Subdivision Feasibility

Hi,

I am new to Property Investing/Development. I have spent the past 4-5months learning as much as I can about it. Would be great if you guys could assist me in doing a feasibility on a property that I'm looking at (purchase, demolish, subdivide, sell the lots).

900 - Purchase Price
810 - Mortgage

Upfront Cash
90 - 10% deposit
38 - Stamp duty
61 - Holding costs (assuming 5% I/O for 1.5 years)
49 - Demolish, trees removal & site clearing
189 - Developer Contribution - 189 (assuming $31.5k per lot for 6 lots)
20 - ~5% buffer
?? - Subdivision Clearance fee
?? - Professional fees (surveyors, accountants, solicitor, settlement, etc)
-------
447 + ??

Total investment: 810 + 447 + ?? = 1257 + ??
Aim: Sell 6 lots at 300 each, thus 1800
Agent fees = 1800 x 0.03 = 54
Profit before tax = 1800 - 54 - 1257 - ?? = 489 - ??

1. Does the numbers sound correct?
2. Is there anything missing?
3. Any idea about ?? numbers?
4. What sort of timeframe should I expect for such a project?
5. I am looking at a JV with 3 people as I don't have enough cash upfront (yet to find/confirm the other partners - any takers?), what sort of structure would you recommend in regards to tax / CGT?
6. Am I crazy (I like to think of myself as ambitious though) to be doing such a project for my very first investment? Don't even own an IP

Thanks

 

6 lot development first up? Any reason why you don't want to go with a more traditional start - single IP or just a retain/subdivide/2 lot subbie?

 

I love challenges, and that's the reason I'm looking at this one...I believe there's more to learn in this project. I also aspire to develop properties one day and I'm hoping this might get me there faster compared to the traditional starts.

 

Well i dont think your crazy, you will just have one huuuuge learning curve and your risk is increased as well. hmm..Perhaps somewhat crazy

 

I note that you have put Development Contribution Scheme in there - is this an amount that the Council have said is required? Some councils call it Open Space Levy, others Public Open Space Contribution. Wanneroo call it Development Contribution Scheme. Whatever it's called it's to improve and/or create local parks for areas where infill is increasing population numbers.

So things I see missing
- headworks - power and water
- retaining if required
- stormwater if required
- subdivision fees to WAPC, titles to Landgate
- survey & subdivision plans by Surveyor

As to #5 this would not be a CGT event this would be income/company tax. An accountant would best suited to explain if a unit trust or shares in a company would best suit your project.

Remember that if multiple people are in the JV they are most likely all responsible for 100% of the debt and it can impact on their own serviceability outside the project.

 

@Ichigo

Few costs to add

LMI
Town planner
Utilities
Road/driveway(if required)
And few other things based on site

 

I think most important is to make sure you can subdivide into 6 lots. It will probably make a big difference if you can only subdivide into 4 or 5 lots. JV may be another risk as other people may have different financial goals and risk tolerance.

 

What is the site classification? This will determine if you need a full geotech report and stormwater management.

 

This! If no correct storm water in place then run far far away!

 

You totally missed purchasing costs - LMI, lender application fees, registration fees, conveyancing, investment structure costs, etc.
Holding cost needs to be a tad higher. You only considered Interest rate. Didn't factor in things like council rates, water, insurance, bank account fees, don't know about your state but I would guess 6 parcels of land will get you over the land tax threshold, mortgage pro-pack fees, etc.
Can't comment on demolition, tree removal and site clearing. Don't know how many or size of trees, slope of land, asbestos in building, etc.
I'm assuming developer contribution is council infrastructure contribution. Can't comment here either. Will be dependent on each council. Just give them a call and they will advice accordingly. As an example, the council i'm doing a 4 lot subdivision in has a maximum contribution cap of $28.5k.
Personally, I wouldn't be comfortable with such a small buffer. If you think of it as per lot it amounts to only ~3k buffer per new lot. Hope your sale price is spot on. If you're off by 1% it will wipe out your whole buffer.
Professional fees - call them up and ask. If you add them all up it will be quite large. At least a few thousand for each profession. Some other professional fees you are missing are: town planner, civil engineer, electrical engineer, and council application fees.
Not sure what subdivision clearance fee is. Maybe we call it something different here.
Agents fees seem about right. I paid just under the 3% mark for the last piece of land I sold.


A biggie your missing is siteworks. Water connections, wastewater, stormwater, electricity, telstra, driveways or new road, boundary pegging, fencing, retaining, etc. This is gonna be huge.
Another huge one your missing is GST. It will be big. Talk to an accountant to find out how it is calculated. I don't think you can lump this in with CGT. You might have to declare it as all income. Another thing to talk to an accountant about.

And a few small bits your missing include title registration, plan sealing, postage and peties, bank cheque fees, etc.

Not trying to scare you. Just trying to help fill your knowledge gap so that you go into this with both eyes open.

 

Thanks all I will factor in the other costs to be able to do a more accurate feasibility. Thought of sharing some quotes I already have, in regards to some of the above items.





Demolition Quote

 

Also thought of summarising the additional items mentioned (might work as a checklist)

Headworks/siteworks
power, water, wastewater, stormwater, telstra, retaining/boundary pegging/fencing

Site classification?
This will determine if you need a full geotech report and stormwater management.

Application
subdivision fees to WAPC
council application fees
titles to Landgate / title registration
survey & subdivision plans by Surveyor

Bank/Mortgage fees
LMI
lender application fees
bank account fees
bank cheque fees
registration fees
conveyancing

Other Holding costs
council rates
water rates
insurance

Other Professional fees
Investment structure costs
Town planner
civil engineer
electrical engineer

Miscellaneous fees
Road/driveway(if required)
land tax threshold
plan sealing
postage and petties

 

Just curious, are you finding your own development site? Are you confident in being able to pick a site out?

 

@thatbum, this was the first decent site that I decided to do a feasibility. I've mostly been looking at buy IP & hold over the past few months. As I tend to learn more about investing (and now a bit more about subdiv/develop), I thought I might even consider a subdiv.


How do you guys go about finding your development site?

 

@Ichigo what return are you looking for and what is your end value (1.8m) based on?

Seeking the advice of a town planner would be invaluable.

 

I studied the Rcodes and local planning schemes like a fiend until I was confident about the subdivision potential of the first place I bought.

I actually also had an exit strategy as well, just in case my estimates were off and I couldn't subdivide. And this was just a really basic 2 lot subdivision of an existing duplex pair.

I wouldn't be normally recommending a 6 lot subbie to someone who hasn't had IP experience before...

 

may i ask what is your exit strategy?

do you mean to do DD before buying? or place a clause in the contract?

 

@Leo2413 , initially I was assuming a JV of 3 people (chipping in $150k each) and an after tax profit of about $75k - 100k. The biggest thing for me is the knowledge that I will acquire.

The 1.8m (6 lots - 300k each) is based on the price of smiliar-sized blocks being sold in that area. Went through all the land available on RE, and did a land per sqm calc. Also spoke to investors who live in that area.

Yeps, also spoke to Town Planners @WAPC, Council planners. Awaiting response from Department of Env Regulation.

 

hmm OK. just seems to me the margin is really small and i dont know if its worth the risk personally. Just make sure you get your costings right. Also i dont think i saw a Contingency anywhere mate.

 

I haven't made an offer My plan was to do as much DD to assess its feasibility. If I were to make an offer, and I was still awaiting some decision/reply, I would have used a DD clause of 30 days or so.

I have reached the stage where all the planners I have spoken to...believe they can only confirm, with certainty, the number of lots achievable after getting a surveyor to draw the plans. Haven't done this yet.

What sort of clause would you recommend? or exit strategy?