How to make a profit from subdivision these days!

[RoyalBlue]

Hi All,

I hope this is not a stupid question - but how is it that people are making money from subdivision these days? I've been doing some due dilligance on development opportunities around Adelaide (where large blocks are selling like hotcakes) and the figures just don't seem to add up to me. Obviously plenty of people see an opportunity, judging by how quickly these places are being snapped up - but I question how they are making a decent profit. For example, sub div land with an old house around Windsor Gardens, Hillcrest, etc areas are selling for around $360K. Taking into account all subdivision, building and holding costs, gst, and assuming the two completed new homes sell for around $400K (which seems about the norm) - where is the profit! Am I missing something?
Your views would be most welcome

 

[alexlee]

Just because people are buying doesn't mean they'll all make a profit.

 

[ArJay]

You're right RB...in Adelaide the market's too hot. Every man and his dog are out for the larger blocks.

My sister bought a 1000sqm block in Oaklands Park just under 2yrs ago for $240k....now similar sizes are deep into the $400ks.

IMO all the smart developers are prob out of the market because
a). the margins are too small
b). who knows where the market will be in 12-18 months time down here.

IMO you'd either need b*lls of steel or a truckload of experience to be looking start a project right now...

R

 

[steveadl]

Yeah I'd agree with Arjay - everyone is jumping on the bandwagon these days. (I'll include myself in that bunch too!)

As far as the profit goes, some people - not strict developers only - may be willing to hold for longer than just the year assuming you knock it down immediately. A developer needs to go through projects quickly and make them work on today's figures. Others (like myself) are willing to sit on the land for a few years before we develop. Hence the longer we wait, the more profitable it becomes.

 

[ArJay]

Yeah that's definitely a good point Steve...

My only query would be the holding costs involved in buying a large block at a premium price with an average existing dwelling. The yield would be shocking..

I guess if you held long enough you might be right tho but personally I'd be waiting for things to cool off (if that happens ) a bit before I took the plunge.

 

[RoyalBlue]

I agree with your point Steve - I can see the merit on buying to hold. I definately don't have experience or b*lls of steel so I don't think I can justify taking the risk in the "hotspots" of the Adelaide market!
Where are you looking at/buying in Steve? I know you have a good idea of the Adelaide area. What are your views on Mawson Lakes?
Arjay, I hope the market is still buoyant here in 12 months but who knows!

 

[steveadl]

My only query would be the holding costs involved in buying a large block at a premium price with an average existing dwelling. The yield would be shocking..

I guess if you held long enough you might be right tho but personally I'd be waiting for things to cool off (if that happens ) a bit before I took the plunge.

Absolutely Arjay. I can't speak for how others do it, but I would want to expect substantial upside if I were to do it with another one now. The yield on mine would be about 3.8%. Doing some rough figures on my personal siutation - another $400k negativley geared property in the areas I'm looking at would cost me almost $15kpa after tax to hold. Now I think that this can still be a good investment long term, but those are some killer holding costs in the mean time. ie. $15k cost vs. $28k growth in yr 1 (assuming 7%pa), but the cap gains can be lumpy and you need to be able to handle the holding costs.

In my particular case the decision was made a bit easier as I'm using the development block I bought as a PPOR. So I have less debt on it as a result (not my first PPOR), and the extra holding costs over what I would pay if I was renting the same house are around $100pw. So for $100pw I get to hold a triplex block for future development.

I agree with your point Steve - I can see the merit on buying to hold. I definately don't have experience or b*lls of steel so I don't think I can justify taking the risk in the "hotspots" of the Adelaide market!
Where are you looking at/buying in Steve? I know you have a good idea of the Adelaide area. What are your views on Mawson Lakes?
Arjay, I hope the market is still buoyant here in 12 months but who knows!

The area I'm focusing on at the moment are the inner northern suburbs (Enfield, Clearview, Blair Athol, Kilburn, Broadview). Bit hard to tell with a lack of decent supply at the moment, but should still be able to get duplex size blocks for the mid $300k level. If you can find them, triplex blocks are now heading to the $400k level. I bought in Enfield back in October last year.

I really don't know a great deal about Mawson Lakes as I haven't been interested in new properties - only older ones for development. Ekwatee here on SS knows a lot about ML, so perhaps he can help you here. It depends on what you're after though. If you want to develop - you could also look at Pooraka on the other side of Main North Rd from ML, where you can get development blocks for the high $200k to low $300k level, although again - supply is a problem, but that may get better as people start to stress about interest rates.

(Additonal Note: In fact, just reading back over my post - if I was going to choose a place to rent as opposed to the house I'm in, it would probably bring the gap in holding cost down to closer to $50pw.)

 

[ArJay]

In my particular case the decision was made a bit easier as I'm using the development block I bought as a PPOR. So I have less debt on it as a result (not my first PPOR), and the extra holding costs over what I would pay if I was renting the same house are around $100pw. So for $100pw I get to hold a triplex block for future development.

Ah....that's using your smarts!

We're just finished doing the same so to speak. Renoed then rented the existing house, sub'd the block and built on the back (hammerhead). The numbers were better than knocking and starting afresh... in our circumstance at least.

R

 

[steveadl]

Renoed then rented the existing house, sub'd the block and built on the back (hammerhead). The numbers were better than knocking and starting afresh... in our circumstance at least.

R

Yeah that's the same position I'm in. The block is suitable for leaving existing house and going hammerhead. I haven't ruled it out completely, but would really like to hold out and build 3. More risk and cost involved, but a bigger payout at the end. Still, nice to have options - never know what the future holds.

 

[RoyalBlue]

Thanks Steve - I'm wondering about Mawson Lakes as that is where we hold our PPOR. We were thinking of selling to relieve our cashflow situation for other properties, but I have a feeling CG will be good here in the next few years so now looking at renting it out instead.

 

[steveadl]

RB, in the situation you've described - my preference would always be to hold onto it. But it depends on how that would effect your cashflow ie. would it pay for itself, or still be a big drain on your cashflow, and also could the equity from that be better utilized elsewhere.

I really wanted to keep my old PPOR, but bank wouldn't come to the party with valuations, so had to sell. It worked well in the way that I have lower repayments on my new PPOR had I kept the other one. Still annoying though as the old PPOR would have been cashflow neutral and increasing in value.

 

[Pablo]

Hi All,

I hope this is not a stupid question - but how is it that people are making money from subdivision these days? I've been doing some due dilligance on development opportunities around Adelaide (where large blocks are selling like hotcakes) and the figures just don't seem to add up to me. Obviously plenty of people see an opportunity, judging by how quickly these places are being snapped up - but I question how they are making a decent profit. For example, sub div land with an old house around Windsor Gardens, Hillcrest, etc areas are selling for around $360K. Taking into account all subdivision, building and holding costs, gst, and assuming the two completed new homes sell for around $400K (which seems about the norm) - where is the profit! Am I missing something?
Your views would be most welcome

I agree completely with you, ArJay, and Steve.

I don't believe the profits are there to warrant the risk unless you go to a triplex block and even then the profit isn't what I would want it to be.

The problem is that people are buying and willing to make a 10% profit which seems scary to me. Builders are also still buying as they can save $30-$50k on the building costs so they can afford to pay more to start off with.

For me I choose to buy an IP with a good yield that can be developed at a latter date.

Cheers
Pablo.

 

[asdf]

Taking into account all subdivision, building and holding costs, gst, and assuming the two completed new homes sell for around $400K (which seems about the norm) - where is the profit! Am I missing something?

If you sell in 10 years time, you SHOULD make a profit. But you're right, margins are thin or non-existent. Holding $500k vacant block costs $45k a year. Not for the feint hearted.

Perhaps theres been one too many "How to be a Property Developer" books flying around and not enough "How to do well at your day job".

 

[Mamaof3]

Although it is hard, development sites in metro Adelaide with healthy profits are STILL out there.

We secured a few only in the last couple of months all with at least a 20%+ return.

The sites where you can get 3 or 4 units on are definitely better but not as easy to get at a good price these days as their prices have also increased to reflect the fact that you can create a 3+ unit site...they've all cottoned on unfortunately.

Take for example a deal we made an offer on yesterday ..development site within 10km of the CBD, 3 unit site, purchase price of low $400K's with each house having a resale of over $415K each. Depending on what your build price is etc, this is a deal that would work. We settled on a house last month which we bought for $392K, this project alone will give us a profit of about $185K...not bad for a simple 2 build site in 12mths

The biggest factors determining whether a deal will work or not are the purchase price, build price and sale price. For example... if your builder has a build price of roughly $1000/m2 just for the house then its going to be harder for you to find a deal that'll return a decent profit....but compare that with someone else who can build at $790/m2 and its more than likely going to work for them. Sale price is also a big factor if not the most important factor which people often get wrong.....this can make or break a deal essentially, get this wrong and you could be in for making a big loss ....

Pablo is right in that builders/trades can often make it work because they can save a significant amount on the build costs......but even though development sites are selling like hotcakes at those high prices, doesn't mean everyone is going to develop straight away and even if they do, many don't make a profit! A developer who's been in this industry for a number of years once told me that most developers/developer wannabes actually lose money

Hope this gives you some encouragement that there are still deals out there that give a good return! Its definitely harder to find and even harder to secure at a good price to make a healthy profit but its definitely not impossible. Good luck and hope you find what you're after.

Cheers,

Kim