Help out a young whipper snapper!

Hi Guys,

Background information.

I am in my early 20's and earn about $100K per year. I have a house which I purchased when I was 19 and want to sell. After selling I should have about $300K equity which I want to invest and thinking about property. I will be living with a friend while I invest paying $100 a week rent.

What I want to do

I want to purchase a duplex block and put 2 duplexes on it and then sell.

I have done some research and here is what I came up with.

Duplex Block $340k
Cost to build each duplex $150k + $20k to finish off. So $170k x 2 = $340k

So I am at $680k total which I would get an interest only loan of $380k and use my $300k equity.

So I will pay $32k interest on quick calculation which means I am up to $710k total.

The cheapest duplex in the suburb are starting at $400k+. If I complete this project in 12 months and IF prices go up I could get more than $400k.

So to me it looks like a good idea. I should be able to make $90k minus tax after expenses.

So what I need help with is:

Do you guys think this is a good idea? What am I missing?

I need to learn more about sub-dividing, tax etc. Is there any books or online literature you recommend. It needs to explain things real basic :)

Anyone bored and want to help a young guy out in Perth. Happy to catch up for a coffee or beer and have a chat about the subject.
 
Hiya

Welcome

sounds good

If you end up with less than 20 % margin on costs before tax youd want to think again.

At the moment you have some other costs to consider such as council contributions etc which vary from place to place, selling costs and a few other odds and sods.

Looks like we may need to also allow for buying costs on the site ?

In general, id be looking at borrowing 80 % of the block and build price with an IO loan with offset and stikc my cash into an offset once the loan is drawn

This will gove you some more flex at no greater real cost.

ta
rolf
 
a couple of additional costs to consider:

- GST (estimate it at 10% of profit for quick calcs)
- costs on purchase (stamp duty etc - say $15k)
- sales costs (agent will want ~3% so there is $24k)
- bank fees (will most likely have early termination as well - say $2.5k conservative)
- plans and permits (about $20k i would guess)

I am assuming the $20k per site you have are site costs (pumps if needed, landscaping etc) so the above is additional. And *could* look like this:

$800k val
$720k cost
$61.5k from above

= $18.5k profit less GST and Tax.

Not trying to shoot down the idea - just trying to show what needs to be included :)

20% is a good margin because it leaves more room for error.

So on a $780k total build price you would be wanting a value of $975k or $488k each - is this realistic in the current market?
 
Hi Snapper,

good on you for having a go at a duplex.
Nice to see you jump in when 19 as well.

I'd recommend you hunt around for a property mentor/property savvy accountant/developer to help you with the sums.

Very important to understand the cash flows and tax and gst implications.

If you want to sell the duplex within 5 years, you'll most likely be up for gst, even if you aren't registered currently. But check it with a prop savvy acct.

Here's a xls that might give some insight into cash flows. I made it to compare building a house with buying a house, so it doesn't allow for gst or local government development application costs and processes versus building application processes.

You want to allow around 12 months from settlement until completion, and consider holding costs (interest and rates). It is possible your LGA could approve a DA within 6 weeks and have a build time of 14 weeks, but both highly unlikely. Always best to build in time and $ contingencies.

If you are unmarried, paying $100 a week for rent, making $100kpa, and contributing 300k equity, you are in a pretty comfortable position to avoid cash flow gremlins.

Nevertheless, you want to think in terms of risk adjusted rewards....and as Rolf says, anything under 20% would be a poor return for the hassle and risk.
 
Mate,

Welcome! You're on the path, well done. I kicked off at about the same age as you but then went into a holding pattern for a decade through the 90's. But then Somersoft didn't exist at the time to give me the support I was lacking...

I'm with the other guys here in that your margin seems a bit tight. I'm about to kick off my little project which is a triplex ;) and the margin is about 30% after everything. You might want to see if you can pick up a cheaper site, or squeeze that build cost down as it sounds very expensive. Send a PM to Blue Card on the forum here, he's a developer who lives in WA and might be able to give you some ideas.

Welcome to the forum, and I look forward to reading about your future successes.

Cheers,
Michael
 
Hi Guys,

Background information.

I am in my early 20's and earn about $100K per year. I have a house which I purchased when I was 19 and want to sell. After selling I should have about $300K equity which I want to invest and thinking about property. I will be living with a friend while I invest paying $100 a week rent.

What I want to do

I want to purchase a duplex block and put 2 duplexes on it and then sell.

I have done some research and here is what I came up with.

Duplex Block $340k
Cost to build each duplex $150k + $20k to finish off. So $170k x 2 = $340k

So I am at $680k total which I would get an interest only loan of $380k and use my $300k equity.

So I will pay $32k interest on quick calculation which means I am up to $710k total.

The cheapest duplex in the suburb are starting at $400k+. If I complete this project in 12 months and IF prices go up I could get more than $400k.

So to me it looks like a good idea. I should be able to make $90k minus tax after expenses.

So what I need help with is:

Do you guys think this is a good idea? What am I missing?

I need to learn more about sub-dividing, tax etc. Is there any books or online literature you recommend. It needs to explain things real basic :)

Anyone bored and want to help a young guy out in Perth. Happy to catch up for a coffee or beer and have a chat about the subject.
Not sure how the system works over there,but you may want too look at the costs for the driveways-external carparking,air-conditioning/mechanical ventilation and noise assessment costs,if it's on a main road you will need a
acoustic barrier fencing,a control management for soil erosion and sediment
control,telecomunication costs for underground services-underground electricty underground supply costs,have a hydraulics plan in place if a future water meter is too be installed a body corporate,access for Disabled
persons,repair damage to kerb,footpath,or roadway during the building stage
Architect/building designer costs,and the "BIG" MISTAKE some make is not asking the question if you have to make a :rolleyes:,monetary contribution to your local Council to help Infrastructure changes around the development..
good luck willair..imho..
 
Well I'm not very smart but it sounds like you want to use the $300K from selling your house to do a development that will net you $90K?

Am I missing something because I'd rather have $300K than $90K.
 
He will use $300k CASH and only borrow the rest of the costs say $500k = $300k cash + $500k loan = $800 TOTL

If he sells for $890, he will pay th bank back $500 and be left with $390k

Have I missed something ?
 
Thanks for such a warm response. I really want to get into doing this and with no support I have been hesitant. This forum has already given me a world of information already. Looks like I have a lot of research, reading etc still to do.

I am going to research heavily and wait for the right block where I can work on 20% + margin.

I have some quick questions however.

A) I work in sales and am very good at it. Has anyone sold there property privately and what was the experience like? How much did it cost, paperwork, hard? I will have no issue with the selling part more worried about the paperwork etc

B) Is the idea soon as each duplex is ready you put on market straight away. Is it better financially to get tenants and rent for a while? Anyone know about the strategy of living in each one for 3 months as to lower tax.

C) Thanks for that spreadsheet. Having a play around and that is every helpful


Thanks again!
 
Hey Messmorph,

The key to completing a successful development is to spend a while getting to know the market that you are going to sell in. Once you know how much similar properties are going to sell for TODAY, you can then work backwards with your (semi)fixed costs, construction costs and the like, and arrive at a maximum purchase price for your site.

Unfortunately, at the moment in Perth, I am having a heap of trouble making any deal stack up (factoring in a 20% development profit) as most vendors are trying to cash in and asking way too much for their sites (you can't blame them, I would do the same)

Lowballing may work, but more often than not, someone else who has done zero DD will buy it, and probably have to sit on it for a while.

If persistent, you will find something, but you better have all of your ducks lined up to enable you to act quickly.

Good luck with it all, sounds like you have your head screwed on for someone just starting out!:)

Boods
 
the other dark horse is that a builder can do such a project at less than 50 % your effective margin and have an ok profit.

This means if you get into a competitive bid situation it would be great to knowwho the other bidder/offeror actually is :)

ta
rolf
 
Hi messmorph.

Belu hit it on the head insofar as what you missed - however, i think your costs are HIGH.

i reckon you could do a basic 3x2 DG for about $160k TURN KEY + $15-17k in sites for a survey strata situation - obviously that's a the lower figure for a sandy site in the metro area.

unfortunately - boods is spot on - anyone selling a development site just looks at what the finished value is, then tries to sell their unfinished site for that. it doesn't help if they've been conditioned by their REA. you have to tell them that figure is sans 20% profit, sans headworks/siteworks -all of a sudden that ferrari has disappeared into smoke.

you could be exposed to the upside of developing without physical developing by investing in a few local syndicates (Jardim, IAspire etc) which have some great turnarounds and returns, or you could look towards a JV.

but - you don't need to - you've got the land, and the equity, you should prob come in an have a chat and see what can be organised for you. a $90k return on $300k is borderline for me - there's got to be a better return in there somewhere - personally that's not a high enough "risk/reward" ratio.

no obligation either, i just like to meet other people operating in these circles. :)
 
Lowballing may work, but more often than not, someone else who has done zero DD will buy it, and probably have to sit on it for a while.

yeah i've recently learned a lot of speculators are back in the market. they're just buying whatever devvy site they can and holding with their existing equity.

$15-$20k on holdings versus possible $100-$150k of upside....
 
have you considered how CGT is going to impact things?

I'd compare $90k quick profit now vs holding $1 million of property (easily done with $300k equity since that is more than a 20% deposit) for 10+ years which will be reduced to 50% CGT and you may possibly get tax deductions against your income if you build or purchase a new house.

and of course the time value of money comes into play too.
 
Bluecard - I will organise to meet you. Need to find a block to show you what I am trying to work with.

Problem now is 3 or 4 months ago I found a few blocks available at the correct price. Duplex Block $300k and Triplex $390k. Which at the moment is the price I want to work with. However struggling to find any block at this pricing or even available now!
 
Bluecard - I will organise to meet you. Need to find a block to show you what I am trying to work with.

Problem now is 3 or 4 months ago I found a few blocks available at the correct price. Duplex Block $300k and Triplex $390k. Which at the moment is the price I want to work with. However struggling to find any block at this pricing or even available now!

Yeah, I know what you mean, there seems to be a little "feeding frenzy" going on at the moment for devvy sites in Perth...

For example, had my eye on a triplex site in Innaloo that hit the market on Sunday, right next door to pretty much an identical property that had sold for $670k a couple of weeks ago. Got sold on Monday for $730k!:eek:

The development would'nt work at $670k, never mind $730k:rolleyes:

Boods
 
Yeah, I know what you mean, there seems to be a little "feeding frenzy" going on at the moment for devvy sites in Perth...

For example, had my eye on a triplex site in Innaloo that hit the market on Sunday, right next door to pretty much an identical property that had sold for $670k a couple of weeks ago. Got sold on Monday for $730k!:eek:

The development would'nt work at $670k, never mind $730k:rolleyes:

Boods

Exactly. Any idea why sites are getting snapped up so quick?
 
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