IP Next door to current one?

[Chris.R_WA]

FAST RESPONSE NEEDED!

The opportunity has come up to purchase the property next to our existing PPOR (very soon to be IP). I had a plan all sorted out to move out of the current PPOR to a rental (already sorted), get the now IP valued and get a tenant in there, release equity from that one and buy interstate (prob Brisbane).

NOW: About 4 hours ago the place next door came on the market, and this has thrown a spanner in the works of my original, nice-and-relaxed pace, plan. There is one interested party already viewing the For Sale property, I have sent my partner along at the same time just to express our interest and buy a bit more time.

The numbers on the new place by itself do not stack up in my mind (Perth is too overheated, yields way too low), but when considered in conjunction with my existing place, things start to look a bit more interesting. Full figures provided below, if I have missed anything please let me know.

PPOR (soon to be IP): Val: 490-500K
Loan: 345K
Rent: 270pw (conservative estimate)

Next Door: Asking: 390-410K
Costs: Approx 20K
LMI: ??
Rent: Prob 240pw

Cash: F** All (1.5K probably)
I have shares & managed funds that I can cash in with a few days notice to the value of 15K, but would prefer not to...

The thing that makes this whole situation attractive to me is that the combined land holding would then be 1642sqm, with R40 zoning (220sqm per site), meaning it would be a 7-unit development site if amalgamated. This is in a high growth area within 10km of the CBD with other new developments going up around the place.

Basically, I need to know if I can afford this new place, given that I may or may not have a fairly limited time to organise to deal/finance? Also, any tips from others who have faced the same situation (successfully or unsuccessfully) would be very greatly appreciated.

Thanks very very much, Chris

 

[wylie]

Hey Chris.

We had the same situation 18 months ago. House directly behind an IP had been on the market for over twelve months at a stupidly high price. It finally came down to a realistic figure and we asked our broker could we do it. Luckily he lived two doors down and knew our situation and said yes and we contracted that day (Saturday). If we had to wait for the banks to open, we would have missed it as a developer had put a contract on and we needed to move quickly. We went lo-doc because it was an asset lend, meaning we don't have the means to repay the loan, but have enough assets to basically live off our equity for a while until prices, rents etc catch up.

It did mean we now have 72 perches (2 x 906 sq m) blocks that we can develop down the track. We have to keep the two houses on the blocks and will have to develop in the middle of the two blocks, so it is not a block a developer would go for over an "easier" side by side with knockdown houses, but in our situation it was worth stretching for. Even if we never develop the blocks ourselves, someone else may do so, as land 5km from the city is not getting easier to find.

As stand alone deals, both houses are on good big blocks, very sought after, in a good suburb, so we didn't think we could lose.

I am pretty relaxed about not actually having enough money to pay the loan back because the values have risen considerably in the 18 months since buying the house. We also live in the suburb, so our total equity has risen more than the amount we are short for the payments. It is not something we would have done if the house was not next door, giving us the development potential.

I don't know what we will do with the blocks, but we are holding for the moment. The bottom line for us is that if everything goes pear shaped we would sell something to get out of trouble. I am not a gambler, but I suppose this is a bit of a gamble.

I'd say go for it, because the double block will be more valuable than two single blocks, but you have to be comfortable with the deal.

Wylie

 

[Chris.R_WA]

Thanks for the reply Wylie. You have firmed up some of my thoughts. If the worst scenario eventuated itself, we could always sell one or both and still come out ahead.
The new property would be in demand from other developers, but like you said, the two adjoing blocks will be worth more than the sum of the two separate properties.

I need to speak to a few brokers today, to see if we can stretch ourselves enough to grab the deal...

Thanks again, Chris