Buy an investment property vs developing two on a block.

[evshaun]

Hi Everyone,

We are currently in hiatus at the moment waiting to build our PPOR. That said, I'm already thinking about my next project once the build is complete.

I have the following options in mind with a budget of around $400 - $450k:

Option 1: We have a current investment property which is getting past it's used by date. It will need quite a bit of renovations in the coming years. My thought is we can tear it down and build two side by side on the block. We've looked at putting one on the back, but the block is too small for that given site of the current house. Estimate of the current house is $430K. Two new 3/1/1 would be around $480K - $500K each (conservative).

Option 2: Buy another property worth the $400 K.

The downside to option 1 is the holding costs and the lost of rent during the build phase plus any cost overruns during the build. This may eat into any of the profits we expect to gain. Although saying that, we are planning to hold the two units. The property is currently neutral geared. The two units will make it slightly positive, after taking into account depreciation. The risk in developing is also weighing on my mind, making sure we have enough capital to complete the build. Option 2 is definitely the less risky, and more tried and tested option.

Anyway, wanted to get some other views. Which way would you go and why?

 

[devank]

We were in similar situation a year ago. So I developed spreadsheet to do a bit of scenario forecasting.
- File -

We ended up building a granny flat.

You may want to change few things to suit your situation.

 

[evshaun]

Hi devank,

Wow a 20 year plan! We find our spreadsheets only go five years out, as by that stage, it's time to revise our goals again. Thanks, I'll look through it to see if there's anything I can incorporate to ours.

To be honest, we have talked about the development on and off for the last three years, though then the GFC hit and it got shelved. We have a spreadsheet somewhere with our past figures and I think I can make the figures work, as even if the capital has dropped in Melb, the rent in the area has stayed mostly the same. What I'm starting to find is my appetite for risk is waning. I'm wondering if I should go with the less risky option of buying another property instead of the development option of pulling down an existing property (which is costing us nothing to hold) and building, which would cost us a year of lost rent and interest payments.. etc.