Supercharged Cashflow - Build to Rent Specialist

Hi all, just introducing myself. My name is Michael Lin from Sydney and Chatham Projects is my development company.

I'm not a builder or agent but I've been managing property since I was in school. I have done all kinds such as regional deals, land banking, picking up houses for less than 20k, granny flats, normal houses, townhouses and now more recently Build to Rent deals.

Currently just completed a rooming accom/boarding house deal in Brisbane few weeks ago, literally all rooms but one rented within 2-3 weeks validating the demand for self contained accomodation during these unprecedented times.

This one deal brings in $1440 gross rent a week and the project cost us under 800k and took 9 months to complete. Fully insured and undersupplied class of property, that's not my opinion, that's the market screaming at us to deliver more of these.

Hope to connect with other sophisticated investors. Cheers

 

I am also interested in mini boarding house in Brisbane. We can only do 5 self contained studios in Brisbane. If your project costs under 800k, is the land located in desirable suburbs? Do you build single storey or double storey? I heard construction cost for single storey is aroud 330k. Did the bank lend you up to 80% to fund the construction cost?

 

I'm Sydney based but all my cashflow projects are in Brisbane.
Under 800k is not in desirable location. That's not to say undesirable but it's definitely not Coorparoo.
Depends on the land. single storey is approx 370k, maybe it was 330k a while back but no longer. Yes 80% LVR but depends on lender and your financial circumstances. Banks are undervaluing at the moment so realistically it's closer to 70-75 LVR.

 

Welcome Michael,
Couple of questions for you:
What suburb?
Does the $800K include the cost of the land?
How many rooms?
What are typical yearly holding costs for these kinds of properties?

 

Thanks Lindsay,
Sorry I can't share suburb, part of agreement with client but I can say it's basically the border of BCC.
800k inclusive of everything including land.
5 rooms.
39k was the projected holding expenses for a project we're about to start. This is mainly made up interest repayments approx 65%.

 

How many m2 is it ?
What is the value of the land ?

 

Are you able to share how many car parking spaces on the property? is the mortgage under commercial or residential rates? how big is each room? fully self-contained? are you able to build in BCC?

 

The land is 300sqm. We purchased for a bit over mid 200s but was a lucky buy and sourced offmarket

 

Minimum required is 2 spaces, we could only fit 2 being a 300sqm lot. We got it through as residential. All of our cashcow projects are residential loan. Room size varies, it's a custom design and build. For this one the rooms range from 36-44sqm internal, not incl patios, balconys. They're self contained and yes we do them in BCC.

 

Thanks for sharing Michael.
For simple folk like me can you please share what net profit is. My calculations must be wrong - if cost 800k, income approx 75k/year gross less 39k holding cost = 36k net = approx 4.5% net return. Surely I am missing something - am not great at maths? I would hope for a higher return for a higher risk property.

 

Net return would be 75k/(800+39)=8.9%. Good commercial return for residential properties with low risks of vacancy and depreciation benefits due to brand new

Michael, when you get the loan under residential, did you say to bank it is a normal house or boarding house? Do they take rental income of each room for servicing? Did you apply for the loan with big 4 bank?

Did the builder apply for DA and CC for you so it took only 9 months to complete. That is much quicker than in Nsw. Did you use a project builder or a builder specialized in boarding house? Are property managers willing to manage each room individually?

Did you look into NSW new gen boarding houses? They do more than 5 studios which can give us higher return

Thank you for sharing

 

OK, now I am confused. So what is the annual running cost please (i.e. rates, insurance, water, power, agents fees, gov't compliance, loan payments (IO or P & I?) etc. Thanks.

 

How many m2 is the building ?

 

Michael said " Net return would be 75k/(800+39)=8.9%" so I assume it's plus outgoings .
All my commercial rents are plus outgoings so that's a pretty good return so long as there is no vacancies

 

Sorry, still confused. With normal commercial rents the tennant pays outgoings. I just want to know what they are cos in this case the owner pays them. Thanks.

 

Net return = (75k- outgoing)/(800,000+39,000)
Assume outgoing is 4k
Net return is (75k-4k)/839k=8.46% still a very good return compared to some commercial properties

 

what - 4k for outgoing. so what is the 39 k for then? I thought that was more realistic for outgoings, although I wonder if that includes interest, which would be quite substantial on an $800k loan, apart from all the other running costs. Rather than speculate further I will wait for Michael to set us straight on actual costs per year including interest. Thanks.

 

Hi all, I'm a little limited with how much I can share cause admins have already pulled me aside for sharing too much and self promotion (was sharing case study and pictures) which is fair enough, it's their platform.

Gross yield is usually what I use to measure our cashflow projects, not net yield because everyone's circumstances are different. In terms of returns, compared to buying any other kind of residential property which would most likely be negatively geared, I think it's considerably better at commercial level yield. So, difference of opinion here and it's all based on your own circumstances and experiences I guess. I do townhouse projects too, they're super risky at the moment IMO.

39k is holding plus interest for a new project we're about to start, it's closer to 760k TDC, just so we're not mixing up projects. 26k of that 39k is interest.

Re financing, it's residential and we do not advise the banks our intention to operate it as a multi rental dwelling. From their pov it's just a 5 bdr house that happens to have 5 bathrooms. We've had no issues so far getting across the line.

No DA and CC process, self assessable through certifier. For NSW people (I'm NSW as well even though these are interstate projects) it's basically CDC. We have a team specially for these projects, from designers/certifier/builder and property manager. We don't use normal team like I would for a townhouse build and flip project for example.

Regarding risk, my opinion is it's the least risky class for your everyday investor becasue you have 5 tenants, all on standard 6/12 month leases versus a residential home with just one tenant. If they leave, you lose all your income. We've got 5 and it's relatively easy to rent due to undersupply of single occupant housing in all our major cities.

Re comparison to commercial, we own several commercial. One of them is a warehouse that we purpose built in Sydney that leases for 155k gross and was valued for over 3m by the bank. We're also building a pair of rooming accom side by side. They'll generate 168k (within 10km of cbd) together and costs 1.6m. Even though outgoings not covered, risk versus reward in the current market where growth is a long time away, I think positive cashflow is the least risky strategy. Not a financial strategist so maybe I'm wrong.

Yes, I've looked at NGBH, have been looking at them for a long time, lots of research. Even had land ready for it but the politics involved to get approval is just too onerous and we did townhouses instead. One of my architects has done a few for clients, they average 12-24 months for approval or outright rejection. Being class 3 builds, it can be quite expensive to build plus very regulated. The state's 2k per room cash bonus for 5 years is no more, they also bumped up the 0.2 carpark exemption to 0.5 last year. The FSR bonus isn't really a bonus unless you have a specific block that can take advantage. The main thing is local council do not want it despite it being a state planning policy so expect to go to LEC. I have a friend who's got a DA with Penrith, reduced proposed rooms from 14 to 8 self contain studios after 12months, 6 months later still waiting for the approval any day and gets an inquiry whether basement carpark can be added which blows out the whole project. Too much politics despite compliance with state planning policy.

Unless you've got institutional level money behind you, doing it at scale with strategy to take to LEC no matter what, it's not really worthwhile for the average investor unless we're talking early 2010. Eg there's a few in Lidcombe doing really well near UNSW campus, 11 and 10 rooms on 550-600sqm. Great yield but different times. The only people I know who are starting NEW NGBH now are in regional cities like Wollongong or Orange. Metro Sydney, they're definitely institutions linked to superfunds, etc. There's one in Cabramatta, 4 levels from memory plus basements for 35+ rooms so they're still happening, just on a different level.

 

hmmm
wonder how you'd go selling these properties if the potential buyer's lender catches on to the fact it's a boarding home, even most commercial lenders don't like them.
How does the capital growth stack up vs a standard 5 bed resi home in the same suburb?

But of course you would have that opinion, you sell em!

 

Rents on these sound way to good to be true for something on the fringes of Brisbane. We have a student accomm in Taringa which is pretty much best case location for these properties in terms of students/access to CBD and universities and we top out at $225/week for bedroom with ensuite.

If these are more studio type arrangements with own living area etc then I can maybe understand a higher rents but at $288/week you are pretty close to a single bed unit rental cost on the fringes of the CBD. Never mind the glut of cheap 2 bed apartments in Newstead/South Brisbane. It's cheaper as a student to rent a 2 bedroom with 1 other person at $550/week in Newstead and you get all of the bells and whistles with it.

Over 7 years of operating as student accom we have only increased rents consistently for 2 years and then topped out at where we are now about 4 years ago, since then there was a massive uptick in student accomm supply into the brissy market, that was driven by council concessions for purpose built student accomm buildings in 2015-2016. Big towers with 900+ beds under management. Those operations also have the people to get out and market to foreign exchange students and keep vacancies low. You need a property manager who is onto it marketing to uni's to ensure you can keep the rooms rented long term. The more you churn through residents the less likely you can get rent rises in our experience because we generally end up offering concessions to get people signed up.

Also typically these are done in brissy as full service so the outgoings include all power, water, internet, furniture etc etc etc. We have averaged 3k per room PA over the last few years including management costs, excluding holding cost.

The way I would see it long term

Holding cost 3.5% on 800k - $28k
Outgoings full service - $15k

Operating costs total - $43k

Rent $1440/week = 75k

Net return = 32k PA or 4%

I'd put sustainable rents at $225/week per room for a bed with an ensuite which would reduce the net return to 2%ish. Without knowing the specific suburb but from the description of fringe BCC with that build/land cost it's going to be difficult competing with CBD markets etc.

Not to mention reduced capital gains due to smaller markets that these get sold into. Normally difficult to sell on to a family etc unless they are designed just as a house.