What would you do with a 1.1m dollar home?

hey team, can I get some help from those that understand figures better than I do.

I'm trying to work out the best possible way to maximise a return on my ppor. This home was gifted to me many years ago. It's been my ppor and doesn't have any cg tax if I sold. It's valued at around 1.2million but I like to be reserved with figures so round off to 1.1m. I don't live in it as I am else where and don't want to live there in the future. I can build 1 huge home, or 2 or 3 townhouses on it as its big enough.
I'm looking for the best return possible for cash flow and is part of my retirement strategy. So let's assume I'm not working so I can keep tax at 0 earnings to help with the overall figures.
If I sold as is, 3% sales fees, leaves me 1,067,000 in cash. If I bank it at 3.6% that's a return at today's rates of 38,412 per year income. Tax on that income is 4375, leaves me 34,037 income a year.
I can rent it out for 350/week without any improvements, it's an old home and needs a new kitchen etc etc to get the rents up to 450 a week. So renting it at 350 as is a week will get 18200 a year on 52weeks rented. Minus management fees expenses taxes etc etc rough guess 27% of the return on 18200 =13,286 a year and no tax on it as it falls under the limits. So far it's best to sell and get a better return in the bank.

If I build one house, sale price would be 1.7mil-2m,
If I build 2 units I could sell each for 850k, could rent each for 500-700, lets go with worst case 500 as oversupply of units in the area currently. 52000 minus 27% =37960 without build costs.
If I build 3 I could get 850k for 2 of them, and 750k for the other. Rents on each as smaller 450/400/450 equals 1300week/67600year minus 27% gives a return of 49348, minus taxes gives 41,036 clear.
I can build 1 at the back of the existing house and subdivide, , not so sure what it would sell for, maybe 750k? as the front is an old ugly 1930 home and not in the best possible position on the land, the old house if subdivided would perhaps sell for 650k.
I'm not sure the level of build quality if I was to do the project, keep it cheap, spend a bit more as its in a professional area. I don't know what the exact total build cost will be but my architect knows we can get 3 town houses/total 48square on the site. And it roughly comes at 770-850k with all council fees etc etc etc, rough guesses.

I'm slightly lost on the build costs, wether it's best to sell as is, build 1, 2, or 3 and sell all off, how many to keep etc for best return. Sorry for the long post, would love some help on my lost figures. Cheers

 

Gift it to someone in this forum

 

Nice problem Lucky you

I would make sure you seek tax advice regarding implications if you build and sell on the property, as you will very likely be up for tax if sub dividing .

Start off with feasibility of all the different scenarios you mentioned.

Check out what they are building new product in the area, what is in demand, contact agents and find out how much it costs to build this, per sqm? Contact builders for prices and find out expected end values.

Do you know any local draftees they can give you some idea on costings.

Generally speaking the more you can fit on the block the more profit you will make.
But I don't really know what your goals are etc.

Am sure some of the more experienced developers can help you with more detailed info.

Is this property in Melb?

MTR

 

Wish I had your dilemma

 

Sell Sell Sell, seems an absolute no brainer to me. Firstly how can you develop the land if you don't have any income? How can you service the loans required? Secondly and if you could do you have development experience, believe me I just subdivided And renovated and it's not easy and takes it out of you. You mentioned retirement so not sure how far off that is and how keen you are to deal with tradies and councils.

Finally the returns you mentioned were very limited. They were bank it in a term deposit or keep it and rent it. But what about selling and buying say 3 townhouses in blue chip suburbs netting say 350 each a week. Your income is now at 55k before other costs.

 

Thanks mtr, the build costs are about 850k if 3 town houses, worst case but that seems high to me. Yes it's in Melbourne, Essendon.
The goals are to produce as much cash flow as possible, income, what ever gives the best continual return from the current scenario I'm in, I would love to replace my working income.
I'm still working now so I can borrow the full amount needed to build.
I really do need to see my accountant to go over the figures as there's to many options and I don't know what would give the best result.

 

Hi albanga, I'm currently working and I can borrow the full amount if I build without issues.
I want to replace my working income and retire as soon as possible.
I bought and subdivided and build in Werribee 3 years ago, but that's a lower level build costs and they sit as rentals. I haven't sold etc so don't know what cg tax etc and what the best outcome for income would be. I know many usually build 3 but I don't know the figures as yet to decide if that's the ideal option, or best to sell as is.

I'm confused by the returns you mentioned being limited?

If I sell now,and bye 3 townhouses, rent for 350 each a week, that's 54600 minus 27% of expenses, gives you 39,858, then minus taxes of 4896 a year, nets me 34962 clear. Which is 925 a year better off than in the bank earning 3.6%, and it has more chance for capital growth as you have 3, which is great.

 

What about: how many deposits can you fund with that coin if you sold? Nevermind developing.
Developing may or may not be a more profitable option but have you done your analysis on how many Much of a portfolio you could build with that kind of cash..

 

Another option. Sell now, invest the cash and buy later when prices correct.

 

No I'm not sure, I just want to earn the best possible income from the current scenario. So if I fund more deposits by selling, do you mean purchase more properties?

 

I need to make sure that developing isn't a better option first. Gonna send the info to my accountant now, as to many possible scenarios and I'm confused the on the best outcome. But I have definitely thought about selling now.
Was hoping some developers and accountants would tune in too.

 

@Barny - take your hands out of your pockets before putting your brain in gear.

• Research.- get hold of your LEP and zoning map, work out what you can build on the block based on its current zoning (you may have to order a S149 certificate from council, a copy of the certificate of title, copies of any S88b instruments (ie easements)
• Talk - talk is cheap, have a chat to an agent or three. What do they say the block is worth? Is it worth more as a development site? How much will units/townhouses etc sell/rent?
• Read - the the information ie what is the zoning? what does that allow? What are the restrictions (eg minimum land size/frontage)?
• Budget - what will the maximum permissible development cost to build ie 3 x 3/2/2 townhouses or duplexes or units etc
• How long will it take?
• Use a feasibility program to work out profit scenarios (NPV, IRR)

 

As others have said selling would be a much easier and less risky outcome given your situation.


#firstworldproblems

 

I would build 3 townhouses, sell one and let the rent flow in. Selling one will pretty much remove any of the construction debt right?

 

This is solid advice. At the some time, put it to them - sale price of a mid level 3x2 vs higher end 3x2, or mid level 4x2 vs higher end 4x2. Find out what people want vs what they can't find. If you fill a gap in the market, it could be more profitable.

The maximum development potential may not be the most profitable scenario. It depends on what people in the area value. For example, if people are looking for 4x2 townhouses and everyone is building apartments, the apartments might not give a good return.

 

Regardless of what you can squeeze on the block, what is the market asking for? What will attract the biggest premium. As scott no mates said - speak to a few agents who are guns at this type of property with these opportunities. Then speak to your planning team to see if they can translate that into a plan.

 

Yes it would. If I sold 1 for 850k(I can say this one I sell is my ppor,so tax free still), worst case build costs would be 850k. So that means I have 2 earning rent. 450 and 400 a week rent x52=44200-27% of agent fees etc etc leaves 32266. If I structure the debt correctly I could also get to claim the investment part and not pay additional tax on the earnings, I think.
@albanga return is a better choice, 34962 clear if I buy 3 new townhouses. But they won't be in a better location for that price. So yes I think this is a better choice @beachgurl. Cheers.

 

Suggest you check with your accountant if the MR expemption applies to a newly built townhouse. Also ask if GST needs to be factored into your calcs and if you can sell under the margin scheme.

 

Yes excellent info thanks,
The rental figures I posted are from rental agents that I spoke to, and current rentals in the same street, similar townhouses if I build that are currently renting now and surrounding locations on realestate.com
I also asked what the market required and wanted regarding sizes, bedrooms, etc etc through 3 real estate agents in different agency's to be clear, they are also the lowest conservative figures I posted to make sure it can still work.
Front will fit double story 3/2//2 middle double story 2/2/1 and rear single story 3/2/2

My figures so far..please correct me if you see wrong.
73000- 82658 for architect fees, subdivisions costs, etc, council contribution open space fees if I build more than 2.
633,600 inc get, 12k per square buildingx48 squares,
15k demolish current house
3800 new driveway
22k soil and rock removal
5k front fence
2k side fence
2k fix other side driveway
17-23k holding interest costs for 10-12months build time
That's a total of 774k, plus 10% for unseen issues or expenses and that comes to 851k

Architect has gone over all the info and knows 3 townhouses can fit and 90% chance of getting it approved.

Is 13.2k inclusive of gst to much? I built for 9k a square inclusive of gst,
3 years ago but that was a basic low build quality home.

 

I'm surprised no one has mentioned it yet . . .

you could sell as is - take the $1,067,000 cash - spend $67K on yourself - a nice little convertible or round the world trip . . . put $333,000 into TLS, NAB & ANZ - based on last years dividends, this would provide an income of $65,056 which has franking credits of $27,881. Thus gross income would be 92,938, assuming no other income the tax on that at the individual tax rates would be $23,933 thus after tax income would be $69,004 per year. Don't watch the market, just sit back and have them deposit money into your bank account twice a year each. The share prices took a dive during the GFC, the dividends dropped a bit but would be still much higher than what you would achieve by having the money in the bank.

Or if you wanted to diversify a bit more and let someone else manage the portfolio consider Vanguards high yield fund. Forecast grossed up yield is 9.32%