Help needed!!! What would you do in this situation?

[Mindmaster]

I’m in a position where I have 3 choices regarding my IP portfolio (one lonely property) and would really appreciate any feed back, ideas or opinions because my knowledge and experience in property is limited and I’m uncertain which way to go.

I have a 603.9sqm block (15.25m by 39.6m) in Sunshine Victoria with a very run down old 3 bedroom weatherboard house currently rented for $170 a week that will be increased to $190. It is valued between 300k and 310k and there is 20k left on the loan to pay off.

Option one is demolish the house and build two single story free standing units, Option two is build two double story free standing units instead of single story and option 3 is leave that property as is and buy another IP in the 250-300k range.

The details of each option are

Option one: Two brick veneer tiled roof 3 bedroom 2 bathroom (1 ensuite) single story units each around 15-16 square with double garage

weekly rent $600
total property value $640k
yield 4.48%

construction costs $290k
other cost $50k (planning permit, driveway, fences, heavy duty slab etc etc)
unforeseen cost $10k
Interest only loan 350k
Weekly payments $417(at 6.21% interest)

Management fees $36 (6%)

Net Cash flow $147
net value of IP $310k

Option two: Two brick veneer tilted roof 3 bedroom two bathroom (1 ensuite) double story units each around 17 square with double garage

weekly rent $620
total property value $660k
yield 4.48%

construction costs $346k
other cost $44k (planning permit, driveway, fences, heavy duty slab etc etc)
unforeseen cost $10k
Interest only loan 400k
Weekly payments $477(at 6.21% interest)

Management fees $37 (6%)

Net Cash flow $106
net value of IP $295k

Option 3: Leave as is and by 2nd IP for example $300k

weekly rent $470 ($190+$280)
total portfolio value $600k
yield 4.1%

purchase costs 300k
other cost $15k (5% of purchase)
unforeseen cost $10k
Interest only loan 325k
Weekly payments $388(at 6.21% interest)

Management fees $24 (6%)

Net Cash flow $58

Points to take into account
-the current building is not in good condition with a limited life span and can need repairs/maintenance at any time, for example I just spent over $3000 repairing the roof and need to spend another $600 on blinds. This is likely to be a cash flow killer.

-two single story buildings is going to be a tight squeeze and leave very little yard where as two story units would have less of a problem

-If I went with building units, I’d plan on buying an IP when the units are tenanted and the positive cashflow from units would probably make supporting the 2nd IP clash flow positive or nuetral

-planning permit would take any where between 6 to 12 months to get and construction would take up to 5 months

-I don’t pay taxes in Australia to negative gearing and tax benefits/deductions are not useful

-the units would not be subtitled now but would be done in a way so they can be subtitled later

Please feel free to destroy any of my assumptions, make comments, give advice or what have you

 

[Learnings]

Without owning any property myself, there seems to be alot of variables here.

In short it seems developing with 2x single storey townhouses seems to offer the best short term gain (reval in 12m) although the CG of a 2nd stand alone property could outgrow it in the longer term.

Im interested to hear what some more experianced people come up with.

I dont think any of the above would be a 'wrong' choice, you've got a fair amount of equity in #1 to help cover the development.

 

[RumpledElf]

2 storey buildings cost more to build. Build the single storey ones

 

[Sheryn]

2 storey buildings cost more to build. Build the single storey ones

I agree - flat single story better and cheaper.

Regards
Sheryn

 

[Mindmaster]

I agree - flat single story better and cheaper.

Regards
Sheryn

You don't think the lack of yard will reduce CG or rental appeal?

 

[AdamP]

If you have a single storey run down property in this suburb already, it may seem wise to stay as single story buildings, so that you don't over capitalise.

However, if this property is very run down and old and you are thinking of knocking it down and building, are people in that suburb already doing the same?

Are double storey houses already being built in this suburb?

If so, you might want to consider this as an option with the single storey.

Although, if your two options only build 3x2 houses, then go single storey. If you are building double, can't you build a 4x2.

Though in saying that, I would personally sell the property and buy multiple new ones, with all of that equity. Just get the mortgage as high as possible so it at least covers the costs and maybe slightly positively geared.

Building always seems like it takes too long and you will lose out on too much rental in the mean time. This of course all depends on how long it would take to sell your property in the current market.

 

[Electro]

I think it will depend on what area of sunshine the IP is in. Can I ask where?

I know the area well and I have seen townhouses/units single and double popping up in certains parts of the suburb and think they are doing well. If it is in one of these parts I think either single or double would do well. However, with my limited knowledge of the development aspect I think single stories are the way to go.

I've spotted a property in sunshine - old weatherboard, 3brm, decent block, livable as is going for ~220K-230K. I've considered it but I don't really want to take the risk on in it as it is in one of these boring old industrial areas of sunshine.

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=2007690306#
I don't know - could be ok - would you consider it?

In the end it will still be sunshine. I'm not sure if it will shed its reputation any time soon.

I think with the equity you have there I personally would sell it and buy multiple properies around melbourne. Your money could be working better for you without the added risk of development and the headaches that go along with that.

Of course just my 2c

 

[Mindmaster]

If you have a single storey run down property in this suburb already, it may seem wise to stay as single story buildings, so that you don't over capitalise.

Sorry AdamP, I must have confused you with my description. The run down house will be demolished if I build new ones so it will have no bearing on whether the new buildings are single or double storey.

However, if this property is very run down and old and you are thinking of knocking it down and building, are people in that suburb already doing the same?

Are double storey houses already being built in this suburb?

That area of Sunshine is mostly typical single story houses with a small mix of single storey and two storey units and town houses.

Although, if your two options only build 3x2 houses, then go single storey. If you are building double, can't you build a 4x2.

What do you mean by building 3.2 houses?

Though in saying that, I would personally sell the property and buy multiple new ones, with all of that equity. Just get the mortgage as high as possible so it at least covers the costs and maybe slightly positively geared.

Building always seems like it takes too long and you will lose out on too much rental in the mean time. This of course all depends on how long it would take to sell your property in the current market.

I had not considered this. It does not suit my strategy so I would not do it but it is a good idea and worth thinking about.

 

[RumpledElf]

3x2 - 3 bedroom 2 bathroom.

You're concerned over not getting too negatively geared but also concerned about lack of yard? Single storey will be cheaper, period, and you get more choice of tenants too, as old farts with gammy knees and people with little kids will be reluctant to rent a house with stairs if there is a comparable single storey around (I know I'd steer clear of stairs - I have an exploratory toddler).

Have you seen the size backyards they have on modern HOUSES these days? I've seen units with more backyard. As long as you've got room to swing a cat (are you going to allow pets?) and its fenced off so kiddies can't run off, your average joe these days doesn't expect much in the way of backyard in a new house. If they want a 1/4 acre backyard to run their kids and dogs, they can go rent an old run-down house like the one you're going to knock down, and if they want the same with a new house on it they have to move out to the country where they still have 1000sqm blocks as standard. You're not going to attract more people by having 15sqm extra backyard because you went double storey.

I'm thinking of doing some development sans bank loan or very small loan myself as I want income not capital gains or negative gearing and am tossing around lots of options. Damn we have a lot of options. None of them are double storey though

 

[Mindmaster]

I think it will depend on what area of sunshine the IP is in. Can I ask where?

It is on 89 King Edward Ave. You can see it here on google map hiding behind a couple big bushes http://maps.google.com/maps?hl=en&q...p=12,159.18528207760403,,0,-2.499999999999997

As for selling and buying multiple properties, a good idea, thank you. Definitely tempting. For me though with the strategy I have in mind and my investment limitations/capabilities, keeping that property and developing or leaving as is currently the best option.

 

[Mindmaster]

3x2 - 3 bedroom 2 bathroom.

You're concerned over not getting too negatively geared but also concerned about lack of yard? Single storey will be cheaper, period, and you get more choice of tenants too, as old farts with gammy knees and people with little kids will be reluctant to rent a house with stairs if there is a comparable single storey around (I know I'd steer clear of stairs - I have an exploratory toddler)

Thank you for your comments RE. I'll take on board your comments and not stress about the lack of yard. Not sure if there will be enough yard for each unit to even fence though

 

[RumpledElf]

Talk to your local council planning dude or dudette, they know Everything.

Well, they should, ours is pretty uninformed, but they still approved our subdivision app (and then forgot what it was subject to)

 

[atti]

building 2 much messing around..

best i idea imho, sub divide and sell as 2 individual blocks then buy 2 new ones tats built

 

[HiEquity]

What is your ability like to buy more property? For me the answer to your question would depend on whether I would be inhibitied from buying more while I wait for construction to finish on this project. A lot of opportunities can go by in that timeframe...

I would personally choose option 3 but with a better yielding property. It gives you more land in your name (ie a bigger exposure to the stuff that goes up in value) and given the inevitable rubberyness in your assumptions would probably give a similar cashflow position.

Selling out never makes sense to me given the transaction costs - CGT, agents fees etc but if the -ve cashflow on this one will significantly impact your ability to get a larger exposure then it may be better to get rid of it and chalk it up to experience. The only dogs I have been prepared to do that with though are the CGT free ones...

 

[Mindmaster]

What is your ability like to buy more property? For me the answer to your question would depend on whether I would be inhibitied from buying more while I wait for construction to finish on this project. A lot of opportunities can go by in that timeframe...

I would personally choose option 3 but with a better yielding property. It gives you more land in your name (ie a bigger exposure to the stuff that goes up in value) and given the inevitable rubberyness in your assumptions would probably give a similar cashflow position.

Selling out never makes sense to me given the transaction costs - CGT, agents fees etc but if the -ve cashflow on this one will significantly impact your ability to get a larger exposure then it may be better to get rid of it and chalk it up to experience. The only dogs I have been prepared to do that with though are the CGT free ones...

Thank you for your opinion HE.

My ability to buy one more property is good. The existing IP is worth 300k (put a question mark on this value) and I owe 20k on that giving me plenty of equity. I'd be comfortable to buy an IP with upto 400k if the yield was right. My only need is that if I did go for option 3, the two properties would be at least CF nuetral. Not hard IF the existing IP does not need any more expensive repairs. There lies the crux of my problem. Not knowing if that pig of an IP will suddenly need repairs and how long it can survive for.

I was thinking of paying a building inspecter to go over the IP and give me an assessment on the defects/trouble spots that were likely to come on in the near future. A mate though told me thats a waste of time cos so many problems involved expenses can occur that an inspection can't pick up.

Going for option 3 has been tempting from the beginning and hearing the thoughts of people like you adds to the temptation. Not to mention the hassle of building that I'm finding out from talking to various builders and as other people have mentioned on this thread.

One way to go is start on the planning permit process which only cost 6-8k and at the end of that 6-12 months or even during, see what the property market and opportunities are like. The permit will always be useful and a valuee adding move to the 6-8k will not go to waste.

What do you think?

 

[Player]

Hi Mindmaster,

I've come here thru your link on Rixter's eastern suburbs thread.

I'm with Hi Equity......keep this as is and buy another. Just checked the location.....well poised as far as amenity to transport and Sunshine Plaza shops. The following is not advice just my opinion. If your pockets support another as you've indicated they do, leave this one alone (for now) and go again. Sunshine is City of Brimbank if I'm not mistaken. If you aree keen to buy another in this area, check with town planners at council via email or phone on propspective purchases. Aim for greater than 600 sq m to give you potential to subdivide. Accumulate the land with rental boxes on them for the time being for income to support your mini-land banking strategy. Maybe aim for a better yield with the next one. Let tincture of time do its thing and there is always opportunity to subdivide later and develop at a future time.

They are not manufacturing any more land there, so you are after in-fill upside for the future. Not sure how old or young you are, however I would accumulate another especially seeing as your equity position is so favourable. Bank's will love to lend to with your LVR situation.

Are you only looking at Sunshine again, or any other areas in your circa 300 K price range?

 

[HiEquity]

What do you think?

Hi MM

You may be asking the wrong person as I tried developing and gave up on the idea due to the factors I just mentioned - I would have made more just by buying more and holding. I would save the $8k myself unless I knew I wanted to develop it within the timeframe of the permit as an immently expiring DA may pressure you to do something you otherwise wouldn't.

I would rather just sit on the land you've got -it's a great asset to have and subdividable blocks will only get rarer - and look elsewhere for more land.

Just give me the dirt!

 

[Mindmaster]

Yiippeeee finally figured how to use the multiple quote function.

More seriously, thank you Michael and HE for your opinions. They make a lot of sense and match a lot of other things I've been reading/hearing about. Leaving the dump as it is and buying another IP is slowly becoming like the best option. Especially with such a favorable buying environment. Waiting for a building quote before making a final desicion.

Are you only looking at Sunshine again, or any other areas in your circa 300 K price range?

I'll start a thread in the where to buy section on where to by in Melbourne with a budget of 300-400k so more people can benefit from comments made. Do tomorrow, need sleep now.

Hi MM

You may be asking the wrong person as I tried developing and gave up on the idea due to the factors I just mentioned - I would have made more just by buying more and holding. I would save the $8k myself unless I knew I wanted to develop it within the timeframe of the permit as an immently expiring DA may pressure you to do something you otherwise wouldn't.

I would rather just sit on the land you've got -it's a great asset to have and subdividable blocks will only get rarer - and look elsewhere for more land.

Just give me the dirt!

Good point. I dragged out the old permit for two years claiming poverty and could have gone further if the renewal date had not been forgotten. Brimbank seems flexible about that.