Repair IP for 100K or Knock down rebuild

Current place is 1950s 4Br house on brick piers. It needs about 100K of repairs. I have 2 options going forward.
1. Spend 100K on repairs (foundations, drainage, laundry leak). Rental approx 500pw.
2. Knock down rebuild 4BR new house for 300-400K (if possible). 500K wont be worth it . Rental approx 600pw

Current value 1.3mil
If build new, value would probably be 1.5mil
Current loan amount : 700K

Id like to keep this property long term as its in a good location.
My thinking is a new place would have more deductions and I wouldnt have to worry about repairs of the older place.
If I do spend the 100K, I probably would get at least 5-7 years out of it I hope. Theres 20K a year in rental income which would be lost if rebuilding

Property has CGT free status currently as it is a PPOR.
If I do knock down rebuild, if I convert it to an IP would I be able to still claim CGT free status if sold within 6 years?

Can I build a duplex if I already have a dual occ on it (house + gf?)

Long term plan is to keep this property as long as I can as it is a good cash cow. Gf on the back would rent out at 400-450pw. If I buy a new PPOR (2-3 years time)and cannot afford the deposit I would have to sell this.

 

@menty
First I would call council and see what they will let you do. Can you kerpgf but kdrb main house (we did this once). If block is big enough can you build to one side to allow sub division down the track. Igiven it's on piers can you lift/ slide the house hence fixing foundation and moving to one side of block in one go. Then split and build new house on other half. Two houses for 11/2 cost. This would give 2 X 1m property valuations, double rental income etc. Worth considering given your lvr is lowish.

 

Spending $300-400k to only increase the value by $200k doesn't make sense, it means that there's still alot of value in the current building.

Likewise, it's not reflected in your rent return either.

Spending $100k on r&m including refurbishment goes a long way and would also increase your rent by the same amount. Once the groundwater/foundation issues are resolved, you'll get more than 7 years from the property.

 

It’d be helpful to get photos to see how bad it is. You might get it sorted for less!

 

With the speed of construction and build quality these days, you could end up with a worse place. It's possible.

 

I had an engineer come in today to assess the property. He thinks the repair the property it would still be 100K ish. Rent would not go up much. He reccomended Knock down rebuld or sell.
I ended up doing some maths and here are the scenarios I came up with.

1. Sell Property as is.
Property Purchased for $513K (2011) , GF built for $120K
Sell for $1.2Mil
Profit $587K
Pros: problem goes away
Cons: I cant buy anything else (servicability issues). There have been cash out done on this loan to fund deposits for other properties so if sold I would lose tax deductibility of those . Property makes 900PW rental currently. I cant get anything else at 1.2mil to make 900pW

2. Repair property
Property Value 1.2-1.3Mil
Total Cost: $513K purchase + GF $120K + 100K repairs = 733K
House rental would be 500pw, Granny flat 400pw. Total rent = 900pw
Yield = 6.38%
Pros: cheapest option
Cons: House may have further problems


3. Knock down rebuild
Property Value 1.5Mil
Total Cost: $513K purchase + $120K GF + 400K new build = $1033000
House rental would be 700pw, Granny flat 400pw. Total rent = 1100PW
Yield = 5.54%
Pros: Headache. Loss of rent in front house for 1 year ($25000). Depreciation of 2.5% of 300K construction: $7500 per year
Cons: May not be able to afford construction loan and have to front up some cash for the build.

The way I see it, there's nothing you can buy for 1-1.1Mil which would give you $1100/week return.

 

Rent for current main house is 500PW, GF is 400PW

If I build a new main house, the main house would rent for $800PW, Gf 400PW.

I did some maths, and if I manage to pull in a build at 350K, it would take me about 8 years for the new place to overtake repairing the old place, assuming about 7% pa CG per year.

I would also like to buy another PPOR in 3years ish time. Would it be better to just sell this PPOR in 3 years time to make use of CGT exemptions and buy another PPOR, and then use the proceeds of sale for a PPOR and another IP? If so, it would be more worthwhile to repair? Ideally I would like to keep this long term AND have another PPOR.

 

so 8 months on what did you end up doing? curious because i'm trying to see in what situation I would actually build an IP (I struggle to have convincing cases)

 

Ended up repairing it. In hindsight, maybe should of sold considering the downturn in market?