Beckenham, WA Triplex Development

Hiya Folks

I'd like to share my journey of a 3 villa development in Beckenham, WA including the feasibility numbers so that those contemplating a similar development in this suburb would have an idea of the cost involved.

The Development Site:
The site a 3x1 1950s dwelling on 964 sqm was purchase in Oct 2003 for $160,000 and currently zoned R35 making it a 3 unit site. It has been rented since 2003 and still is for $320 per week.

The dwelling is showing its age and requiring more and more repairs and maintenance on it. The decision was made last year to put 3 units on the land to execute the cash flow stage of our strategy.

The property was valued recently at $400,000 (land $330k & dwelling $70k). There is nothing out there similar for $400k more like between 475 to 500k. This was performed by licensed valuers and not estate agents doing a drive by style inspection. I have no idea how they can grossly under estimate the value of this site. It will impact on my financing position as i'd probably have to chip in some money.

Development Goal
We are building three 3x2x2 villas plus a media room with mid level specs. Each villa averages about 185 m2. We are intending to hold all 3 villas for cash flow.

Feasibility:

* site cost 400,000
* holding cost 25,000
* rates 2,000
* design plans 6,000
* contour survey 1,000
* geotech 1,500
* storm water design 1,500
* slab design 1,500
* engineers roof design 1,350
* 6 start energy report 1,000
* finance app fee 500
* DA & building license 3,800
* site works 120,500
* construction cost 638,000
* subdivision cost 3,500
* contingency 37,925
* consulting 3,000
* selling cost 45,000

TOTAL COST $1,293,075
End Value $500k @3 = $1,500,000
Gross margin 13.8%


I've not factored in net GST of approx 20k and under normal circumstances this project will not go ahead as it has not attained the 20% gross margin threshold.

For those considering Beckenham or any other site which has clay soil you must somehow get a good estimate of the site cost before purchasing the block. The geotech engineers wants the ENTIRE site to be dug out by 1m and replaced with clean sand and they have designed 18 soak wells :eek:

Out of the $120,500 for site cost the soak wells are $35,000 and earthworks $45,000 the rest are for demolition $17,000, water corp headworks $15,500 and western power dome $6,000.

At the moment, the plans are in council and DA is not far off.

My journey begins.
 
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TOTAL COST $1,293,075
End Value $500k @3 = $1,500,000
Gross margin 13.8%


under normal circumstances this project will not go ahead as it has not attained the 20% gross margin threshold. So this is a bad idea but Im going to do it anyway...

I fixed it for you.

I fail to see why you are proceding with this. Your cost is $1.3mil. Profit of +/-$200k.
You paid $160k and can potentially sell for up to $500k. A total increase of $340k (or $240k at $400k).
Why not sell the block - and go and find a profitable site?

The slightest hickup wipes out your profit margin and leaves you in the red.

I also dont understand why you are registering for GST if you are not selling them. Speak to your accountant - you should just have CGT to deal with - and given you wont make a profit, there wont be any tax to pay anyway.

Dont proceed with this!

Blacky
 
Ditto.
The DA/plans are good for 2 years, hold off and see what happens during this period, just rent it out in the interim.

If you are lucky enough to achieve growth of end value (villas) during this period, then perhaps review/proceed. Forget 20% profit, you need to be making money, otherwise you are getting burnt, akin with throwing money down the toilet.

Certainly not one I would proceed with.


MTR:)
 
I fixed it for you.

I fail to see why you are proceding with this. Your cost is $1.3mil. Profit of +/-$200k.
You paid $160k and can potentially sell for up to $500k. A total increase of $340k (or $240k at $400k).
Why not sell the block - and go and find a profitable site?

The slightest hickup wipes out your profit margin and leaves you in the red.

I also dont understand why you are registering for GST if you are not selling them. Speak to your accountant - you should just have CGT to deal with - and given you wont make a profit, there wont be any tax to pay anyway.

Dont proceed with this!

Blacky

hi Blacky

i think you've misunderstood the GST bit, i've not actually registered for it but only making a point that if i were to sell these villas then i'd have to allow for the net gst payable in the gross margin.

The decision to proceed forward is the positive cash flow it will provide us in the future in addition to the capital growth whilst holding onto the assets.
 
The decision to proceed forward is the positive cash flow it will provide us in the future in addition to the capital growth whilst holding onto the assets.

Is it actually cash flow positive? I didn't think it would be looking at the rentals of 3x2s in the area.
 
Your cash flow play should (could) be to sell the land (there's your positive cash flow) then repeat the process and build to hold. Makes no sense building this one.
 
at $450 pw it'll return 7% which is neutral this is at the low end but these should get between 450 to 500 pw conservatively.

$450/week each at $1.3 million is around a 5.4% gross yield on my calculations.

I'm all for developing for cashflow (its my main strategy), but this one doesn't make much sense to me. Sounds like a lot of effort for even a 7% gross yield.
 
$450/week each at $1.3 million is around a 5.4% gross yield on my calculations.

I'm all for developing for cashflow (its my main strategy), but this one doesn't make much sense to me. Sounds like a lot of effort for even a 7% gross yield.

when i calculate the yield i'm actually using the original site cost which is 160k not the 400k current value. that way i'm looking at it is its costing nothing to hold whilst the asset is appreciating. am i completely wrong in my analysis?
 
Ditto.
The DA/plans are good for 2 years, hold off and see what happens during this period, just rent it out in the interim.

hi MTR

yes holding off building whilst having the DA from council is an option.

another option is to reduce the construction cost by 40k.
 
Yes, and no.
I would be looking at it as the actual current value. Assume you have 1.5mil invested, what is the return on that money?
Can you get better returns elsewhere?
Even now, assuming your current calculations (property val at $160k) you have a gross return of 10%+. Though in real terms it is 3.3% as you could sell for $500k and invest elsewhere.

Even so - all that work to retain neutral CF?. Not worth the risk.

I would either hold, or sell (selling is looking good to me). Can you sub-divide and sell the lots as is?
Sell it for $500k and take the money and invest it elswhere. $500k deposit opens up a number of decent options to you.

I still dont get the GST. You are not a developer. You are an investor. Therefore you should apply CGT not GST. But again - speak to your accountant.

Blacky
 
Stumpies returns could be higher.

If you take out $45k selling fees as he's holding and keep the contingency money out of it then there is better gross returns.

Don't forget if he sells it as is at the moment then he'll have to pay CGT and might only end up with around $250k.

If he developments and holds there is at least a $400k equity available to him to do another development.

This is pretty much what I ended up doing with Westminster. I knew going into it, the profit margin was poor but I needed to realise the asset and the rents on it helped with serviceability for other projects. The equity in them allowed the next project to start as well.
 
Your cash flow play should (could) be to sell the land (there's your positive cash flow) then repeat the process and build to hold. Makes no sense building this one.

That's a good play Oscar, problem is in Perth at the moment the development sites continue to rise, so unless you can look outside the square and do something creative it is difficult to find a development site that stacks up. Not saying its impossible, but its hard work.

Stumpies also building in an area with clay soil, unfortunately its a cost killer.
 
I think I calculate Stumpies gross profit % at 41% if we use original cost.

I get WHY we use current values to determine yield/profit BUT all that does in this instance is tell you that you wouldn't purchase at this price in this area for a development.

$350k gross/$250k nett 'instant' income vs $500k from the development which if holding you can use to LOC for next development.
 
The way i see it you have to weigh up risk vs reward vs experience. Sometimes experience is worth the most. If it makes sense and creates equity cashflow and experience then it may be the right path for you if you have all your bases covered. Just sucks about all the site costs involved.

I relate this sort of situation the same as securing a development site for 400k in a market where its valued at 500k. The numbers work at the 400k price (20%+) but its worth 500k and now it doesnt stack up. Would you really pass that opportunity up? Or develop and move onto the next project.

Cheers
 
I still dont get the GST. You are not a developer. You are an investor. Therefore you should apply CGT not GST. But again - speak to your accountant.

Blacky

Grey area unfortunately.

What my accountant advised is if you are making anything over $75K profit on selling you are seen as a developer.

If Stumpie continues to develop as a strategy then ATO will back date and charge interest on GST that is payable. I know someone who got caught out. If you hold all three unit/villas and continue to develop, you will still pay GST if you sell prior to 5 years.

Unfortunately the tax man takes a bite wherever he can. I wish there was a way around this, catching up again with my accountant to find out whether buying in trusts and some in various personal names will somehow help with reducing tax??? Probably a very long shot though.

I agree need to verify everything with accountant.
 
Grey area unfortunately.

What my accountant advised is if you are making anything over $75K profit on selling you are seen as a developer.

If Stumpie continues to develop as a strategy then ATO will back date and charge interest on GST that is payable. I know someone who got caught out. If you hold all three unit/villas and continue to develop, you will still pay GST if you sell prior to 5 years.

Unfortunately the tax man takes a bite wherever he can. I wish there was a way around this, catching up again with my accountant to find out whether buying in trusts and some in various personal names will somehow help with reducing tax??? Probably a very long shot though.

I agree need to verify everything with accountant.

That is bad advice from your accountant. The nature of the deal/enterprise is what affects whether gst is payable or not, profit levels are irrelevant. Imagine if you developed 200 apartments in the city but due to market conditions you only broke even. Gst would absolutely be payable on the sale.

The 75K gst threshold refers to turnover for a business, once it turns over more than 75K it has to be registered for gst.
 
Stumpies returns could be higher.

If you take out $45k selling fees as he's holding and keep the contingency money out of it then there is better gross returns.

Don't forget if he sells it as is at the moment then he'll have to pay CGT and might only end up with around $250k.

If he developments and holds there is at least a $400k equity available to him to do another development.

This is pretty much what I ended up doing with Westminster. I knew going into it, the profit margin was poor but I needed to realise the asset and the rents on it helped with serviceability for other projects. The equity in them allowed the next project to start as well.

Hmm. Valid points.

Stumpie. What's your forecast lvr on completion?
 
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