We have a 940sqm block of land that we're planning to build on. We're buy-and-holders so our primary goal is rental yield, but we don't want to disadvantage ourselves if we ever need to sell, either. This is one of our risk management strategies as we are highly leveraged, over 90% across the portfolio at present.
It's relevant to mention that this particular block is in a regional town where good houses go fast, average houses go in 3-6 months, and bad houses sit for a year or more. That said - we do have other houses that would sell very easily, so we could probably live with one that was a little harder to move.
I should also mention that despite the block size, subdivision is not an option at present. The three barriers are a council minimum of 1000sqm, very high council contributions ($30K+ for the new property), and a council sewer easement in an inconvenient spot. We could possibly ask for leeway on the minimum block size, but we'd also have to move the sewer line at our own expense and I suspect in the end we'd be overcapitalising.
We have narrowed it down to two options, plus a variation of the second.
First is your standard glossy 4br/2 bath project home, 250sqm. The loan (including the land we already have) would be about $340K, and we'd get about $400pw on it. So nearly 6% gross yield to start with, not counting depreciation. It would be easy to sell it if we ever needed to, and the capital growth is something we can make some reasonable guesses about based on past years and some leading indicators in the area (we estimate 7-8% pa averaged over ten years).
The second is a slightly less glossy 4br/2bath project home, 196sqm, plus a 58sqm 2br granny flat under the new NSW SEPPs. The loan would be about $370K, and we'd get about $540pw rent, so over 7% gross yield. However, the impact of the flat is hard to guage. Our resale prospects might reduce - our market would be mainly investors and maybe people with elderly family members. We might also get interest from FHBs who see the flat as a nice extra, but they wouldn't pay much extra for it, and some might actively dislike it (because they'd rather a bigger yard). In other words - we might be selling a slightly less desirable main house to a reduced market who wouldn't necessarily pay the full premium for the flat. I don't think we'd actually lose money (unless we had to sell in the first year, but we're not so tightly leveraged as that and we do have income protection) but I suspect over time the 250sqm house would gain more.
There is also a potential variation on the second idea here. The granny flat could be a transportable rather than a built home. It wouldn't be any cheaper this way and the yields would probably stay the same. However, come resale time, if the potential buyer didn't want it and wasn't prepared to pay its value, we could move it to a holiday block I own. So we'd have flexibility to appeal to FHBs and investors alike, and could continue to get some benefit on something that might otherwise become a "sunk cost." On the downside, I suspect that even a good transportable might depreciate faster than a built home in terms of its appeal to buyers.
What do you think?
It's relevant to mention that this particular block is in a regional town where good houses go fast, average houses go in 3-6 months, and bad houses sit for a year or more. That said - we do have other houses that would sell very easily, so we could probably live with one that was a little harder to move.
I should also mention that despite the block size, subdivision is not an option at present. The three barriers are a council minimum of 1000sqm, very high council contributions ($30K+ for the new property), and a council sewer easement in an inconvenient spot. We could possibly ask for leeway on the minimum block size, but we'd also have to move the sewer line at our own expense and I suspect in the end we'd be overcapitalising.
We have narrowed it down to two options, plus a variation of the second.
First is your standard glossy 4br/2 bath project home, 250sqm. The loan (including the land we already have) would be about $340K, and we'd get about $400pw on it. So nearly 6% gross yield to start with, not counting depreciation. It would be easy to sell it if we ever needed to, and the capital growth is something we can make some reasonable guesses about based on past years and some leading indicators in the area (we estimate 7-8% pa averaged over ten years).
The second is a slightly less glossy 4br/2bath project home, 196sqm, plus a 58sqm 2br granny flat under the new NSW SEPPs. The loan would be about $370K, and we'd get about $540pw rent, so over 7% gross yield. However, the impact of the flat is hard to guage. Our resale prospects might reduce - our market would be mainly investors and maybe people with elderly family members. We might also get interest from FHBs who see the flat as a nice extra, but they wouldn't pay much extra for it, and some might actively dislike it (because they'd rather a bigger yard). In other words - we might be selling a slightly less desirable main house to a reduced market who wouldn't necessarily pay the full premium for the flat. I don't think we'd actually lose money (unless we had to sell in the first year, but we're not so tightly leveraged as that and we do have income protection) but I suspect over time the 250sqm house would gain more.
There is also a potential variation on the second idea here. The granny flat could be a transportable rather than a built home. It wouldn't be any cheaper this way and the yields would probably stay the same. However, come resale time, if the potential buyer didn't want it and wasn't prepared to pay its value, we could move it to a holiday block I own. So we'd have flexibility to appeal to FHBs and investors alike, and could continue to get some benefit on something that might otherwise become a "sunk cost." On the downside, I suspect that even a good transportable might depreciate faster than a built home in terms of its appeal to buyers.
What do you think?