You have two blocks valued at approx $500k and $530k respectively. Total current value is $1,030,000.
It seems not to matter too much in our local area how big the block is. For example, another block in the street with the same house as one of ours, but built under so it is 4x2 (ours is 3x1), was split from the back yard. A new house was built in the back yard and the front house sold for $671K.
Also in the street, (one year later) a much nicer queenslander (3x1) on 906 sqm sold for $685K.
Prices haven't moved much since the GFC (until now, when things are looking a bit rosier), so these houses on big and small blocks selling in the same street for very similar figures regardless of block size, do confuse my efforts to work out what these houses are worth "now" and what they will be worth once they are on tiny blocks.
Add build cost of $1,250,000 for a total development cost of $2,280,000.
From this you will end up with 4 townhouses, plus two blocks (albiet smaller than what they are now).
The end value of this will be
4x townhouses @ $450-650k each = 1,800-2600k
2x blocks of land @ $350k each =$700k (66% of $1,030k - assuming you cut the blocks equally).
Total = 2,500-3300
or 9%-31% profit.
The townhouses in a similarly good street, but not battle-axe that I linked to as having the "wow" in a previous post sold for $648 (3x2). I don't think we will "lose" as much due to being battle-axe with townhouses, because unlike a freestanding house, those buying townhouses are not expecting a block of land or driveway to themselves, nor expecting necessarily a street frontage, so I'd like to think if we do a reasonably high spec as per the "wow" link we would achieve $650K sale price, but I'll do the figures on achieving $600K value once finished. Without the higher end spec (nice bathrooms, stone kitchen bench etc) I believe we would be looking at sale prices like the other link.
So, copying your figures from above, I'll amend them to what I would "hope" we can achieve.
The end value of this will be
4x townhouses @ $600k each = $2,400,000
2x small blocks of land with a house on each @ $600,000 each =$1,200,000
Total = $3,600,000
Also need to add into the expenses column your holding costs, plus contingency.
I probably am missing something, but holding costs will not change until we start having to borrow to get the DA through, plus starting the first part of the staged approval, as we are "holding" the land already.
Right now, we tip in money to the mortgage. We've been doing that for a while, and managing, but building four townhouses in the back yards will mean the extra rent pays for the whole thing (assume expenses don't blow out hugely).
Im not keen on your idea of borrowing the interest, which would indicate you cant afford to hold the properties. It places you at risk. Make sure you have a massive buffer built it.
We are not working, so we have to borrow the interest. The plan is that first stage is lift and shift the old cottage facing the street to allow driveway to the back yards. Once services are hooked back up, we will rent this house (or keep the current tenant). So we will lose the rent whilst the lift and shift happens, but should go back to how things are now once it is rented again.
Once (or if?) DA approval comes through, we continue on with building two townhouses. We will have to meet interest whilst this happens, and we would be using family loan money. We will be paying interest on this, but can capitalise it whilst the build happens.
Once built, we would obtain occupancy certificate and rent these out.
Go to a bank, refinance these two rented townhouses, and use that money to repay our family loan, and use the remainder to go towards building the second lot of two. Our loan broker says he sees no issues with getting finance (low doc) as we don't work, but we do have other income from a family trust and my casual work, so I'm not too concerned about this. If we hit problems, we work through them, sell one house, get a job, plenty of options.
Your friends advice is sound. Aim for 25% profit, if it doesnt hit 20% then you need to re-plan. If you cant get it to 20% profit, then dont do the development. This has more to do than simply drawing out the profit for the next project. It is prudent for risk mitigation.
By the sounds of it, you will not be selling. Therefore tax shouldnt be an issue - however, check with your accountant.
It is sounding reasonably positive. You just need to do your homework.\
Best of luck with it.
Blacky