Sunshine Development Diary In Detail

[Mindmaster]

The Property
The property is a 603m2 (15.25m x 39.6m) block purchased in 2005 on King Edward Ave Sunshine for around $190k. The house is a 3 bedroom dump rented for $250 a week that is only tenanted because it is the cheapest place in Sunshine. RPData gives a value of $375k and the local PM gives it a land value of mid to high 300’s. Basically the house has little or no value.

The Development Goal
Build three 2-3 bedroom units which would 1-increase equity and 2-eliminate the likelihood of frequent very expensive repairs and patch ups on the old building that is due to fall down any minute. There will probably an increase in yield of around 1% which is nice but not the major goal.

My Background
I’m an Aussie expat in China with an ordinary income, 3 IP’s including this one and no experience with developments. To make this development work with minimal risk, I need a development company that will take care of the entire process from town planning through to project management of construction.

The Development Company
Did a lot of research online and made a list of potential development companies and eventually narrowed the last down to 4 companies. I contacted each of these companies directly to see what services they offer, their prices, their opinion on the feasibility of the development and their ability to handle a clueless out of town client.

Pillar + Post – Their process is that potential clients sign up for a Property Development Assessment for around $460. I signed up for that (still not sure if that is a mistake) and they gave me an assessment with 4 different development options. Two were useless and not what I asked for. One option would have given me an equity gain of around $70,000 and the other option would have ended up in VCAT and eventually probably be knocked back.

They then wanted me to pay $1,477 and sign up for stage two which was meet with their accountant and mortgage broker. After I politely declined, they invited me to sign up for their discreet property acquisition service for educated and property savvy clients that cost $5,900. I was very disappointed with what I feel to be their incompetence and excessive focus on sales.

PnP – They provided a complete service and had glossy brochures that had some useful information on development and plenty of self promotion. They provided exact numbers on their fees and options that included $99 for an ebook, $2,500 for a development calculator and $66 for a development checklist. When it came to profit margins, end values etc etc they were very vague.

DSB – They impressed me and gave good information and assistance. The problem is they only did the permit side and did not deal with the construction. They do work closely with builders they could recommend and I was tempted but I really needed a mob that took care of the whole process.

Complete Development – After a couple of email exchanges, they sent me condition study, cash flow analysis and fee schedule with a lot of detail. They also patiently assured me that they do handle the entire process and have plenty of experience dealing with out of town inexperienced clients. I triple checked all the numbers I could such as end values and everything checked out with surprising accuracy which was very comforting. Their attention to detail, professionalism and complete lack of BS sales was great so after a number of emails, couple of phone calls and a fair bit of research, I signed up with them.

Recently found out that one of the partners is a regular poster here

Planned Development – STCA
3 units with a total area of around 315m2
1 x 3 bedroom 2 floors, 1 x 2 bedroom 2 floors, 1 x 2 bedroom 1 floors

The costs
$18,000 Town Planning Permit
$13,000 Building Permits
$18,000 Subdivision stuff
$420,000 Build costs
$10,000 Demolition (free doors and windows anyone???)
$20,000 holding costs
$15,000 contingency
$350,000 land value
$860,000 very roughly in total

End value
$380,000 Unit One
$360,000 Unit Two
$330,000 Unit Three
$1 070,000 Total

These values are the lower end of the values that local REA’s gave me and a little lower than prices I checked on REA.com

$950 expected rent giving a yield of around 4.6%

So IF nothing goes wrong, the increase in equity will be around $200k. I would still do this if it was $100k (kind of have no choice) and would be happy with a more conservative $150k.

Info, Updates and Your Feedback
I know enough about developments to know I am out of my depth and know next to nothing so if you have any advice, criticisms, suggestions or feedback, I’d be delighted to hear from you.

If you would like any detailed information, please ask in a comment or PM me. I am more than happy to share any information I have.

I’ll be updating this thread over the next 12 to 18 months (expected timeframe) as the development continues.

 

[Kinnon Bell]

I may be missing something here but at the start of your post you said that you purchased the property in 2005 for $190k then in your costings you have a $350k land value.

I'm reading it as you paid $190k in 2005 but you're also adding today's value of the land into your costings even though you've owned it for 7/8 years - so doubling up/adding an unnecessary cost?

 

[tegosands]

Looks good....Will be interested to follow your posts on progress.

Have you considered having the existing property quantity surveyed before you demolish? This will give you a depreciation figure for reducing your tax. The cost will be more than offset by the deduction you'll get.

Good luck with it all...!

 

[Rockstar]

$950 expected rent giving a yield of around 4.6%

Good luck with it Brendon,

You must be planning to sell? This figure looks like you've based it on an purchaser/ investor's return.

Have you considered holding any of the three?

Like Kesse mentioned, better to put in the real costs into your feaso to show your actual returns. ie: purchase costs + holding costs until now. Don't hide the healthy reality.

 

[starter]

I disagree, you need current value to work out whether the project is feasible.

 

[mattnz]

I disagree, you need current value to work out whether the project is feasible.

I'm with you starter. Historical cost isn't important, the difference in value between selling as is and doing the development is what you need to assess.

 

[Kinnon Bell]

Starter & Mattnz - not being argumentative here but I would like to know why you would work off current sale price of the property as opposed to the price paid when doing the feasibility. I know nothing when it comes to developments so am interested to find out the reasoning.

 

[mattnz]

The reason is that you are comparing options:
option a) don't develop - value = $350k
option b) do develop - value = $350k + extra equity of $70k from the development.

People can otherwise trick themselves into thinking that the development is what gained them $70k + $160k = $230k when in reality, the market movement was what did it.

Its a bit like when you watch Property Ladder and the presenter says "congratulations, you made $120k in a rising market from your renovation, but did you realise that if you had done nothing, you would still have made $120k just from the increase in property value over that time".

 

[Kinnon Bell]

The reason is that you are comparing options:
option a) don't develop - value = $350k
option b) do develop - value = $350k + extra equity of $70k from the development.

People can otherwise trick themselves into thinking that the development is what gained them $70k + $160k = $230k when in reality, the market movement was what did it.

Its a bit like when you watch Property Ladder and the presenter says "congratulations, you made $120k in a rising market from your renovation, but did you realise that if you had done nothing, you would still have made $120k just from the increase in property value over that time".

Thanks, makes sense.

 

[Mindmaster]

I may be missing something here but at the start of your post you said that you purchased the property in 2005 for $190k then in your costings you have a $350k land value.

I'm reading it as you paid $190k in 2005 but you're also adding today's value of the land into your costings even though you've owned it for 7/8 years - so doubling up/adding an unnecessary cost?

Hi Kesse, As mattnz explained, to find out how profitable the development is, I need to use the current value of the property. If I don't do that, the profit margin will in include previous CG which is irrelevant.

Looks good....Will be interested to follow your posts on progress.

Have you considered having the existing property quantity surveyed before you demolish? This will give you a depreciation figure for reducing your tax. The cost will be more than offset by the deduction you'll get.

Good luck with it all...!

Thanks, I had no idea about doing a quantity survey for tax reasons. I'll have to look it up and do a bit of research on it.

Good luck with it Brendon,

You must be planning to sell? This figure looks like you've based it on an purchaser/ investor's return.

Have you considered holding any of the three?

Like Kesse mentioned, better to put in the real costs into your feaso to show your actual returns. ie: purchase costs + holding costs until now. Don't hide the healthy reality.

Hi Rockstar, my plan is to hold all 3 which will help in growing my portfolio. I like Sunshine which (to me) has a lot going for it and good prospects for CG.

I've gone over the numbers with my mortgage broker and I'll still have good borrowing ability once the development is finished. That is based on the assumption though that the development does clear around $150k profit or more. If it does not clear $150k, I have plan B which is to panic, go into denial and blame everyone but myself

 

[Rockstar]

I disagree, you need current value to work out whether the project is feasible.

No worries. See your point. So maybe need to compare scenarios a little more carefully.

eg: Scenario 1. Sell property as is

Est sale price - (selling costs + holding costs + original purchase cost) = $x

Vs 2. Develop and sell either all, one, or two (add tax and selling costs to feaso )

Vs 3. Sell with DA approval

Vs 4. Develop and hold all

Hi Rockstar, my plan is to hold all 3 which will help in growing my portfolio. I like Sunshine which (to me) has a lot going for it and good prospects for CG.

Looks like it's No. 4

That is based on the assumption though that the development does clear around $150k profit or more. If it does not clear $150k, I have plan B which is to panic, go into denial and blame everyone but myself

Those margins are looking very thin to me and this is only paper profit till sold so then it's more a question of returns for you and potential to borrow against reval. Have you considered not subdividing them if you hold on? In my shire you get slugged for more rates upon subdivision.

I know enough about developments to know I am out of my depth and know next to nothing so if you have any advice, criticisms, suggestions or feedback, I’d be delighted to hear from you.

$860,000 very roughly in total

Don't be rough in total when you are investing 860k!

Try to attain profit margins over 20% to keep it safe. I go for around 30% for mine.

 

[RightValue]

King Edward Ave is in Albion not Sunshine

 

[RightValue]

Before you go too far down the development path, when you have plans, you should get the thing independently valued by a valuer who does not have a vested interest int he project.

I cannot tell you how many people go through a lot of headhache and asorb a huge risk and end up making very little or even a loss as they did not get this advice.

Also be aware, if you are borrowing from a bank , even though the development may be worth $1.07m upon completion and on separate titles, that on one title as it will be valued by the bank it could be worth/valued at less than $800k upon completion.

 

[mattnz]

Hi Rightvalue,

This is something that frustrates me no end.

If you ever see a brand new 3 townhouse development being sold for $270k less than it would be worth when strata titled, please let me know, as I would buy it in a flash. This simply doesn't reflect the reality of how commercial transactions take place.

Cheers,
Matt

Also be aware, if you are borrowing from a bank , even though the development may be worth $1.07m upon completion and on separate titles, that on one title as it will be valued by the bank it could be worth/valued at less than $800k upon completion.

 

[RightValue]

Hi Rightvalue,

This is something that frustrates me no end.

If you ever see a brand new 3 townhouse development being sold for $270k less than it would be worth when strata titled, please let me know, as I would buy it in a flash. This simply doesn't reflect the reality of how commercial transactions take place.

Cheers,
Matt

Ok,

so lets work this through on another thread.

http://somersoft.com/forums/showthread.php?p=1008727#post1008727

 

[Mindmaster]

Those margins are looking very thin to me and this is only paper profit till sold so then it's more a question of returns for you and potential to borrow against reval. Have you considered not subdividing them if you hold on? In my shire you get slugged for more rates upon subdivision.

Don't be rough in total when you are investing 860k!

Try to attain profit margins over 20% to keep it safe. I go for around 30% for mine.

Great point about the subdivision. Thank you. Not being subdivided may affect the banks valuation and my ability to use the profit/equity. I've emailed my broker to see what affect subdivision makes and I'll call the council tomorrow to see how much would be saves in rates.

But with 3 tentants, that would be 3 bins, can't see that happening with one set of rates.

Based on a profit of $200k, the margin is around 24% which meets your 20%. I am using a profit of $150k to be conservative and not get too excited. Even if the margin is not great, I need to developmet this property before the house falls down and the experience will be very beneficial.

I've read some of your development threads before and plan on going over them in more detail while twiddling thumbs during the 6-12 month permit wait

King Edward Ave is in Albion not Sunshine

Yaahhh I've said the same myself. It is in the 3020 post code which includes Sunshine, West Sunshine, North Sunshine and Albion. Some people say it is Sunshine, others say it is Albion. Choose which one makes you the happiest.

Before you go too far down the development path, when you have plans, you should get the thing independently valued by a valuer who does not have a vested interest int he project.

I cannot tell you how many people go through a lot of headhache and asorb a huge risk and end up making very little or even a loss as they did not get this advice.

Also be aware, if you are borrowing from a bank , even though the development may be worth $1.07m upon completion and on separate titles, that on one title as it will be valued by the bank it could be worth/valued at less than $800k upon completion.

Good point. Once permits are in place I'm going to get everything thorougly valued. This is necessary for finance and also a precaution.

 

[anson_he]

Hi Mindmaster,

Your feasibility looks OK to expect some minor issues:
$18,000 Town Planning Permit -- reasonable
$13,000 Building Permits -- reasonable
$18,000 Subdivision stuff -- 6k to 10k would be enough
$420,000 Build costs -- 1300/m2, I would use 1400/m2
$10,000 Demolition (free doors and windows anyone???) -- reasonable
$20,000 holding costs -- interest cost for the whole project, too low
$15,000 contingency -- 5% of construction cost, use 21,000
$350,000 land value -- good, always use the current land value
$860,000 very roughly in total

You forgot the council contribution cost(section 94 + long service leave), which could be 20k to 30k depending on the councils. The development would give you around 20% return excluding agent commission, which looks OK.

The best way to work out the end value is to use RPData and talk to the local agents. If you have used the lower end of the values and be a little bit conservative in feasibility study, that should be OK. You will have to get the end products valued by a professional valuer when applying finance.

Remember you can use a normal residential development loans because you are building less than 5 units, otherwise you will have to go through commercial channel. Your project won't be valued by the bank under one title and hence worth/valued at less than $800k upon completion. This is called "all in line" evaluation, it is only used in commercial loans which basically applied a 15% discount to the full price under separate title. For the 6 units development I am doing right now, my lender (wespac) had it valued at full price and all in line but used the full price to calculate GRV for loan amount. All in line value is just an indicator to assess the risks.

It is your choice to strata title them after completion or not. I would prefer to have them strata titled so they are ready to be sold if you have to. If you sell them within 5 years from the completion, you will have to pay GST and income tax on the profit and you won't entitle for 50% CG tax concession.

If you don't have the time to manage the development, you can just sell the property with DA approval. In this case, you will still have 50% CG tax concession if you bought the property 1 year ago.

 

[Rockstar]

If you sell them within 5 years from the completion, you will have to pay GST and income tax on the profit and you won't entitle for 50% CG tax concession.

This isn't my understanding.

I thought you could rent out for 12 mths and then sell one or more without gst and be entitled to 50% CG tax concession. As long as your initial intention was to develop as an investment rather than spec home.

 

[Rockstar]

A few years ago I had a val done through St George on a duplex that wasn't strata'ed. I met the valuer and he told me he would only deduct 15k from a fully strata'ed val to cover the cost of registration.

We did have approval from council and strata plans in place so maybe that made the difference in our case. It's just that the registration hadn't been done.

 

[Rockstar]

I'll call the council tomorrow to see how much would be saves in rates.

But with 3 tentants, that would be 3 bins, can't see that happening with one set of rates.

We do pay more rates but not the full amount because, like you say, you need bin collection and extra water service. However we only pay general land rates for one property instead of two. It probably saves us around 1k per yr.