Built, Sell or Leave as is

Hi everyone,

I'm running out of paper in the office number crunching and writing the positives and negatives for either selling or developing my IP1

Looks like this

Value - $600k
Debt - $400k
equity - $200k

Rented @ 575pw after costs its roughly Neg CF by $80pw on 7% rates but after tax its $82.50pw +


Build DA approved duplex that look like this ( note the loss of $200k equity)

Land value $400k
Build Contract $425k
Finish costs $125k
Total build $550k
Total Costs $950k

Sale price $650k x2 based on sales in the last 4 weeks 650k to 700k
Total Income $1.3mil
Profit $350k

My mental dilemma is yes the profit is higher, but I have to borrow a further $550k to build and only increase my return by $150k ???? It is a 27% return :D but I guess I'm getting a little cautious in my old age
In the current market I'd play it safe - wait a bit before gearing up again. Reduce the risk for now and review in 6 mths, that's my advice!
I did view this earlier, and not being a maths whizz, left it alone.

.....but I do tend to agree with sizzler and I'd wait it out a bit longer if its not costing you too much. You can always do your plan later, its an anytime option, and as it will cost you money (while your demolishing and rebuilding etc), I'd be dubious to take the plunge....but thats just me. I'm currently sitting on two subdividable blocks, and they haven't lost any value just sitting there.
Sorry Andrew L, i also viewed your post. i think the reason it's so hard to decide is because it's pretty marginal. I suppose that's a sign. I would definitely keep the property, try & be patient and look at developing a few years down the track. I'm sure in 5 years those numbers will look a lot more attractive.
I am also not good enough at maths (or developing) to know what to make of the numbers.

We are in a similar situation with a double block that gives us 72 perches with two street access and a few options on how to develop it.

Too many options = too hard to make a decision :eek:.

While we are waiting to see what we will do, we do nothing, but these are paying for themselves, so we are not forced to make a decision.

The thought of borrowing a lot of money to develop them, having never developed before, is not something that excites us in this financial climate. I reckon we would have trouble getting finance anyway.

The town planner who we saw when we initially bought the second block told us that he has seen numerous "mum and dad" developers divorce after the stress of taking on a role they are new to. If we ever develop it, we will probably hand it to someone to manage it. We give up some profit, but we also give up the headaches (mostly) to someone who knows what they are doing.

It is safe right now to sit on them.
Andrew - costs I see (having done this before) are:
Interest on $900k ($400k + $550k borrowed @ 7.5% averaging $675k over 12 months) approx $$55,000
Real Estate Agents Fees @ 2.5% of sale value ($1.3mill) approx $32,500
GST input credit (GST you pay on the $550k build costs) approx (-$50,000) - yes you can claim this GST back!
GST to be paid on sales of $1.3mill approx $120,000
Loan to be paid out = $950,000
Original investment/equity = $200,000

Overall profit = $1,300,000(sale price) - $950,000(loans) - $200,000(equity) - $55,000(interest) - $32,500(REFees) + $50,000(GSTInput) - $120,000(GSTPayable) = $7500LOSS

Finance - not a problem if you go to the bank with a spreadsheet showing best/expected/worst case scenarios - presuming the expected is profitable.

Remember also if you do make a profit you then also pay Capital Gains Tax (30%) on that profit.
Oh and the one thing nobody takes into account is the landscape design (about $1000) the actual landscaping (how long is a piece of string? but count minimum of $10k per unit) and all the extras such a surveyors fees for subdivision, new crossovers, driveways and maybe footpaths if they get damaged by the builders, fences, clotheslines etc etc.

Then to purchase another property (to replace what you sold) you are up for another lot of Stamp Duty also.

Redevelopment is a great way to earn big $$ but to make money on your property you would have to either:
--Get 3 units on your site - have you spoken to the council to see if this is an option?
--Get your design and development costs down to around $400,000-$450,000 - how many builders have you got quotes from? Have you overspecced the designs for your area (eg put in too many luxury features such as glass splashbacks, granite benchtops and timber flooring)? Can you cut down the size of the units a bit without lowering the sale price?
Having said all that remember one thing in your favour is you will achieve capital gains of around 10% on $1.3mill - not on $600k (the current value) Presumably in a year when the units are finished you would be able to sell them for about $1.40-1.45mill - and this is where the profit lies in development the fact that the gains are doubled because you now have two properties! Not sure what the market is in Sydney but still strong in Melbourne. I have never let this worry me anyway, as if the market goes down you buy your next property at the lower prices, if it goes up then you pay more for the next development.
Food for thought :)
Good luck with whatever you do!!