it might become a thing.
     
  15. Archaon

    Archaon Well-Known Member

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  16. Brisbane_reader

    Brisbane_reader Well-Known Member

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    Thanks, I'll look into that, especially for future projects where we do look to build on one of the blocks.

    Once the tenants moved out in Jan the next step for us was organising the demolition. We pretty much had our Energex connection certificate the final survey plan had been completed (now that's a funny process doing it non-electronically). We very much trust our project manager but besides getting a couple of comparison quotes have no real idea of the reasonableness of what we've paid so far. I'd love any feedback on the areas listed below and where we could be more efficient (prices include GST).

    All initial DA work: $19,000 (surveys, project management, submission etc)
    All electrical/NBN works: $14,100
    NBN connection: $1,200
    Demolition: $21,000 (includes all fencing, certificates etc, is there a lot of this that you can run around and organise yourself?)
    Survey plans: $3,500
    Project management: $4,000

    This basically covers everything besides bank, legal, water, sewerage, stormwater, selling and rates/utilities invoices. As mentioned would love to hear thoughts on what sounds high/low, happy to pm with details to help get to the bottom of where we could be better.
     
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  17. Leeroy93

    Leeroy93 Well-Known Member

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    Those prices seem reasonable. Each site is specific and often something run of the mill can still result in an extra $5k or $10k just due to position of sewer on the lot or water across the road. Even at $50k profit the ROI is better than you'll find in majority of other endeavours. Not to mention the learnings you can apply to subsequent projects.
     
  18. Brisbane_reader

    Brisbane_reader Well-Known Member

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    That's good to know, thanks.

    The next part for us (Jan onwards) got a little messier. Tenants abandoned the property so we were down on rent and when it came to the demolition we couldn't move the meter because the tenants' electricity company needed to get in contact with them to close their account and settle their bill. This took the best part of 3 weeks and was not something that we considered leading into the demo.

    After that we found out that no one had contracted the civil engineering work. That communication error set us back another couple of months as we obtained quotes, agreed the scope and got the works completed. That's all done now but that was another couple of months paying interest on a loan with no rent coming in. Easy lesson learned around not assuming that everyone is on the same page. The actual works themselves came in over budget too due to needing to run a pipe across the road, but I that's on us to improve our budgeting.

    When getting quotes for the civil engineering work we found there was almost a $10k discrepancy ($25k-$35k range) between providers, which seems massive. Do people that do this regularly keep going with the cheapest provider or prefer to stick to someone that they know? This seems like a big area to target efficiencies in.
     
  19. Leeroy93

    Leeroy93 Well-Known Member

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    Many people go through the same ups and downs for their first development. There are so many items to tick off in the process, each often depending on completing a previous task and council/contractor timeframes. Even seasoned pros will miscalculate costs like replacement of sewer pipes, neighbour related issues and earthworks. Unless you pay for the official, designed and approved civil works quotes prior to development most costs are still estimates. If you're only doing a single development or tight on costs it makes sense to tender, however once you find a team and understand the process you'll want to streamline things and largely use the same contacts. Just my experience :)
     
  20. thatbum

    thatbum Well-Known Member

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    Couldn't agree more. I just recently concluded my first flipping development and went through similar stuff, and coincidentally the sewer connection was the big cost and delay for me too.

    I dealt with it by making sure I had plenty of buffer and margin in my numbers to absorb any crazy extra costs or delays.

    @Brisbane_reader to be honest your margins sound a little too thin for my liking, even for a first and relatively low risk project.
     
    Archaon likes this.