What I learnt out of buying 7 properties

Ah, I see what you're asking now. Using your previous example of purchasing a new property, only the security that is to be purchased will be valued. Other details for property 1A and 1B (property value, rent etc) will just be taken by the lender as what you have stated in the application.

For property value submission I always use the value from RPData instead of whatever the customer states so I've got grounds to stand on should lender tries to challenge this.

And then as long as rental statements or current lease are submitted as part of supporting evidence for property 1A and 1B then that's all lenders care about from servicing perspective.

Does that help answer your question?

Cheers,
David

 

I just don't understand what's happened to architecture I suppose you could blame the builders but I think it's the architects because the amount of otp apartments that have some water issue is just astounding it's so common but that didn't seem to be a problem when they were building units in the sixties and so on. That's one of the first things to consider when designing a dwelling is how to keep the water out or how to keep the water contained.

 

I have been in the construction industry for 35 years.

From what i see first hand, is there have been some dodgy (under qualified) builders-developers pop up in the last 10-15 years of the Sydney boom.

A typical scenario is where multiple building sites are overseen by one qualified tradesman, with unqualified laborours doing work unsupervised. Builders cutting costs using cheaper materials and the jobs not getting inspected as they should and signed off by dodgy private certifiers.

I have been (still are) invovled in too many recently built developments where the building is full of substandard construction. structural defects (some major), water leaks. etc etc and the builder and developer is bankrupt or vanished.

What we see now is a legacy of local governments privatising building regulations and it is now relying on the honesty of a fragmented array of builders, subcontactors and private certifiers, and the owners left to pick up the pieces.

buying new OTP ?

Caveat emptor

 

Firstly great post David! Thank you for putting all the time and effort into sharing your experiences . I was just wondering why you would say think again to Corio and Norlane? and also what's so bad about Fairbarn Drive?

Cheers!

 

Thanks @Green

For Corio/Norlane - lower social demographics in general, and also there have been heaps of investors jumping into these suburbs between 2017 to 18. That's a risk in itself because if lots of investors decide to sell out then price could come down.

Fairbairn Dr is one of the worst street in Corio for social housing. You wouldn't want to be investing there (no matter how cheap!) as you'll attract terrible tenants who will pay no rent and probably cause more headache than anything.

Cheers,
David

 

18. Eighteenth Lesson - What types of Value Add are there in a Property? (Houses)

The ability to identify Value Add potentials during asset selection is crucial for all investors who wants to be able to manufacture their own equity rather waiting on the market to do the heavy lifting. This is even more important in particular at low growth periods like where we are now.

So let’s have a look at the different types of value adds today which an investor can implement in order to propel themselves further in the wealth creation game!

In part 1, we look at some options that can be done to houses and in later parts look at what can be implemented to units/apartments. The ones we'll look at today are:
1. Construction – Granny Flat
2. Construction – Subdivide and build
3. Construction – Building out downstairs (dual-level occupancy)

House on a block of land simply has a lot more options in terms of what can be done and by no means this is an extensive list. But I think it is a start for investors who wants to be able to pick something more than just a vanilla property.

1. Construction – Granny Flat
Difficulty: beginner - intermediate
Risk: low

Granny flat is one of the simple way of adding value by constructing a secondary dwelling (Granny Flat) at rear or other side of the existing house. I have already covered quite a bit of details in the previous lesson, When should you build a Granny Flat?, so I won’t cover in details again here.

I've defined the difficulty as beginner to intermediate. It can be suited to investors who are starting out as GF is the simplest form of construction with low risk of going wrong with a smaller investment fund required. So if you have bigger ambitions down the track to do bigger projects such as building out a unit complex then this would be a good entry level way to get an understanding on the construction process and some general pitfalls.

2. Construction – Subdivide and build
Difficulty: intermediate - complex
Risk: medium - high

Subdivision is the process of splitting one block of land into two or more smaller chunks. Every state, every council has their own criteria for subdivision. For example Logan council in QLD requires minimum size of 750 SQM for a corner block, or 1000 SQM for a standard block. There could also be a criteria for frontage so it is important to do your own due diligence to check these criteria before purchasing a block rather than blindly trust an advertisement that says has “subdivision potential” with S.T.C.A stated with it.

Couple of options with this approach:

- Acquire, on-sell with DA approval
I have also seen some investors buy a sub-dividable block, got through to DA approval and then simply sell the block for others to complete the subdivision process. There is value add even by just obtaining the DA approval – simply because they have spotted the opportunity that the block has subdivision potential, and got through the DA approval process. Instead of continuing on and execute the split, they may decide to leave the remaining work to someone else and just take the profit as is. Profit will depend on where the cycle is at that time, but if the entry price is good (i.e. you've identified the subdivision potential when others haven't) then this can still be profitable.

- Acquire, obtain DA approval and subdivide
And then there are the investors who will obtain DA approval and then continue onto completing the subdivision process. If the property cycle is in a rising market then an investor could sell the subdivided block for a good profit once the electricity/gas/water has been connected (i.e. ready to build) or even sell with a design plan in place. From that point the next person can take on the subdivided land and proceed with engaging a builder to either re-design or build out the property. This is a relatively simple approach and much lower risk involved overall and is quite commonly used by investors who's had some experience in the game but don't want to take on the risk of construction themselves, or don't see much profit in the end product.

- Acquire, obtain DA approval, subdivide and build out second dwelling
Then there is the type of investor who would go all the way, from acquisition of a sub-dividable block, going through DA, subdivide, design and build. The investor can decide whether to keep second dwelling and rent it out, or simply on-sell and reap the reward of the hard work. This type of approach requires careful upfront due diligence on numbers with good profit margin and a good read of where the market is heading, as the decision to rent or on sell will somewhat depend on where the market cycle is at time of project completion. At time of making such decision, if the market is at peak and starting to turn then an investor may want to on sell the block rather than carrying out the full build instead.

- Acquire and develop (multiple dwellings)
Last but not least are the ones who would purchase a development block and knock down the existing house and re-build. This is more inclined towards full development. To warrant a profit on these projects, careful due diligence and consideration is required upfront to ensure the end dwellings can be resold for a sizeable profit. That's why the end product almost need to be the likes of multiple dwellings such as apartment complex to ensure enough profit margin is in the project to outweigh the overall risk and ideally with a conservative buffer of contingency. Which is why development is usually high risk and high reward and is more suited for advanced investors only.

So there is quite a few exit points using this strategy depending on how comfortable an investor is with this process and his/her risk appetite. In general, start with simpler techniques or engage professionals to assist you in making a logical decision on which approach could be best suited for your circumstances.

3. Construction – Building out downstairs (dual-level occupancy)
Difficulty: intermediate
Risk: medium

This is the type of value add that is more specific to QLD's "highsets" where a property has two levels with upstairs being the functional level (living area, bedroom, bathroom, kitchen) and downstairs has the potential to be utilized as second functional space.

In QLD, whether downstairs are legal height or not they have the potential to be built out and transformed into a fully functional level, including living area, kitchen, bathroom and bedrooms. Note if downstairs is not legal height then they will not be able to be leased out separately. But they do suit demographics that has big family requirements. Also as it's a proper construction of living space you should be mindful that council approval will most likely be required - contact the local council for their specific requirements on this.

Depending on the what the structure is downstairs and what has been completed already, it may cost anywhere $75K to $120K to build out underneath (based on my 2016 estimate obtained - probably more expensive now in 2019 terms!). So it’s not a small investment. But in Logan (SEQ) for example, a fully built out highset can present it’s own unique attraction to demographics and can provide up to additional $100 to $150/week rent (in comparison with highset that does not have downstairs built out or single level dwellings) depending on build quality, how many bedrooms and available space.

Note I'm generalising here as these are the numbers that I had back in 2016 terms - there are much more dual-living properties available for rent in Logan now so the additional $100 - $150/week rental return may no longer be applicable in the current environment. Again do your own due diligence and speak to local PM agencies to get a good idea on the potential ROI.

This can be an option to increase overall cashflow position of the property and make it easier to hold for the long term. In addition if done well, there may also be some potential equity to be made.

Given not all land are set for granny flat configuration, building out downstairs may be an alternative option for investors to consider to improve the overall portfolio cashflow.

Cheers,
David

(Above is written based on my personal experience/opinion and is general in nature. Please seek specific advice from qualified professionals)

 

19. Nineteenth lesson – What types of Value Add are there in a Property? (Units)

Today we’ll continue the discussion and unveil a few more value adds in general that can be done to houses/townhouses/units, including Strata Title of land as well as renovations, both cosmetic and major renovation.

4. Strata Title
Difficulty: intermediate - complex
Risk: medium - high

The simplest way to understand strata titling is splitting one into multiple – in a sense similar to subdivision of land, but this term is more commonly used in Units/Townhouses, as strata title will involve some common area.

So the biggest difference between subdivsion and strata titling is subdivision is complete separate without any common area – each LOT will be to it’s own. While strata titling will involve some form of common area such as stairs in units or driveway for garage and these will be used and shared by all LOTS.

For this reason strata titling strategy is mainly used in townhouses or units, where there could be an old apartment block that is available for sale as a whole, and an investor can purchase the whole apartment block as a single title (maybe 4 or 5 units), and then go through the strata titling process to split each unit into it’s own. Before strata titling the whole apartment block would be known and registered as for example, LOT123. After strata titling unit 1 would then become 1/LOT123, and unit 2 will be 2/LOT123 and so on. After each unit has it’s own strata title then essentially each unit can be sold on it’s own!

While the concept is simple but in reality there are quite a number of steps and hoops to jump through. I have outlined them in very simple terms:
1. As a start an investor will need to check whether there are any restrictions to the current LOT or land, such as size or disposition that could potentially prevent strata title from proceeding.
2. Then once the restriction aspect is cleared, there will need to be a strata plan drawn up to clearly outline common property and each lots.
3. And then a Community Management Statement will need to be prepared to include by-laws and LOT entitlements.

Once all the plans and relevant documentation have been completed and in place then the individual LOTS can be registered and the body corporate will then come into the party.

You can also strata title two houses on a block of land separating each into it’s own LOT. Some people do this in order to be able to sell one off without having to sell both (on the same LOT). In NSW this is known as “duplex” – two houses on a single LOT.

5. Renovation – Cosmetic
Difficulty: low - intermediate
Risk: low - medium

In my view cosmetic renovations can be as simple as repainting a bedroom to as complex as complete kitchen renovation. Either way the goal of cosmetic renovation is to improve the value of the property, and as a basic rule of thumb for every dollar you spend on cosmetic reno you would want to get 1.5 to 2 dollars in return depending on the type of cosmetic reno. So I believe it's important to do your DD and work out estimated Return on Investment (ROI) before going ahead.

Cosmetic reno are usually lower risk in nature and are more suited for everyday investors. They can be applied to all property types including houses/townhouses/units. There are professional builders who focus on purchase run down places, live in the place while transforming the property via cosmetic reno and then flip at the end for a profit. So as you can see, if done well, cosmetic reno can have excellent rewards in both increasing property's intrinsic value as well as rent increase should you wish to continue keeping the property afterwards (plus making the property more attractive to securing a decent tenant!).

Fundamentally, cosmetic renovation is to be able to transform the appearance of a property without changing the underlying structure of building. Some of the common ones are:
- New carpet/floorboards
- New interior/exterior paint
- New kitchen or bathroom
- New lighting/fixtures, blinds/curtains

6. Renovation – Structural/Major
Difficulty: intermediate - complex
Risk: medium - high

Structural renovations are the ones that fundamentally changes the building structure. Examples are house extensions – changing current floor layout, adding a second floor or extending additional space out towards the backyard, and these actions will involve a team around you - quantity surveyor, various engineers and will almost always require council approval.

Structural renovations are usually costly so are not commonly adopted as an investment strategy (not for beginners anyway) and risk of budget overruns are much higher.

They’re more carried out by owner occupiers, who are emotionally attached and would like to improve living quality at home or needing additional space due to growing family. If purchasing a new home proves to be too costly and not viable, such as the current affordability issue in Sydney property market, then structural renovation on the existing home could be a more viable alternative in comparison.

Nevertheless for home owners it is definitely a way to improve the value of a property whilst being able to enjoy the fruits of renovation.

Cheers,
David

(Above is written based on my personal experience/opinion and is general in nature. Please seek specific advice from qualified professionals)

 

Great post David.

 

Can you give a working example of a cosmic reno that you've done? I just find it hard to justify the extra 15k to 20k outlay which usually takes about 10 years or more to recover through the increased rent. If your aim in to increase equity, extract and buy again, well that strategy won't get one far in this lending environment. It's a different case if you're looking to flip but even then with the entry and exit costs, it's hardly worth it.

 

Hi Andy,

The best example I have is the one I've done on my Geelong place - adding an extra bedroom plus cosmetic refresh of the bathroom. More details in this post:
My latest Geelong purchase - Go Newcomb!!

This was done in a good timing because Geelong was on a rising market at that time. So the extra bedroom helped boost the property value and I was able to get rental return of a 3 bedder.

I do agree with you that in the current slowed growth & tight lending environment it may be challenging to guarantee equity after the all that initial outlay. My suggestion on this is during property selection, try pick ones that have got some sort of value add potential so that people have options to manufacture equity some time down the track when they wish to. It doesn't have to be done immediately. So it's more about finding a balance between current yield vs value-add potential.

Like property cycle lending also goes in cycles too. I'm sure at some point in time it will become easier to borrow again so that could be a good timing then to deploy these cosmetic reno strategies, like what lots of people have done back in 2014-2015 period.

Cheers,
David

 

20. Twentieth Lesson - 3 years on, what did I learn from my Slacks Creek (Logan) IP?

The Slacks Creek IP is my first interstate acquisition and by no means was perfect. 3+ years in since I initially bought this property I thought it's interesting to do a "rear mirror view" and see what events have happened and share what I would do differently if I'm to purchase again today.

And this time instead of writing out thousands of words, I thought I'll do a video on it for a change - hopefully conveys faster & more info than written words!



Cheers,
David

 

Thank you for sharing your experiences, David. Your posts, blogs, podcasts and video are always very informative and I am glad to learn/know something that I did not know about each time.

 

Glad to help

Always open to feedback though on how to do it better and what else will benefit our investors community so if anyone has any suggestions don't hesitate to let me know.

Cheers,
David

 

Geez David.....you are brave.....you could get lynched with all the guys/gals who got into Logan...Logan is sacred...youse can't lose money

 

Haha, I try to be as objective as I can in analysing these things...overall it is an investment and numbers do speak for themselves. Not trying to talk up or down with Logan really, but just with the amount of ups and downs going on (never a dull day in Logan, in particular the 4114s!) it's worthwhile sharing my personal experience so new investors who is considering can factor this in as part of their decision making process.

Cheers,
David

 

Hi David, for Strata Titling do you suggest that a town planner be involved in most of the process required? Is it an expensive exercise?

Thanks.

 

I can hear the Bogans from Logans sayin' get a rope.....

 

The whole of Bris has not done too well so far, and what worries me, is when the next decent floods hit.....if it has not gone up by then, we all may be kissing our rears goodbye !

 

Hi diagnostic,

Yep I would say Town Planner should be your first contact to reach out, and then can involve other professionals as required.

In terms of cost I would say it vary depending on states plus the scope of what you're trying to do. Professional services cost with Town Planner plus council contribution fees can add up quite quickly - so best to speak to each profession and get some specific figures to complete your feasibility study.

Cheers,
David

 

It'll take a while for them to travel to NSW so I reckon I'm fine for now...perhaps till the next Epping meetup?

Yea we've all been patiently waiting for that growth...though I still think it'll be slow & steady in next couple of years for Brissie. Can't see any big drivers that'll give Syd/Mel type of boom however happy to be proven otherwise.

It'll also get better when easier to get credit so let's see what happens in next couple of years.

Cheers,
David