Better to subdivide and sell off or build on it?

[BAZARI]

Hi all,

I wanted to throw a situation at you all and see what suggestions you may have:

I'm in the process of purchasing an IP in a suburb about 30km west of Melbourne that has the council approval/town planning to build a second dwelling in the back.
The home is on a corner and there is access on both sides for both parts of the land.

The final purchase price would be close to $215,000

I'm contemplating if I should build the proposed 2br unit on the spare land, or subdivide it and sell the land off.

If I decide to build, I would need to obtain the following:
Working drawings, soil test, building permit, land subdivision & fencing.
The unit will cost approx $110,000 to build (which includes the drawings, permits and soil test only).

In this case, I would have 2 homes at a price of around $325,000+
Both would be valued at around $380,000 once completed.

If I sell the land, I could get $65,000 meaning the existing home would have only cost approx $150,000 (215,000 - $65,000)

The rental returns would be $185+ p/w on the existing home, and $210+ p/w on the proposed unit. Both would provide good rental returns on the purchase price. on a 100% I.O. loan, the rental would almost cover the full mortgage payments.

Both situations seem good, but I'm worried about hidden costs and extra charges when building the unit. Maybe it's better to let someone else worry about this and sell the land off?

On the other hand, I'm thinking of just building the proposed unit and renovating the existing home during the contruction stages and holding onto them as the gains would be pretty good.
The existing home could be sold for $190,000 (after renos) and the unit could sell for $190,000 (compared to the current market)

And some quick questions:
Can anyone give me any idea how much subdivision usually costs in these situations? And how the long the process usually takes?
Will i be liable to pay the full CGT on the land that I subdivide and sell off?
If so, do you know how they would calculate the land values to base the profits on?

Thanks in advance,

Rick

 

[The Y-man]

My understating is that unless you can do the building bit cost effectivley (as some can), you could be better off doing a "divide and sell".

Cheers,

The Y-man

 

[Twitch]

Except often to divide you must first build.

 

[BAZARI]

Hey Twitch, I've never heard of that before...

 

[BAZARI]

Just spoke to the council, and they said I'm looking at around $4,000 for the subdivision (but more if I need a crossover for the drive way entrance)

They also said that subdivision can be done before building, so I can sell off the land before building, but the new owner must build a house according to my plans that have been approved.

Rich

 

[Giulio Taranto]

So the plans have been stamped? 4k sounds about right for the sub division, although id give a surveor a call just to get a mor accurate explanantion and quote.

How big is the proposed dwelling?
Did you get a builder to quote you?

 

[nats12]

if you're buying with permits to already build in the backyard, you're going to have to throw out that permit and start again to complete a subdivision, which then allows you to sell the land to someone else who then applies for a building permit to get the house up.

arborist report, survey, permits from council I would say $4k or so. the surveyor alone could be $2.5k

 

[gussman]

if you're buying with permits to already build in the backyard, you're going to have to throw out that permit and start again to complete a subdivision, which then allows you to sell the land to someone else who then applies for a building permit to get the house up.

What gives you that idea most councils will allow you to enter into a section 173 agreement to allow you to subdivide prior to construction. The agreement stipulates the unit must be built in accordance with the previous permit. They generally cost up to 1K. I would say 7-8K would be a better alllowance for subdivsion and incedentals.

 

[Mark C]

Rick,

I know its being speculative but what about do nothing, rent the property as is and hold it for a few years until you build some equity up. Then build or cut and sell.

I've don't this with a 4 unit site in Mandurah, there is a heap of equity in the deal now and I can demolish, build and pay all expenses without putting my hand in my pocket.

Mark

 

[GreenTreeFrog]

How big is the land?

We have a corner block 950m2 with an old three bedroom house and we built a colonial style 4 bedroom out the back facing the other street. Worked out fantastic.

Rent pays the mortgage with some left over.

To subdivide will cost us about $25k as we have to put a separate sewerage pit or something to do with sewerage.

We have taken the whole subdivision process as far as we can with surveyors and lodging with council so it can sit there until we are ready to sell.

So even if they change the subdivision laws in this area again we are safe for 5 years.

Have you factored in the internal furnishings and external landscaping for the new place?

I would build (if the figures were really good) because I love a challenge.

 

[BAZARI]

Thanks Marc, but the cost of the house and land is priced accordingly due to the developement potential. It's not financially feasable to rent it out as is and have to pay $220 p/w out of my own pocket to maintain the I.O. mortgage (the $220 is After I receive $180 in rental income)
If I build and rent both out I'm only looking to lose approx $40 p/w to support them.
If I subdivide and sell of, I'm looking at losing approx $20 p/w to maintain the existing home.
I'm on a moderate wage, and cannot afford to pay more than $50 p/w for this IP.

Nats12 -
I'm allowed to subdivide without building, but the plans that I already have Must be used to construct. If another buyer decided to get his owns plans, they will draw new ones up exactly the same as what I have now. No use doing it tiwce, and my plans are good until Feb 2008.

I was informed that I would need a surveyer to submit the subdivided plans to the council, and that they would need to organise to have the utilities prepared on the site (electricity, water etc..)
This process takes about 3 months, and there's a 99.9% chance it will be approved as long as all the requirements are met.
The cost of all this can easily be included in the sale price of the land so It should only be a short-time expense.

I'm thinking about getting a surveyer to subdivide the land and put the land on the market. During the 3 month counsil approval period I will do some renos on the existing home and have rented.
If the land doesn't sell, I'll start building. If it does sell, I would have a $150k IP that's generating positive cashflow (The rent should cover the mortgage, but not all the expenses - that's where the tax benefits help out).

Giulio Taranto - the plans have been approved (Not sure what stamp they use =) and I have a copy of the council meeting's minutes on the day of the approval.
I have not received an accurate quote yet, but a few months ago I was looking at building 2 18sq units (3br, 2bath with garage) on a 900sq block.
The average quotes came back at around $110,000 and as low as $98,000 (with basic inclusions)

The current plans are to build a 2br, 1bath unit that's around 14sq so I should be looking at around the same price range to be conservative.

Rich

 

[Mark C]

It's not financially feasable to rent it out as is and have to pay $220 p/w out of my own pocket to maintain the I.O. mortgage (the $220 is After I receive $180 in rental income)

Lets explore what your saying "It's not financially feasable".

I'm glad you didn't tell me this a few years ago, I'm now paying around $13,000 per week in holding costs "out of my own pocket".

But if you still believe it's not feasible, then your right.

I on the other hand believe there are many ways to make something feasible.

Mark

 

[BAZARI]

Hi Marc,

Is that $13,000 the net or gross figure per week that's coming out of your pocket?
What I mean is - are you receiving any rental income that makes up the $13,000 and is the $13,000 the mortgage repayments, or what you have to pay as the difference to cover the mortgage repayments?
I hope that made sense =P

Maybe I worded my post incorrectly. I meant to say that it's not Possible for me to have an IP that costs me $220 p/w out of my own pocket to maintain at this stage.

Cheers

 

[Mark C]

Rich,

$13K, $5K or $50K is not the point, your post was correct as I read it.

Your making a statement "it's not possible for me". Then you are correct, if you had said "There is a way I just don't know it yet" then you would also be correct.

I hear people say "I cant..." many times and they are also right. If you believe you cant then you cant.

Mark

PS $13K is after all income on investments, ouch!

 

[Twitch]

is this a hint? equity <--> income

 

[BAZARI]

*Sigh...*

Please don't start preaching Marc, I've heard and read those words many many times.
In those terms - your right, I CAN do it, but I don't want to as it means that I would have to re-arrange many things in my life.

As your not familiar with my current situation, it's not right to make the illusion that it's that simple.
And i hear you now say "But it IS simple"
You have to realise that it's prioritisation. I can surely do anything with investments, but at what cost? In my case the benefits are not justified.
I'm a very positive person, but every financial decision I make is mathematical, not personal and certainly not irrational.

I choose not to be naive (I'm not saying you are.)

I don't have the patience to sit here for the next hour and type up the reasons behind why I say this is not possible for me.
You'll just have to take my word for it

Rich

 

[Peter Parker]

I'm in the process of purchasing an IP in a suburb about 30km west of Melbourne that has the council approval/town planning to build a second dwelling in the back.

I've done a few back of the envelope calculations for similar cheap suburbs and the figures weren't good enough to interest me in going further (especially when considering work vs reward).

The yield you'd get is only a bit better than just buying 2 x $190k houses and not subdividing. Admittedly you'd have the depreciation of the new place if you went ahead with the plan, but you'd only have less square metreage in land.

If two $190k houses were built post 1987 the depreciation difference between it and one new building would be far less than if the houses were older. And 95% less work required!

Hence there would need to be a lot of fine-tuning to make it worthwhile and much better than the 'buy 2 houses and hold' suggested above. Eg building 3 units on a 900m2 block. Or maybe a dearer area where rent is better, unit living is more sought-after so the economics of building are better.

Peter

 

[Giulio Taranto]

some great points Spiderman. Then again some people just love the challange of building