Due diligence...the key to a successful development

[Sailesh Channan]

Sailesh,

the information you have provided is very interesting, but it would be helpful if you could share the depreciation tax deductions etc that is making this property positive after these deductions.

thanks.

Klausb

One of the greatest benefit of undergoing such a development is the equity generated from this development.

For an investor this means that this equity will help you accelerate your wealth creation and purchase multiple properties sooner, you are not relying on market growth for a profit or you can sell for a profit.

The other benefit is that the immediate equity is lower holding cost as income is related to property values.

The other major conrtibutor to lower holding costs is the amount of assistance you recieve from the tax man. It is a widely accepted fact that the higher your income the greater the tax benefit from your property.

The following scenario is based on an income of $70 000 and you will need to speak with your tax accountant to determine how these figures apply to you.

Property value.....................$550 000
loan Amount........................$457100
Rent @ $260 per duplex.........$520


Expenses
Interest @7%......................$31997
Property on going expenses....$5000
Total expenses.....................$36997

Income
Rent Income.......................$27040
Tax deductions...................$10632
Total Expenses....................$37672

Cashflow position.................$675 positive ( without one off deductions)

During the first year you will find that there will be several one off deductions that will make the cash flow look better.

Depending on your personal tax positions these properties could range from costing you $60 per week to positive cash flow up to $20 per week.

One of the ways you can reduce your holding cost is to sell one of the duplexes and rent the other. This has a huge impact on reducing your holding costs

 

[Keen]

Sailesh,

thanks for a very different post.

I recently bought land and am building (expected completion Mid April).

As with most people that build it has at times been stressful but will be very profitable (To build and all bank fees $175k, advised by real estate agent should be worth at least $220k).

I was indeed naive when I jumped in - didn't know much about site costs etc.

As far as picking a block (other than its location) what things should I also consider? Youv'e mentioned the slope (how bad is bad?) and I understand there would be costs for the removal of trees - so not a block with that resembles a forrest!, anything else you would recommend?

Regards and thanks

Keen

 

[Sailesh Channan]

Keen

Congratulations on your site purchase and subsequent successful development.

By choosing a simple site with minimal slope to the kerb you are simplifying the due diligence process. However in reality such blocks are hard to find...especially at the right place and in the right location.

Each site that you look at will have its challenges. Therefore when you are looking at a block you have to ensure you have looked at all your expenses associated with developing the site.

The reason I mentioned sloping sites is that these can be deceptive to the eye. Your costs on building on these sites can increase dramatically especially if you are building slab on ground. Some of the costs encounter here are retaining wall costs, slope of the driveway ( councils have certain gardients that are acceptable), sediment control, etc.

As an example, one sloping block I came across we had a sewer line going through the block. This is common when you are subdividing. The council will let you build over these as long as the correct engineering plans are submitted. However in this case if we were to level the block then we had to do a cut and fill. By cutting the block we would be close to the sewer line and the minimum clearance required was 1.5m. Therefore in order to build the sewer line would need to re laid at huge cost This would add thousands to the cost of the development.

Therefore the only way you can avoid such unexpected nasties through proper due diligence.

Of cause it helps if you know what to look out for.

 

[Keen]

Thanks for the tips Sailesh.

Keen