I have been an avid reader of this forum for 5 years now and I have learned an incredible amount of knowledge from this wonderful community. It has played a large part in my short investment life and there are many well known forum members who helped me out/shaped my decisions along the way. Big thank you to all.
I guess it is time to contribute something back by diarising my new project in Brisbane. It is uncharted territory for me, a project in terms of size (7) and location (interstate), so I have a project manager right from the beginning. My role is to make decisions, sign paperwork and learn (haven't I already!!). And hopefully anyone reading this will help me to steer this thing along the way and enjoy the ride.
First decision was why do it. I have reached the point where simple buy and hold will not lead me where I want to go. I have had several buy and holds, a not so professional renovation, a relatively successful subdivision, a failed development which is now a dud B&H in my portfolio, and a smaller 4 unit development taking place currently in Melbourne. Develop to hold or sell down is a great way of purchasing new properties at a discount, with instant equity built-in so the process hopefully can be repeated, and enjoying the cashflow and depreciation that comes with it.
Second decision was where to do it. I chose Brisbane because I feel that it is in the right part of the property cycle to be developing in. The third largest capital city in Australia with a lower median house price than many other cities, well known to follow property booms in Sydney. The entry point is also lower compared to other states, giving me more choices of the types of development that can be done within my financial means. I focus on inner city areas within 10km of CBD for maximal capital gain as some units will be held.
So the contract went unconditional on Christmas eve and here are some facts at this point in time.
Site: 610sqm corner block 8km from city, in a good part of a gentrifying suburb
Proposal: 7 units three storey walk up, 6x 2B2B and 1x 3B2B units, 4 of the north facing units have city views. Average size of the units are 79sqm plus a 13-15sqm balcony. All units have an undercover carpark and there are two visitor carparks.
Buying process: The site was DA approved listed as EOI. The vendors did not care too much about settlement duration which was great! It took them at least 9 months to get the DA. I decided to go with a cash unconditional contract with a 31/3/15 settlement and it got accepted. The closest offer was also same price but with a few conditions. Happy to go unconditional as there was no further DD items left unchecked when the offer was made.
So the numbers:
Land cost: $660K (94K per unit)
Construction cost: 1.54M (220K per unit)
Total development cost (including interest less GST input tax credits): 2.46M
End value: 3.06M
End value less GST collected: 2.84M
Profit: 381K (based on sell 4 and keep 3) and will be higher or lower depending on if I am keeping more or less.
Margin on development cost 15.5%
Estimated timeline:
(chill out for the next few days, bit of meditation)
working drawings start as soon as people are back in January, already contacted the architect company who put the DA through and they have an in-house engineering firm. Brief meeting on 5th of Jan to discuss things.
settlement 31/3/15
demolition and begin construction April 2015
completion Jan 2016
When we first looked at this site it appeared that the margin was going to be well over 20% and close to 25%. However after checking with three high volume unit builders in the area the estimated construction cost per unit was 220K instead of 190K as initially thought. Trades are apparently getting more expensive. 210K profit was wiped out as a result and further items identified during a more detailed feasibility cut the profit a bit further. Once it went under 20% I lost interest, for a few days... But very soon after I came back to the deal.
The two main factors in this most difficult decision so far (ie: going ahead at 15.5% margin) were:
1. shorter turnaround in a DA approved site
Cash required is 750K and that represents a 50% return on investment over 12 months, not 24 months or longer.
2. ~4% project management fee
...which makes the actual deal bang on 20% margin - in other words I pay 20% of my profit to the most important person on my team, who has the experience to see this viable project through.
Other factors:
1. Definitely did not over pay per site by checking several unit sites and what other developers paid for (100-141K per site)
2. Good recent sales data backing end value and market is rising.
3. Ability to hold all at projected rental once complete.
4. Thorough feasibility not back of envelope style deal cruncher.
So here you go folks. I will update things throughout the year. I feel that I have just been strapped to a high speed roller coaster. In January this thing will go full speed and it's gonna be a bit bumpy.
I guess it is time to contribute something back by diarising my new project in Brisbane. It is uncharted territory for me, a project in terms of size (7) and location (interstate), so I have a project manager right from the beginning. My role is to make decisions, sign paperwork and learn (haven't I already!!). And hopefully anyone reading this will help me to steer this thing along the way and enjoy the ride.
First decision was why do it. I have reached the point where simple buy and hold will not lead me where I want to go. I have had several buy and holds, a not so professional renovation, a relatively successful subdivision, a failed development which is now a dud B&H in my portfolio, and a smaller 4 unit development taking place currently in Melbourne. Develop to hold or sell down is a great way of purchasing new properties at a discount, with instant equity built-in so the process hopefully can be repeated, and enjoying the cashflow and depreciation that comes with it.
Second decision was where to do it. I chose Brisbane because I feel that it is in the right part of the property cycle to be developing in. The third largest capital city in Australia with a lower median house price than many other cities, well known to follow property booms in Sydney. The entry point is also lower compared to other states, giving me more choices of the types of development that can be done within my financial means. I focus on inner city areas within 10km of CBD for maximal capital gain as some units will be held.
So the contract went unconditional on Christmas eve and here are some facts at this point in time.
Site: 610sqm corner block 8km from city, in a good part of a gentrifying suburb
Proposal: 7 units three storey walk up, 6x 2B2B and 1x 3B2B units, 4 of the north facing units have city views. Average size of the units are 79sqm plus a 13-15sqm balcony. All units have an undercover carpark and there are two visitor carparks.
Buying process: The site was DA approved listed as EOI. The vendors did not care too much about settlement duration which was great! It took them at least 9 months to get the DA. I decided to go with a cash unconditional contract with a 31/3/15 settlement and it got accepted. The closest offer was also same price but with a few conditions. Happy to go unconditional as there was no further DD items left unchecked when the offer was made.
So the numbers:
Land cost: $660K (94K per unit)
Construction cost: 1.54M (220K per unit)
Total development cost (including interest less GST input tax credits): 2.46M
End value: 3.06M
End value less GST collected: 2.84M
Profit: 381K (based on sell 4 and keep 3) and will be higher or lower depending on if I am keeping more or less.
Margin on development cost 15.5%
Estimated timeline:
(chill out for the next few days, bit of meditation)
working drawings start as soon as people are back in January, already contacted the architect company who put the DA through and they have an in-house engineering firm. Brief meeting on 5th of Jan to discuss things.
settlement 31/3/15
demolition and begin construction April 2015
completion Jan 2016
When we first looked at this site it appeared that the margin was going to be well over 20% and close to 25%. However after checking with three high volume unit builders in the area the estimated construction cost per unit was 220K instead of 190K as initially thought. Trades are apparently getting more expensive. 210K profit was wiped out as a result and further items identified during a more detailed feasibility cut the profit a bit further. Once it went under 20% I lost interest, for a few days... But very soon after I came back to the deal.
The two main factors in this most difficult decision so far (ie: going ahead at 15.5% margin) were:
1. shorter turnaround in a DA approved site
Cash required is 750K and that represents a 50% return on investment over 12 months, not 24 months or longer.
2. ~4% project management fee
...which makes the actual deal bang on 20% margin - in other words I pay 20% of my profit to the most important person on my team, who has the experience to see this viable project through.
Other factors:
1. Definitely did not over pay per site by checking several unit sites and what other developers paid for (100-141K per site)
2. Good recent sales data backing end value and market is rising.
3. Ability to hold all at projected rental once complete.
4. Thorough feasibility not back of envelope style deal cruncher.
So here you go folks. I will update things throughout the year. I feel that I have just been strapped to a high speed roller coaster. In January this thing will go full speed and it's gonna be a bit bumpy.