What to do next?

Referring to OP...

 

PG
would love the numbers if you care to share

 

+ 1
should start a post on this PG...

 

I should start a thread. Purchase price for the site was $465,000 in 2011. For build cost I am counting all costs for the townhouse plus any mods for the front house as required by council. Budget is $350,000. Rent for front is $300 pw. Projected rent for the new house is $460 pw. End value keeps falling and is lower every time I look. Maybe $460-$500k? It's a long term hold so I am not particularly fussed. To give you some idea of the market, in 2014, projected end value was $650k. It's not a very attractive proposition for a build ans sell in this market but will provide good cashflow as a build and hold. It will also be unencumbered at completion so I will be able to use it as security for my next project. It's my first build so I am using this project as my learning curve. With that in mind the numbers aren't super important to me. It's still profitable though.

 

Am I understanding this correctly?

$465K P/Price + $350K construction? So the site owes you @ 815K?

Rent from both dwellings will be @ $760 per week?

 

I think the site will owe us maybe $840k by the end of construction (if we spend the full budget on construction) because you missed stamp duty and legals on the original purchase.

In terms of rents, the front house was previously rented out at $440 per week and at that time, the new house at the back would have rented for $600 per week. Rent at that time would have been $1040. I believe at completion the rent will be $760 pw. Rents have dropped that much in the area.

End values are tough to judge at this point because prices are dropping so fast. But I guess the front (duplex potential block) will be worth around $440k and the back maybe $460k at completion. So the site will owe us ~$840k and will be worth perhaps $900k. I realise this is not spectacular.

Currently the site is cashflow negative, so it's costing us money to hold. At completion, it will be cashflow positive after expenses but before tax. We'll also have depreciation on the front house and new house at the back, which will add a little at tax time.

These numbers are not impressive and I'm not arguing that they are. However, we have 3 options:-
1. sell the whole site at around $550k.
2. continue to hold a negative geared property.
3. develop and hold as a cashflow positive property.

One benefit of option 3 is that at completion, I will have a unencumbered IP worth (perhaps) $460k. The back house at completion will be 100% in my name, the front will remain in shared ownership at this stage.

Perth is currently experiencing a downturn so property values are low and rents are low. However, as prices and rents improve in a couple of years time, I am confident the numbers of this site will look at lot better over time. The other benefit of building at this point in time is that building costs are low because we are also in a building downturn. My builder has advised that prices are increasing next year.

My assessment of this project at this time is that from a numbers point of view it doesn't make a lot of sense to do right now. Marginal benefits are that post construction it will be overall cashflow positive and I will also have an unencumbered IP to use as security for the next purchase or purchases (subject to serviceability).

As a long term hold, I am confident the numbers will improve over time. At the same time, we have the option of paying down debt. This property (front + back) in total will likely be securing around $300k debt at completion which is not too much considering an estimated total end value of ~$900k. I hope this makes some sense.

 

Good luck and look out for my post around March

 

Where are you building?

 

Brisbane