Duplex numbers & current margin expectations

This has been probably covered numerous times before but I wanted updated information with the way the markets heading, building costs and expected margins.

I have looked at Sydney duplex potential sites and can't seem to get numbers which work. It would be great if I could get some feedback off the numbers below.

Site acquisition: $2.47 (based off $2.4m purchased price + stamp + legal)
Build costs: $1.82 (based off $1.7m builder contract + 5% contingency + outside contract costs (s73, subdivision, PCA etc))
Documentation fees: $50k (architect, engineer, geotech, council contribution)
Interest over 1.5 yrs: $245k (LTV of 75% at 5% interest ($3.2m) - probably understating this figure)
Total project cost: $4.6m

Sale proceeds: $2.6m per duplex
Cost of goods: $54k (agent 1.5% comm, home staging, legal)
Net proceeds: $5.09m

Net income: $492k
Margin: 10.2%

My understanding is that generally speaking you want to achieve a margin of 15%-20%. This accounts for shifts in the market and building cost blowouts.

Are my numbers incorrect? It seems difficult for developers to achieve those margins unless you find an extremely cheap site or a builder/developer who can build for cheaper?

Thanks

 

Yeah minimum 20% net is ideal, looks like your figures are 10% gross, tiny margin.

Probably, I'd say they're under estimated, for example where you getting 5% interest rate for the funding? Even under resi funding this won't be near 5%, stamp duty figures are off by $45K, can't see any tax on the end figure so probably a gross estimate not Net.

End of the day, it's not easy and if it was, everyone would be doing it, some deals just don't stack up.

Have you checked you can even afford to borrow the amount required?
Have you got an actual quote form a builder for the build costs estimated?

 

15-20% on a duplex is highly unusual after council levies, agent marketing and sale and over run on costs or expected issues. Landscaping has gone through the roof. Many are not bothering at present as present margins are as tight as and then the uncertain future price / demand and lower borrower finnace is all playing a part.

One alarm to me was a total land cost of $300K for a duplex site. Seems very low for a end product at $750K Have you checked the land developer covenants ? Many land devs have restrictions on further subdivisions or density. Land developer often hold specifically approved lots in the estate for this. Corners etc. Bigger lots ...also desired for childcare and similar use.

 

10% is pretty good if you can get it.

A bit above market IMO currently available, your feaso's pretty good though. 5-7% is roughly market for investors at the moment.

The market isn't offering anywhere near 20% for duplex projects as investors though in Sydney.

Not impossible, but hard.

Will need some inflation over the 18-24 month period to complete the project that helps end values out a bit.

 

The feaso is good? HA!
Margin won't be 10% because the numbers are wrong, and if the margins are 5 - 7% I'd say AVOID, especially for the inexperienced in this space, for the experienced they can likely get away with it but for a newbie, hmm.

Plenty of 15% - 20% margin deals outside of Sydney, funding a number of them right now.

 

What about holding costs and GST, have these been taken into account?

A slight blow on on extra costs and delays in completion and/or selling and your profit could disappear.

Is the risk worth the reward?

 

As with all development, the cost of the land blows this feaso out of the water.

At $2.4m, you're paying a premium for the site - either the number is wrong or it's the wrong site eg existing dwelling is not a knockdown.

This is a med-high end build, what are your alternatives? Eg 2x freestanding homes. Even getting this right, won't fix overpaying for the site.

 

Its IMO a good well done feaso, much better than most i see. Numbers are on track too, process too. Not sure on the numbers, its a bit hard to tell, as it really depends on the design of dwelling and end value. Costs look pretty good to me though at a high level glance for a standard product.

In terms of actually acquiring it - i agree, it doesnt make sense. But it's broadly what market outcomes are producing at the moment.

Sydney ain't the same as others - 15-20% isn't market returns now. Its because build costs have escalated dramatically - what we were signing for 1.3 a couple years ago is now 2 +, and holding costs have tripled. Land values havent dropped either, and end values for new stock hasnt really moved much either.

Combined, it means same entry cost in, much much higher cost of doing it, and a much poorer feaso now as a result.

Hence approval rates & starts arent happening now -- the numbers don't make much sense as OP is working out, and that really stops anything before it begins.

Gov't is on the right track though - one very practical way to get things moving again is to increase feaso's by improving land densities. Sydney is going through massive change here, and a big reason why is to improve feasos so the private sector goes and delivers the housing the community needs.

 

I'm amazed you think that.
Every feaso I see is a well laid out spreadsheet with all costs factored in plus contingencies, real numbers, not just plucked out of thin air.

???

Can you tell me what stamp duty costs are for a $2.4M purchase in NSW?

Many people get burned on developments because they don't spend the time upfront on the feaso/proceed with a tight margin that can be eaten up by holding costs, as I'm sure you're aware of or even have experienced yourself.

 

The high level numbers look good to me because their close to right IMO for general sites. Most duplex buyers are targeting pretty much a checklist for land, and would rule out big slopes, etc etc.

His comment on 'not getting the numbers to work' is true on current market conditions for most Sydney duplex sites too - 10% isn't actually a 'middle site' either, its on the slightly better end.

BUT i cant comment on exact numbers because some duplexes have retaining walls, large cut & fills, is there multiple OSDs, does it have basement, etc etc.

There's little detail in OP to get into those specifics.

This is normal, and the best way to deal with this is to have high level costings that are appropriately buffered.

And for UPFRONT DD, sometimes your not going to get answers on some of this and the best way to deal with it is to pad out the build cost appropraitely. OP appears to have done this for the standard 4x3x1 duplexes you see going up across sydney on the 15m fronted sites.

The main variable OP has right there are holdings appropriately accounted for + build cost. Most are getting the build cost figure off now, using 2021-2 pricing not 2024 - which is 30-50%+ higher.

 

'High level' numbers aren't worth squat if they're wrong.
The numbers are wrong, so the feaso is no good.

Not sure how you arrive at that opinion when the rate quoted by OP in their holding cost calcs, is off by a fair margin.

 

Transfer of land or business calculator

About $115k

 

So the OP has quoted $70K in stamps, and underquoted holding costs but Redom reckons the feaso is done well, my opinion is the opposite.
Oh well, I'll agree to disagree

 

I wouldn't be dropping that amount of coin on a knockdown for so little development upside, I haven't run a DCF/IRR on the assumptions but I daresay it's not gonna be pretty.

 

Seems they costed interest on the full amount for 1.5yrs of project. Would it normally be that interest kicks in as you draw down for progressive payments?

 

Thank you for your response. You're correct - I'm basing this off inner west numbers (Ryde).

 

I realised I used my feaso based off 2021 numbers and didn't update Stamp duty calculations to most recent rules.

Can you advise how off my holding costs are? What figure would you get to based on my figures?

 

Explains why they're out, does this also mean you used construction costs from 2021? I'd be re-checking those.
Rate used in holding costs calcs is 5%, you'll be closer to 7% currently.

Have you checked with a Broker if you can even afford to borrow for this project?
No point going any further until you work that out.

 

Hmm those constructions costs are solid. Holding costs are close too, I use a different simpler approach for these given variability and it spits out 270k.
Ryde is 5-10% so your feaso results are giving you broad reflection of what market offers at the moment.
And as an fyi building costs in 2021 was like 1m vs 1.6-1.8 today. 2018 was like 800k!

careful though given 5% type margins can easily be eaten away with things like retainers, OSDs, delays, etc etc. especially if your just an investor (builders can control these things much better)

Many doing this at these numbers is for a personal purpose too - like living in one side.

a little tip to find a deal; can buy the proposed duplex code changes and wait a few months, could make those margins a bit higher if you can find land that’s single now and duplex later in the year.