Life - its not all beer and skittles
- Thread starter Blacky
- Start date
I just took my brickies a carton of Coronas for working this week in some pretty horrible weather. It's raining *again*
Need another labouror
Cor blimey, it didn't rain today
Hmm but I just checked tomorrow's forecast and it says "Chance of any rainfall:100%" bah!
Hmm but I just checked tomorrow's forecast and it says "Chance of any rainfall:100%" bah!
You'll be back in a couple of weeks to bribe your crew too
Im back now and would be happy to bribe the crew... if they ever showed up.
No - its been bucketing down since I arrived, and visually bugger all is happening. However, work is being done, albiet slowly.
The first floor pads are poured and all the scaffolding is up on all three units. Evidently getting brickies at the moment is hard, which doesn't surprise be given that every second property is a construction site in Perth ATM.
The brickies are booked to be onsite next week, weather pending of coarse, and may be delayed a few days. Only one team is mobilising (which Im not happy about) so its going to be a slow process. One unit at a time.
Myf is going to woop my *** in this contest. Current completion date is forecast for March 2014.
The units are really very large though. Its hard to see it from the plans, but at over 200sqm/unit they are generous.
Next door single story town houses are on the market for just under $700k. Which hopefully puts mine in the range of $850 each. Given an extra bedroom and probably an additional 100sqm living space. Fingers crossed anyway.
Ill try and get some pics to you this week.
Blacky
Its been a while since an update
Things have been progressing reasonably well, once we got over the wet weather. There were some delays getting the brickies back on site given the back log of work, but it really didnt hold too much up.
There is now the roof to unit 3 and brick work is complete on all 3 units. The roofs of 1&2 are going on now, and the scaffolding should be coming down in the next week or two.
The places are looking pretty big already, which I am happy about, as they always seem to look smaller during construction.
Here are a couple of photos from a few weeks ago.
Next door neighbour is kicking along, and one of his places has now sold. He got near on the asking price as a cash offer, which is good.
Completion is due around March/April - Westminster and I could be sharing a house warming
Blacky
Things have been progressing reasonably well, once we got over the wet weather. There were some delays getting the brickies back on site given the back log of work, but it really didnt hold too much up.
There is now the roof to unit 3 and brick work is complete on all 3 units. The roofs of 1&2 are going on now, and the scaffolding should be coming down in the next week or two.
The places are looking pretty big already, which I am happy about, as they always seem to look smaller during construction.
Here are a couple of photos from a few weeks ago.
Next door neighbour is kicking along, and one of his places has now sold. He got near on the asking price as a cash offer, which is good.
Completion is due around March/April - Westminster and I could be sharing a house warming
Blacky
Attachments
Blacky,
they will render and paint the second storey before scaffolding comes down?
Looking good!
The race is still neck and neck between us I wonder who I can bribe
they will render and paint the second storey before scaffolding comes down?
Looking good!
The race is still neck and neck between us
I wonder who I can bribe Things have been coming along now - with rooves on each unit and the render starting to go on, and the window frames going in.
Builders have knocked off for a few weeks for christmas, but should kick into it again early in the new year.
WM and I are pretty close - albiet I think she is slighly ahead of me.
Here are some vids of my place and the next door neighbor - if you are interested
http://www.youtube.com/watch?v=f-6sif89Fm4
http://www.youtube.com/watch?v=ymDavXijmv0
http://www.youtube.com/watch?v=wc8UE6_yKK8
Blacky
Builders have knocked off for a few weeks for christmas, but should kick into it again early in the new year.
WM and I are pretty close - albiet I think she is slighly ahead of me.
Here are some vids of my place and the next door neighbor - if you are interested
http://www.youtube.com/watch?v=f-6sif89Fm4
http://www.youtube.com/watch?v=ymDavXijmv0
http://www.youtube.com/watch?v=wc8UE6_yKK8
Blacky
Blacky, I've read your story cover to cover a few times now and have done it again at 0400 hrs in the morning.
I relate to your story and the lessons learnt - especially (1), (2), (3) and (4) - copied below. My issues however (in contrast to yours) are all post development.
I finished my 5 unit development last year. The build itself went smoothly - luck (or great planning) ensured that settlement, valuations, finance approval, building approval and construction all were completed in a nine month timeframe (some things were organised/approved during the settlement period). Like Blacky, once you commit to the land and loan, there is only one way forward, and the quicker you get there the better. Unfortunately, things went downhill from there.
At completion, a large amount of rental stock was becoming available due to two major employers leaving town, mining projects being put on hold and other residential developments being completed. As a result, the rental market was saturated with a large amount of rental properties at reduced rents. The interest on the construction loan at commercial rates was significant. To make matters worse, the construction loan was due to close out in three months and without leases, the bank was reluctant to refinance the loan onto residential rates given the downturn in the rental market. Add to this insurers were reluctant to insure given their exposure to adverse weather conditions in other parts of Australia and the only insurer who was willing to insure would do so at a significant premium to what was charged prior to the 'events'.
I had known prior to the development that two major employers were looking to shut down operations. I didn't foresee that the impact was as large as it was or would coincide with other developments being completed and other operators leaving town. The vacancy rate went from about 1-2% to 8% over a period of a month.
Fortunately titles for the units came through quickly and through the efforts of a property manager most of the units were leased out at the two month mark. Pure luck to get the tenants - other properties had been available six months at ever decreasing rents and the vacancy rate in the town is still approximately 8%. The final unit was leased out four months post completion. The rents obtained are 10-15% less than what was projected when the project was first commenced but at least they are leased out. And fortunately interest rates fell during 2013.
The bank has refinanced the loan onto residential rates (all on standalone titles) and I have locked in most of the loan amount on favourable fixed rates which has made the interest burden significantly less. Refinancing from 65% LVR to 80% LVR has also given me an 'equity buffer'.
To go from a strong equity/cashflow position pre-development, to taking a leap of faith to do a development, to having limited cash on hand and a poor (negative!) cash flow position at completion, to trying to rent out units in a weak rental market has been challenging. I relate to some of Blacky's stress. Even now, one of the units is becoming vacant and I have some anxiety about how long it will take to be leased out again.
So the lessons learnt for me:
1. Make sure all your ducks line up - it makes things easier if plans, finance, approvals, construction all run smoothly.
2. Have contingency funds in case things don't run smoothly.
3. Have an exit plan - in terms of selling / renting and in terms of refinancing the loan.
In hindsight, would I take on the development again? I sure would - I obtained five investment properties all in the one go. Things are roughly cashflow neutral at present. Hopefully the rental market in this town will recover over the next few years with a subsequent increase in yields. All it would take is one or two large businesses to set up and the available rental stock would fall significantly.
Will I do another development again - probably not in my lifetime - its going to take me a long to pay off the loan. I don't foresee myself building or buying anytime in the next five years. I'm happy to wait for rental yields to slowly increase and to build up a cash buffer.
I relate to your story and the lessons learnt - especially (1), (2), (3) and (4) - copied below. My issues however (in contrast to yours) are all post development.
I finished my 5 unit development last year. The build itself went smoothly - luck (or great planning) ensured that settlement, valuations, finance approval, building approval and construction all were completed in a nine month timeframe (some things were organised/approved during the settlement period). Like Blacky, once you commit to the land and loan, there is only one way forward, and the quicker you get there the better. Unfortunately, things went downhill from there.
At completion, a large amount of rental stock was becoming available due to two major employers leaving town, mining projects being put on hold and other residential developments being completed. As a result, the rental market was saturated with a large amount of rental properties at reduced rents. The interest on the construction loan at commercial rates was significant. To make matters worse, the construction loan was due to close out in three months and without leases, the bank was reluctant to refinance the loan onto residential rates given the downturn in the rental market. Add to this insurers were reluctant to insure given their exposure to adverse weather conditions in other parts of Australia and the only insurer who was willing to insure would do so at a significant premium to what was charged prior to the 'events'.
I had known prior to the development that two major employers were looking to shut down operations. I didn't foresee that the impact was as large as it was or would coincide with other developments being completed and other operators leaving town. The vacancy rate went from about 1-2% to 8% over a period of a month.
Fortunately titles for the units came through quickly and through the efforts of a property manager most of the units were leased out at the two month mark. Pure luck to get the tenants - other properties had been available six months at ever decreasing rents and the vacancy rate in the town is still approximately 8%. The final unit was leased out four months post completion. The rents obtained are 10-15% less than what was projected when the project was first commenced but at least they are leased out. And fortunately interest rates fell during 2013.
The bank has refinanced the loan onto residential rates (all on standalone titles) and I have locked in most of the loan amount on favourable fixed rates which has made the interest burden significantly less. Refinancing from 65% LVR to 80% LVR has also given me an 'equity buffer'.
To go from a strong equity/cashflow position pre-development, to taking a leap of faith to do a development, to having limited cash on hand and a poor (negative!) cash flow position at completion, to trying to rent out units in a weak rental market has been challenging. I relate to some of Blacky's stress. Even now, one of the units is becoming vacant and I have some anxiety about how long it will take to be leased out again.
So the lessons learnt for me:
1. Make sure all your ducks line up - it makes things easier if plans, finance, approvals, construction all run smoothly.
2. Have contingency funds in case things don't run smoothly.
3. Have an exit plan - in terms of selling / renting and in terms of refinancing the loan.
In hindsight, would I take on the development again? I sure would - I obtained five investment properties all in the one go. Things are roughly cashflow neutral at present. Hopefully the rental market in this town will recover over the next few years with a subsequent increase in yields. All it would take is one or two large businesses to set up and the available rental stock would fall significantly.
Will I do another development again - probably not in my lifetime - its going to take me a long to pay off the loan. I don't foresee myself building or buying anytime in the next five years. I'm happy to wait for rental yields to slowly increase and to build up a cash buffer.
So - what are my lessons learnt (so far)
1) developments require more cash upfront than you can imagine. Be well liquid before starting.
2) cater for worst case. Have a viable exit strategy for every stage of the development. I didnt have one, so I was in a position of high -ve capital at several stages, meaning that if I bailed out I would have lost the cash. It meant that in order to recover the money invested I had to carry on.
3) Dont rely on your capital for servicing the project. One day this will run out.
4) I would probably say that in reality I jumped into developments too early in my investing career. I should have built a stronger capital and income base before taking the first step - but the numbers just looked too good to resist.
5) Employ the best - the best project manager, the best lawyer and the best accountant. Without these professionals working with me I would never have made it this far. They dont come cheap - but are worth every penny.
6) I still have more learning to do.
Thanks for sharing your story/experience and your advice.
I am curious when you mentioned rents falling back due to companies closing down was this a regional town/mining town?? in WA??
Valued dropped during the building process, but you have increased equity so you still managed to make a profit??, can you access this equity to move on??
What we are seeing now is the rental market softening and in metro areas everything will rent but if there is an oversupply one needs to reduce the rent due to competition.
Cheers
MTR
I am curious when you mentioned rents falling back due to companies closing down was this a regional town/mining town?? in WA??
Valued dropped during the building process, but you have increased equity so you still managed to make a profit??, can you access this equity to move on??
What we are seeing now is the rental market softening and in metro areas everything will rent but if there is an oversupply one needs to reduce the rent due to competition.
Cheers
MTR
Hi Ozk
I am coming to the 'pointy end' of the project now. Where valuations/sales/rentals need to start lining up. My comfortable 1 year interest only period is coming up now so repayments will increase. My current cash flow can cover this though, so Im not stressed about it.
I have had a number of soft enquiries about selling one of the places, and they are not yet on the market. However, this could just be a few clever cookies trying to secure a cheap buy before they hit the market.
While I am in Perth, I will be sitting down and doing the exact numbers on profit/loss. There won't be much in it either way (I don't think).
Thanks for sharing your experiences - Im glad Im not the only one facing difficulties. There are enough people on here who seem to cruise through investments/profits making it sound all too easy.
Blacky
I am coming to the 'pointy end' of the project now. Where valuations/sales/rentals need to start lining up. My comfortable 1 year interest only period is coming up now so repayments will increase. My current cash flow can cover this though, so Im not stressed about it.
I have had a number of soft enquiries about selling one of the places, and they are not yet on the market. However, this could just be a few clever cookies trying to secure a cheap buy before they hit the market.
While I am in Perth, I will be sitting down and doing the exact numbers on profit/loss. There won't be much in it either way (I don't think).
Thanks for sharing your experiences - Im glad Im not the only one facing difficulties. There are enough people on here who seem to cruise through investments/profits making it sound all too easy.
Blacky
Hi Blacky
Very exciting to see you are coming close to the end of your project and that you are in a very strong position.
I am watching my particular area and noticing that there are more villas coming on the market but they are still selling relatively quickly.
The major concern I have with developing is getting the timing right, would hate to be selling property if suddenly there is an oversupply. I suppose in this case as long as the mortgage is covered by rent not a major issue.
This in part why I decided against building in Balga, Westminster, Nollamara - competition when selling and also too much stock on the market. I think it is harder to sell the villas now.
Cheers
MTR
Very exciting to see you are coming close to the end of your project and that you are in a very strong position.
I am watching my particular area and noticing that there are more villas coming on the market but they are still selling relatively quickly.
The major concern I have with developing is getting the timing right, would hate to be selling property if suddenly there is an oversupply. I suppose in this case as long as the mortgage is covered by rent not a major issue.
This in part why I decided against building in Balga, Westminster, Nollamara - competition when selling and also too much stock on the market. I think it is harder to sell the villas now.
Cheers
MTR
Very exciting indeed. It has been a long time coming!
Im heading out there now to have a walk through with the builder. Ill get some pics.
I am selling one, mostly just to reduce debt and free up a bit of equity for the next purchase. Fortunately I don't have to sell, and the rents will cover my expenses. Though having some cash back in my pocket will be nice.
Blacky
Im heading out there now to have a walk through with the builder. Ill get some pics.
I am selling one, mostly just to reduce debt and free up a bit of equity for the next purchase. Fortunately I don't have to sell, and the rents will cover my expenses. Though having some cash back in my pocket will be nice.
Blacky
After so many years, it must be exciting to be at this end of the project instead of the other end. In terms of selling, I have seen a few "keep some, sell some" threads where there was a lot of angst about GST. Just wondering in your situation what the GST situation is with the one you are selling?
MTR:
1. Yes it was a regional town in Western Australia.
2. The equity gained through development without taking into account selling fees/taxation issues was 24% on a conservative pre-construction bank ordered valuations which fell to 11% on bank ordered post-construction valuations. These numbers are based on the actual costs incurred during construction.
The ROI if the units were to be sold taking into account profits being taxed at income tax rates, selling costs etc would give much less cash in hand than the above percentages.
3. The plan was to hold and rent all units for five years to minimise issues with having multiple strata owners, particularly in the current period where strata insurance is expensive and difficult to obtain. This was also to avoid profits being taxed at income tax rates without CGT discount (albeit if I sold I could claim back some construction GST as you allude to with Blacky). Eventually rents will increase - there is no talk of another major employer leaving town and all it would take is a major project announcement and some of the rental excess will be soaked up.
4. I have equity, but am happy to 'bank it' until my not insignificant loan reduces to a manageable amount (which will take many years) or rents increase to a level where the properties will 'self fund' themselves. Keep in mind the current low interest rates will increase sometime - even a 50 basis point increase (5% to 5.5%) will increase the interest payable by 10% and when the loan amount is not small this increase is significant. I can't envisage increasing my loan commitments - the current monthly interest I pay is significant, eventually interest rates will rise and my IO terms will fall back to P+I. My plan is to pay down debt rather than commit myself any further.
The project and holding the units will hopefully be worthwhile in the (hopefully short but probably) long term. The town is a regional hub and will not go backwards. Employers will move to town and eventually the sales and rental markets will reach steady state again. I sense that the number of projects under construction/planned is much less than that has occurred in the last 12 months and already vacancies are slowly falling albeit with a concurrent reduction in asking rents.
Hope this answers your questions MTR. Didn't mean to hijack your thread Blacky.
1. Yes it was a regional town in Western Australia.
2. The equity gained through development without taking into account selling fees/taxation issues was 24% on a conservative pre-construction bank ordered valuations which fell to 11% on bank ordered post-construction valuations. These numbers are based on the actual costs incurred during construction.
The ROI if the units were to be sold taking into account profits being taxed at income tax rates, selling costs etc would give much less cash in hand than the above percentages.
3. The plan was to hold and rent all units for five years to minimise issues with having multiple strata owners, particularly in the current period where strata insurance is expensive and difficult to obtain. This was also to avoid profits being taxed at income tax rates without CGT discount (albeit if I sold I could claim back some construction GST as you allude to with Blacky). Eventually rents will increase - there is no talk of another major employer leaving town and all it would take is a major project announcement and some of the rental excess will be soaked up.
4. I have equity, but am happy to 'bank it' until my not insignificant loan reduces to a manageable amount (which will take many years) or rents increase to a level where the properties will 'self fund' themselves. Keep in mind the current low interest rates will increase sometime - even a 50 basis point increase (5% to 5.5%) will increase the interest payable by 10% and when the loan amount is not small this increase is significant. I can't envisage increasing my loan commitments - the current monthly interest I pay is significant, eventually interest rates will rise and my IO terms will fall back to P+I. My plan is to pay down debt rather than commit myself any further.
The project and holding the units will hopefully be worthwhile in the (hopefully short but probably) long term. The town is a regional hub and will not go backwards. Employers will move to town and eventually the sales and rental markets will reach steady state again. I sense that the number of projects under construction/planned is much less than that has occurred in the last 12 months and already vacancies are slowly falling albeit with a concurrent reduction in asking rents.
Hope this answers your questions MTR. Didn't mean to hijack your thread Blacky.
As this is my first development GST isn't applicable. However, 'CGT' would be if I were to make a profit from the sale. Which I won't so I will get a tax deduction
I have never understood negative gearing... I would much rather make a big profit and pay lots of tax, than lose money but not pay any...
Blacky
Not at all.
Though I would be interested to hear more of your story. The location/plans of the development and how things started/progressed and how they finished up compared to the plan.
Lessons learned etc. I often find you learn more from when things don't go 100% smoothly than when they do.
Maybe start a thread and walk us through it?
In many ways Im glad my first development was a struggle and a challenge. I think if I had walked in, made a million and walked out it would of made me very complacent going forward, and I probably would have ended up buying all sorts of rubbish thinking this development thing is easy.
I often hear inexperienced people harping on about how their 'friend' bought a place for $500k built 4 units and sold the lot for $1.5mil. They seem to think it would be $1mil profit, however, I now know better
Blacky
I'll show you one day if our FIFO breaks coincide. I have hours to spare when I'm on my breaks.
I often hear inexperienced people harping on about how their 'friend' bought a place for $500k built 4 units and sold the lot for $1.5mil. They seem to think it would be $1mil profit, however, I now know better
So true. The stories going around when I started were 'buy a triplex block, demolish, build three units, sell two, get one free to live in'. Things aren't that easy.
