First development 8.65% ROI and $100pw cashflow positive

Well done. The development didn't kill you and has a positive return- which is good going for your first development. Your next one will be more streamlined and will return better margins I expect. It is the lessons learnt that are the most valuable thing to take away.

I have found that it is my mistakes I have learnt from - and I have profited from them next time around.
 
i've thought of wanting to do a development soon aswell.....when i calculate the numbers, doesn't seem to be much profit involved at times.
thinking whether the best way to learn is to just throw oneself in and give it a go.....and take the first one as a learning curve or are there any courses that one woudl recommend ?
 
Congratulations on the first one down. I think it is a good result even if it is slightly less than anticipated.

I like your lessons learned.

While the higher value land component may make more, given some of the subdivision costs are fixed, it can increase your risk also, as any delays cost more. So it is risk for reward.

Well done!

Blacky
 
Its cash flow positive, so who cares about capital gain or equity level at this early stage???
I think this is a terrible attitude to take into a development. If the development doesn't stack up, walk away from it. Don't hang your hat on future growth.

Blacky
 
Great job on your first development and you sound like you have the right attitude Erica towards it all ;)

Can I ask 1 question (which you may already have answered in one of your replies but I didn't have time to read through each one).....for a relatively straight forward development, what caused it to drag out for almost 3yrs?
 
Hey Erica,
congrats on the development. My only question is since you were planning to buy and hold both residences - why did you bother to subdivide? Why not just build the second residence and then worry about subdivision down the track if you ever wanted to sell separately?

Cheers
Rohan
 
Hi Brady

That one in Camden Park was listed on Friday, only one open held the next day (which I missed as I was away for the weekend camping), I rang the agent Monday to arrange a viewing- he told me it was under contract already, WTF, again, gone in 3 days!!! AAARRRGH so frustrating.
 
Hi Rohan

To be honest I don't know if the council would approve construction of a second dwelling without subdivision?? Anyone else know.

Even if council would allow a build without subdivision, I assume the bank wouldn't like it much, it is very uncommon here in SA, there would be literally NO comparable sales of 2 properties on one title to correctly value, therefor any valuation would be conservitively LOW, and finance would be very hard to get for the construction of the second dwelling. I'm certainly not in the position to build using cash- I needed the new title for the subdivided lot as security to obtain the construction loan.

Plus, hypothetically, if you did build 2 houses on one allotment and you came into financial diffiulty and needed to sell in a hurry -you reduce your pool of prospective buyers hugelly (down to investors only), so in my oppinion it would be difficult to sell and more than likely you'd have to sell it cheap -well cheap in comparison to 2 seperate titled allotments).

In my oppinion, 2 dewlling on one allotment- not really a good idea.

I like to invest as safelly as possibly, if i had to sell right now, i would just sell one, easy enough, and would not make a loss.
 
That one in Camden Park was listed on Friday, only one open held the next day (which I missed as I was away for the weekend camping), I rang the agent Monday to arrange a viewing- he told me it was under contract already, WTF, again, gone in 3 days!!! AAARRRGH so frustrating.
I would say unlucky Erica but you need to act super fast with these types of properties, because ever body likes them because it's usually pretty straigt forward. 3 days is too late, need to be ready to make an unconditional offer on day 1 to secure these.
 
Hey Erica,
congrats on the development. My only question is since you were planning to buy and hold both residences - why did you bother to subdivide? Why not just build the second residence and then worry about subdivision down the track if you ever wanted to sell separately?

Cheers
Rohan
Lack of subdivision would value very poorly. It's much better to extract the full available equity.
 
Hi Erica, not too bad an outcome for a 1st attempt. You were a tad late & missed all the growth of 07.

It could be stressful even if you get the 20% gain.

And for those with the question why not build 1st before subdivision, probably the council would not approve the building without the subdivision.

KY
 
I would also like to offer my congrats ... sure ... you didn't win the lotto but the experience gained is priceless.

How much would you have learnt about slopes and infrastructure and build costs etc if you'd have had the perfect block from the start? Nothing ... which could have been dangerous when you launched into your next project thinking "this is money for jam" and "I know it all".

Because of the quirks of this project, you are more aware of what you have to look for in a block of land - how to go about costings - and you didn't lose any money learning ... well done!
 
Nice work Erica. You're never going to learn unless you get into a deal! The way I see if, if you made a 40k profit, then fantastic. you've learnt a hell of a lot more for the next deal you make. You know what they say.... make the mistakes fast when they don't cost you as much $.

Thank you for sharing your story though. For my first development which i'm working on now, I engaged a civil engineer (to avoid any of those capital works nasties that could pop up) and a town planner (to get the project done properly and quicker than I could). I'm a lot more certain of my costs and I've also covered off a lot more of the 'knock backs' that may pop up when council analyses the application. here's hoping anyway! good luck with your next development :)
 
Well done mate!

A profit is a profit, only difference is the %, end of day, you will always get something out of it, and not all can be measured by financials
 
Well, not the amazing 20% ROI developers look for but better than a poke in the eye, for a first try anyway...

Project: Retain front house and subdivide off the back yard then build a new house on the hammerhead style block, long term holds.

Timeline: 3 years to completion (thought it'd only take 2yrs)
Lesson 1- it will take longer than you imagine!

Costs:
Purchace price 3 bed brick house on 820m block $290,000 Morphett Vale, SA.
Stamp duty & closing costs $15,000
Subdivision costs all up $40,000 (budget was $30,000, but with a sewer main extension which was not forseen, cost blow out)
Lesson 2. have a nice big line of credit available if you plan to undertake subdivisions.
Construction $170,000 full turn key, low level project home with SA builder, 3 bed, 1 bath, 1 carport
Holding costs $5,000 cash flow negative (front house tennanted the whole time, 5% interest rates, some good depreciation on the front house)

Total spent all up: $520,000
Bank valuations : $565,000
NET capital gain: $45,000 (8.65% ROI)
Lesson number 3. do not count on market gains during the time you take to subdivide and build, this suburb had a slide backwards in prices over the past 3 yrs, from my initial ROI projections much less.

Both properties tennanted for combined rent of $680 per week, which makes them $100pw cash flow positive.


OK, I've shared, over to you guys for a critique of my strategy.....
Thanks for the great post. Is the bank valuation similar to what you think you could get in selling the house? What was your anticipated profit margin before starting the project? What was much of the rest of the subdivision costs?
 
I think the very fact you actually made a positive ROI is something to be pleased with to begin with! From what I understand many don't on projects like this.

It takes a lot of guts and effort to undertake something like this for the first time, especially working fully time as well, and it only becomes clear what you don't know or what you haven't budgeted for when you get hit with the bill. Just the knowledge you'll take away from it is probably worth an extra 5% or more ROI to begin with.

As far as finding these properties goes, I believe it takes more than just waiting for the right one to come along. We regularly (once a week or more) speak to over 5 agents in a couple of areas, and we also do letter box drops every 6-8 months. From my (incredibly limited) experience most good deals are transacted before marketing, unless the vendor is particularly greedy.

Really looking forward to hearing about your next project!
 
Hi mgs4

Quote:"Is the bank valuation similar to what you think you could get in selling the house?"
- I'm not to sure that I'd get much more than the valuation done for the bank- keeping in mind it is a fully qualified valuer from Herron Todd White that did the valuation and they are as accurate as possible using previous compareable sales, I thought his valuation was spot on, I was able to email the valuer with myown researched comparable sales prior to his walk through, and my estimated valuation he agreed on.

quote "What was your anticipated profit margin before starting the project?"
My initial cost to profit calculations were to spend $320,000 to achieve $60,000 profit so just a smidge shy of 20%- how very wrong was I!

My original plan was to subdivide off the back yard and sell the vacant land- however because I has to create an easement right of way to SA water for the sewer main extension- I percieved this would deter potential buyers, (since there is quite alot of vacant land available in that suburb- why would someone buy a block with a easement unless it was sold much cheaper?) So I decided to build and have 2 houses to tennant, instead of selling the land at a loss.

Important lesson: having a contingency plan- for if things go pear shaped!

Quote "What was much of the rest of the subdivision costs?"
I count as 'subdivision coasts' all site works needed to complete plus all fees and charges from the various gov. bodies and surveyor etc. (a quick run through of cost break downs ballpark figures only- my memory is a bit average, these payments occured sporadically over 3 yrs)
$20,000 paid to SA water for water meter, 2 sewer inspection points (one for new house and one for the existing) plus a 20m sewer main extension
$3000 surveyor fees
$2000 council application fees
$6500 open space contribution fee
$5000 site clearing; bob cat and tipper hire for multimpe large trees removal and dumping, concrete removal and dump fees, shed demolish and dump etc.
$2000 New fence put up by myself along the newly created boundary.
$1000 new curb culvert cross over and gravel for a driveway.
$500 I think there was also a lands tile office fee? also lots of small fees? can't remember all of them exactly.
TOTAL SUBDIVISION $40,000.
 
Top