APK's Development strategy - Ancillary unit - Dual income

I have committed to a strategy with my BA and I'm keen to share my journey!

I'll tell you a little about it. These are some notes I made.

Total Loan borrowings $550 k - $600 k

House $370 K
Construction of a 2 bed 70 sqm unit at the back - $120 K
Yield - Hoping for around 8%

Values
Property including house and unit will not go up in value at completion but this was not my strategy to begin with and was not the purpose of my investment strategy. My strategy is dual income and I will achieve cashflow positive, cashflow neutral from the outset. Over time CG will occur and the next step will be for me to subdivide to create more CG and equity.

Subdivision
We wont need to subdivide before building unit. Once unit is constructed I can apply to subdivide so that both houses are on seperate titles. As seperate dwellings value will go up. I can either sell one of the properties or keep them and make use of the equity growth.

Comparables
Not many comparables around as this kind of development is only just starting to take off. BA did use the term granny flat, but did not like that term, he prefers to call the the property a unit dwelling. Its a unit on its own block of land. You can subdivide on this permanent structure.

He told me about 2 examples of clients he knows who built a unit at the back and has seen good growth. Unit valued at $400 k now. I will be interested to see how profitable these ventures are in the future as not many developments of these types of dwellings have been done before (well not by many investors I have noted). Its becoming more and more popular and I'll be keen to see comparables in the next few years.

Own Supply
Unit will have its own supply. It wont be reliant on the house for anything. Its own services including sewerage, water, gas, electricity. This makes it easier for when you go to subdivide.

Time frame (approx)

September 1
Buy House hopefully ASAP lol. Say at the latest 3 months

Once offer and acceptance is signed and whilst settlement is going through the prep design work and costings for the DA will begin.

January 1 - DA to council after property settles. - 2 - 4 months for approval

February 1 - Plans plus specs to builders. Drawn up and apply for building license - 5 months

June 1 - Construction begins - 2 - 3 months

August 1 2015 Construction completed


So hopefully I'll buy the house no later than September and 9 months later the unit will be constructed. Could take 12 months all up from the day I signed up with BA to the day unit is tenanted.
 
If you will be subdividing in the future your better off going the extra and building a 3x2 or 4x2 to begin with. The returns both cashflow and cg wise will be far greater. Granny flats should be used where subdivision is not posssible.

Have you talked in depth with your broker to finance the purchase and granny flat?

Cheers
 
If you will be subdividing in the future your better off going the extra and building a 3x2 or 4x2 to begin with. The returns both cashflow and cg wise will be far greater. Granny flats should be used where subdivision is not posssible.

Have you talked in depth with your broker to finance the purchase and granny flat?

Cheers


Hi

Thanks for your input

This is my chosen strategy as I can only afford to be NG for the 12 months it takes to construct the 2 bed unit. Once its constructed I will move out of my parents house back into my ppor. Properties need to be cashflow neutral/positive by the time I move.

I weighed all that up and I cant afford all the costs associated with waiting including the subdivision/application expense, the holding costs (NG) whilst waiting (its a long waiting period to go through), and nope I wont be subdividing until way way way into the future or maybe in a few years time, i dunno. Anyway this works for me and my $58 k salary.
 
If you can not afford to go 3x2 etc. as HDACE mentioned, would an option be to buy but build at rear when you can afford this as you are not actually adding any value? This is critical in terms of moving forward. Also is what they are recommending you build today 70 sqm 2 bedder appropriate for the area/this market? Is this what people want? Its not about what you can afford.

Also, if it is not subdivided and you build at rear, can you access equity, far difficult to do this with g/flat, and I would consider it a g/flat unless it is sub-divided and meets council criteria etc. What else can it be???

The BA also mentioned that he/she has used this strategy with other clients and they have achieved growth, I would also keep in mind that the rising market in Perth was in the main over the last 2 years, the market is softening, what about the area he/she is recommending???? Ensure you do your own DD, homework, evidence etc. needs to support what they are saying

All the best, keep us posted.:)
 
Yes I don't exactly understand the strategy here - is it to build a GF and then hope to be allowed to subdivide later on?

Do you know that it will be subdivisable in the future?
 
Agree with above posts, surely if you sold your existing unit you would have enough cash reserves to help fund interest payments on the loan during construction? Going through all that effort and risk to end up with zero manufactured equity doesn't make sense to me.
 
Have to agree, why wouldn't you build a proper house instead of a unit? Does this make it easier for the BA to source you a property as he doesn't have to get a big size block for a subdivide and second house?
 
I also think you need to sit down and have a think about what you're trying to achieve here. Who will buy a granny flat with its own block of land?
 
I have a feeling that Alex's BA is talking about a Single Unit Dwelling not a granny flat. These are able to be subdivided off and sold AND must be under 70sqm if it's in WA. They require 1/2 to 2/3rd of the normal lot size.

Alex is this in WA or another state?
 
One bedders, once again need to find out if there is market for this in this particular area. From my limited research I would be cautious what area I would be popping one of these at the rear.
 
How much buffer do you have on top of your timetable? e.g. the unit doesn't rent out for a month. Or council applications or construction is delayed.
 
I have a feeling that Alex's BA is talking about a Single Unit Dwelling not a granny flat. These are able to be subdivided off and sold AND must be under 70sqm if it's in WA. They require 1/2 to 2/3rd of the normal lot size.

Alex is this in WA or another state?

Yep it's a single unit dwelling (2 bed) & yes in WA
 
Yep it's a single unit dwelling (2 bed) & yes in WA

hi Alex

question for you, will the single unit dwelling have its own driveway and garaging? if so is it a corner block you need to get? if this is the case like the other posters have said it may be wise to build a larger dwelling.
 
Hi

Thanks for your input

This is my chosen strategy as I can only afford to be NG for the 12 months it takes to construct the 2 bed unit. Once its constructed I will move out of my parents house back into my ppor. Properties need to be cashflow neutral/positive by the time I move.

I weighed all that up and I cant afford all the costs associated with waiting including the subdivision/application expense, the holding costs (NG) whilst waiting (its a long waiting period to go through), and nope I wont be subdividing until way way way into the future or maybe in a few years time, i dunno. Anyway this works for me and my $58 k salary.

Yes i realise that. But the process is the same either way.
From where im sitting this is how i see it. Take it as you will.

-The house may take an extra 2-3 months but can be done in your 12 month time frame from go to wohoa
- you dont have to subdivide to enjoy cashflow, but will for equity.
- the yield will be greater with more rents
- you will manafacture usable equity to use for the next purchase.
- you wont be paying for a dual occ site just to put a gf. Buy a cheaper gf site to do that instead.
- the requirements to build a gf and to subdivide a gf will vary.
- I would imagine much easier to finance as comparables will be available.

To name a few.

Cheers.
 
Check financing this strategy

we have run into many issues in NSW where the valuers wontsee the value of the build costadding to the property value.

This is more so in below median burbs, and becomes less of an issue as the main house median price rises in value.

Typically 70 c in the dollar on build costs are added to value in the lower end burbs.

Over time, as the granny stock has become a bit more common, valuers are getting used to it and more comparable stock is coming on the market.

With the legislation being newish in Perth, I can see some reluctance for valurs to accept the stock to be valued as per cost.


Also, note some lenders will NOT do a dual occ/granny above 70 to 80 %, check that your lender will. I recall you used ANZ previously- perhaps not the best fit for a granny build strategy.

ta
rolf
 
Yes i realise that. But the process is the same either way.
From where im sitting this is how i see it. Take it as you will.

-The house may take an extra 2-3 months but can be done in your 12 month time frame from go to wohoa
- you dont have to subdivide to enjoy cashflow, but will for equity.
- the yield will be greater with more rents
- you will manafacture usable equity to use for the next purchase.
- you wont be paying for a dual occ site just to put a gf. Buy a cheaper gf site to do that instead.
- the requirements to build a gf and to subdivide a gf will vary.
- I would imagine much easier to finance as comparables will be available.

To name a few.

Cheers.

However there are certain blocks in Perth which aren't large enough to subdivide in the traditional way but are large enough to do this strategy. They are the odd size blocks.

IF this is what Alex's BA is suggesting then it can be a sounds strategy.

For example, there might be a 500sqm R30 block out there. It can produce a 300sqm block and a 200sqm single dwelling block.
In a retain and build scenario it is trickier to find the block and retainable house but let's say it's an R20 750sqm block and the house takes up 450sqm the remaining 300sqm is not enough for a normal subdivision but you can build a single dwelling on it.
 
Are you going to project manage the development yourself?

Are you ready for 12+ months of extra stress in your life right now?

Are you sure you have the income and surplus cashflow to do a project like this?

What about instead just buying an old 2-bed villa with future renovation potential in a good suburb close to the CBD and walking distance to a train station?
 
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