Our First IP/Development Plans - Advice Needed :)

[Mattc]

Hi All,

This is my first post although I have been following these forums for quite some time. Everyone is so helpful, its great to see.

First off I'll introduce myself, My names is Matt, 27yo and live in the northern suburbs of Melbourne (Fortunately still at home with the parents) I have my own IT company which is travelling quite successfully at the moment.

Myself and my girlfriend are looking at property investment for the first time. We have met with a mortgage broker/financial advisor and worked out we have a borrowing capacity of 750k.

Here is our current plan, any critisism, advice or guidance would be much appreciated

Area of Interest: Pascoe Vale VIC / Oak Park VIC (Or Surrounding Suburbs)

Long Term Plan: To purchase a property with 650+sqm of land with the long term views of subdividing and developing a multi-unit site.

Property Cost: 600k-700k (For a property in Oak Park / Pascoe Vale with the land sizes required to fit with our plans)

Short Term Plan The purchased property would need to have a house currently in a rentable state (Or with some new paint/kitchen/carpet etc. become a rentable property) While receiving some rental income sit tight for a while and slowly plan the subdivision etc.

To be honest, i've done some reading online about subdivision and developing although i'm still very green in this area. I have a few concerns with my above approach, which are mainly financial.

Should our views be to subdivide to build a second unit/townhouse at the rear? Or should we make sure we purchase land large enough for 2 additional units/townhouses? Here are some inexperiences calculations i have made Feel free to correct me....

1 additional Unit:
Price: 650k
Plans: 20k?
Build: 250k
Total Cost: $920k
Outcome: Own 2 properties (Worth roughly 450k each?)

The above calculations see me at a point where i'm no better off than going out and buying 2 already built units. Agree or disagree?

2 additional Units:
Price: 650k
Plans: 20k?
Build: 500k
Cost: $1.170m
Sell: -450k
Total Cost: $720k
Outcome: Own 2 properties (Worth roughly 450k each - 900k)


If my figures above are wayyy off, I'd be very grateful if you could let me know what these figures should be.

As you can see, i'm very green with all of this but I'd like to understand and learn how others have gone about these processes and if you feel i'm not in a position to go down this path, please shoot me down in flames

Once again, any advice or guidance would be much appreciated.
I look forward to everyones respons.

Cheers
Matt

 

[mary&mat]

Welcome Matt!

Just thought I'd reply to keep your thread alive...sorry I don't know anything about the subdivide game.

However, the articles I've read normally indicate that figures blow out a bit due to things like the weather, supplies can get held up, Council may take its time approving your subdivide, unexpected little things that crop up etc.

It seems like quite a ballsy move to jump into property & plan to subdivide first off...not that that's a bad thing, it just seems a bit risky.

I think you need to factor in a bit more into the holding costs due to delays.

Have you thought instead about just buying a couple of 1 bedders to get you started in property? (I'm pretty biassed here though & like my 1 & 2 br's.) You could spread the risk by buying in different suburbs/on different sides of the city/in different states.

It seems like you'll have all your eggs in one basket for a long time if you commit to this plan. If the market goes sour for a while, you'll have to wait it out & cover costs in the meantime.

Best of luck with your investing. I'm sure there are others on here with far more experience than I that can offer some more specific advice.

Regards,
M&M

 

[Wunderbar]

I would focus on buying a property that is good as it stands, without development potential. If you're so green with property investing I wouldn't even consider developing because you will get outsmarted and ripped-off by builders.

 

[Melbournian]

Hi All,

This is my first post although I have been following these forums for quite some time. Everyone is so helpful, its great to see.

First off I'll introduce myself, My names is Matt, 27yo and live in the northern suburbs of Melbourne (Fortunately still at home with the parents) I have my own IT company which is travelling quite successfully at the moment.

Myself and my girlfriend are looking at property investment for the first time. We have met with a mortgage broker/financial advisor and worked out we have a borrowing capacity of 750k.

Here is our current plan, any critisism, advice or guidance would be much appreciated

Area of Interest: Pascoe Vale VIC / Oak Park VIC (Or Surrounding Suburbs)

Long Term Plan: To purchase a property with 650+sqm of land with the long term views of subdividing and developing a multi-unit site.

Property Cost: 600k-700k (For a property in Oak Park / Pascoe Vale with the land sizes required to fit with our plans)

Short Term Plan The purchased property would need to have a house currently in a rentable state (Or with some new paint/kitchen/carpet etc. become a rentable property) While receiving some rental income sit tight for a while and slowly plan the subdivision etc.

To be honest, i've done some reading online about subdivision and developing although i'm still very green in this area. I have a few concerns with my above approach, which are mainly financial.

Should our views be to subdivide to build a second unit/townhouse at the rear? Or should we make sure we purchase land large enough for 2 additional units/townhouses? Here are some inexperiences calculations i have made Feel free to correct me....

1 additional Unit:
Price: 650k
Plans: 20k?
Build: 250k
Total Cost: $920k
Outcome: Own 2 properties (Worth roughly 450k each?)

The above calculations see me at a point where i'm no better off than going out and buying 2 already built units. Agree or disagree?

2 additional Units:
Price: 650k
Plans: 20k?
Build: 500k
Cost: $1.170m
Sell: -450k
Total Cost: $720k
Outcome: Own 2 properties (Worth roughly 450k each - 900k)


If my figures above are wayyy off, I'd be very grateful if you could let me know what these figures should be.

As you can see, i'm very green with all of this but I'd like to understand and learn how others have gone about these processes and if you feel i'm not in a position to go down this path, please shoot me down in flames

Once again, any advice or guidance would be much appreciated.
I look forward to everyones respons.

Cheers
Matt

A lot of my friends are similar like you.they want those big lands where they can just subdivide. Eventually 95% never actually go ahead. Some just get the plans done and selll the house and council approved plans with it.

If you have the time to do it if you don't have a full time job to project manage it should be ok. However you don't and want to save costs - then it might be difficult.

Some builders will come up with some excuses to extend the build as take their time. Others try to add up costs. My painter which i have used maybe 7 times try to pull a fast one on me on a house. Charged me 5.5K but i said i'll think about it - 2 days later 3.5K. now where did that 2K go? He prob din have much work on till the following week.

 

[Gools]

Matt, your sums don't add up at present. As everyone has stated you would be carrying all the risk of delays, increase in costs etc. Not sure how you have priced your build but that is way off the mark for Adelaide at least. You need to think about holding costs during the build too.

The thing you might benefit from is paying the price to purchase the 'potential'. Crystal ball really comes in handy here but if the finished product goes up in price say in 10 years time and you start the development in 8 years time then you can benefit but if the sums don't add up now and you want to start the project fairly soon then you're on a hiding to nothing. You may need to reconsider your location. There are suburbs where the sums do add up and you night want to dig about for these or find a cheaper place in your prefered suburbs.

Gools

 

[LPP]

Hi MAttc,

I agree with the other guys, there are some sums un accounted for. Hopefully someone more experienced than me in development can pop onto the thread and help fill in the gaps for you;

Off the top of my head here are some things I would be adding to my costings

• Construction costs
• Subdivision costs
• Plans and Permits (sound about right to me)
• Shortfall while renting to tenant
• Agents selling costs
• Demolition
• council contributions
• services contributions
• Acquisition costs
• I am not sure if GST is payable when/if you sell??

Has your broker confirmed that you can get finance to build?
Do you have sufficent equity or additional cash to fund the construction costs.

In regards to the broker pre approving you for $700K, can he get you more finance for other properties if you move forward with this pruchase.
Depending on your incomes, buying that one property may max you out, which is not helpful if you want to own multiple properties.

Likely you may be able to buy 3-4 lower priced properties rather than just 1 at that price. which may work out better for depending on what you are trying to achieve overall.
If you have a broker who is very IP savvy they should be able to help you by providing a few different options ie) 2 properties at $600K or 5 @ $450K for example.

Hard to get the 2 unit sites to stck up, anyone else finding that?

 

[dantro]

I'm 13 months into the planning stage of my first development - 4 units on 1000m2 and have been stuck in this stage for quite a while, having had one council rejection so far (and the wait for VCAT is 9-12 months) and having decided to start again and change the plans. I don't regret doing this, I'm learning a lot along the way, and I still believe the end result will be quite profitable assuming there are no disasters. I wouldn't want to be doing this as my first property (it's my 3rd and I bought the 2nd one off the plan, so got the taste of the 'development' process during this one, lots of delays and added costs from making variations along the way, so I knew a bit about what I was in for when I started this one).

You will probably need a lot more cash than you think. The cost base includes planning fees - paying for the architect (for me 25k so far and more fees to come, although you could save a lot by using a building designer instead of an architect), surveyor (3.5k), engineer (expecting 6-7k), arborist report (1k), planning consultants (1.5k) (a lot higher if heading to VCAT), council application fees (750) and council park fees (a lot more)... and this part is generally paid in cash. Also, you may not be able to write off many of these costs in tax until you sell the properties (if you do) possibly years down the track. So you could need a lot more than 20k in cash on top of the holding costs which could be quite high if there are delays and you won't see much return on this cash until the development is complete. You'll be lucky if you don't have any delays, being your first time. The construction costs may require a business loan (higher interest rates) with an LVR 65-70% of on-completion valuation or 80% of construction costs (although if there's only 2 units, you might get away with standard residential lending, depending on the total amount of the construction). As a rule of thumb, I've heard it's around $1500/m2 of building area plus GST depending on how you fit out the buildings and factor in more for variations and unexpected things along the way. There will be GST and other significant tax issues to consider, so you should also discuss this with an accountant who has experience in this area before you begin. You wouldn't want to run out of funding and cash whilst constructing, so whatever you think it's going to cost, it's desirable to have other assets or properties to fall back on.

However, there's no harm in buying something with "development potential" provided you can afford to hold on for long enough and save enough cash. Corner blocks suitable for development can often ask a premium, with lots of would-be developers taking interest in the ads featuring "potential to develop", having attended dozens of auctions myself before finally finding the right site.

I know there are lots of other people who have published their figures on this forum for their completed developments so it's worth doing a search and checking these ones out.

 

[Mattc]

M&M Thank you for keeping the thread alive. And thanks to everyone else for their honest feedback

I guess a question we should have asked of you all is this:
Do you think that purchasing a property in these area's with (I think) good capital growth potential (11 kms to CBD) with a large block (728sqm) for 600k-650k with a long term goal to develop is a good investment strategy?

In the short term I know that we wouldn't receive good rental income for the property as it will be an older property but we can deal with this as our income is quite strong and will continue to be able to save money for the development/planning.

If we went down this path then we wouldn't be in a huge rush to develop/build. We would probably get cracking with the planning/permit side of the equation, get the property to a point where it's ready to build, assess where we are at financially and go from there? What do you guys think?

The reason I threw off figures is that they've been going through my head and I wanted feedback on how realistic I was being and what other things should be taken into in equation etc. Which I thank you guys for doing in some of the responses so far.

LPP - What do you mean when you say "Hard to get 2 unit sites to stack up"?
To answer your question, we have not questioned the broker about borrowing for the building phase as this won't happen for at least a year or so.

Dantro - Thanks for throwing some specific costs into this thread, this is very helpful. If we purchased a property in the 600-650 range then I could quite easily come up with the cash you're talking about for the planning stages etc.

Thanks again for the feedback and please keep it coming. Already learning which i'm keen to do

Cheers
Matt

 

[LPP]

Hi Mattc,

re: getting a 2 unit site to stack up

I was speaking about profitability.

Ie) buying one block, developing into 2 and making a suitable profit margin, in the short term. As you can see from the numbers you have already shown there is no profit. (if that is your aim)

 

[dantro]

If we purchased a property in the 600-650 range then I could quite easily come up with the cash you're talking about for the planning stages etc.

Cheers
Matt

It may be more difficult than you think. A property that is ripe for development is likely to attract a premium since it will naturally attract attention from others who have similar ideas. Consider the risk of budgeting with your figures an additional two units and later finding out that for reasons you had never thought about council (or objecting neighbors taking you to VCAT) will not allow you to get the permits. Even if the backyard seems big enough there are numerous reasons why your plans may be stalled (design reasons, covenants, easements, trees and subjective reasons about street character and zoning interpretation) that council may use to stop you. You can't always use the neighboring developments as a guaranteed precedent either. Factor the risks of not being able to proceed in your figures. You should definitely involve a designer/ architect/ town planner and speak to council about the site prior to purchasing, especially if it's your first one.

 

[BuildingBlocks]

It sounds as though this development is your "end game", rather than the start of your portfolio. It's a pretty massive first step.

Instead of purchasing this and waiting say 5 years till you have the money to develop, consider buying a couple of smaller places now and then using the equity in a few years time to multiply your holdings in higher yield properties with lower holding costs ...then buy and develop the site

 

[Wunderbar]

It sounds as though this development is your "end game", rather than the start of your portfolio. It's a pretty massive first step.

Instead of purchasing this and waiting say 5 years till you have the money to develop, consider buying a couple of smaller places now and then using the equity in a few years time to multiply your holdings in higher yield properties with lower holding costs ...then buy and develop the site

Yeah I think this is true. The real test of a property developer is whether they can hold - if you can't hold - you will end up in trouble really quickly

 

[Mattc]

Hi all,

Thanks again for the advice.
The more I dig deeper and deeper into this the more I am starting to consider other options
I have no regrets looking into development because I have already learnt so much and keen to continue learning.
I don't want to rule out my initial plans and I'll continue investigating to keep that option open. To give you all an indication of the properties I was looking at here is a link below.

http://www.domain.com.au/Property/For-Sale/House/VIC/Oak-Park/?adid=2008751031

If i was to go for it I know that checks (As Dantro mentions) prior to purchasing are a must. I know I would need to:
- Contact council to check if there are any limitations/easments/Street Character etc.
- Organise for a conveyancer to inspect and take a look at section 32.

Is there anything I should consider doing prior to purchase?

Putting development aside though, can I get your opinions on what other options I should consider moving forward? The other option I did consider is buying an older property in these areas with the intent to renovate and maximise to increase the value of the property.

As you guys can probably tell, i'm the kind of person who is looking for more than just buying a new townhouse/unit and sitting on it. I don't mind taking calculated risks in life, might as well while i'm young and have no kids

Once again thanks again and I look forward to your feedback.
Cheers
Matt

 

[dantro]

There's nothing wrong with being young and wanting to take risks, but that is a lot of money you are risking with no experience in an area where a lot of experienced people get burnt.

Based on your last reply, one area I think you may get into trouble is that council cannot tell you before the purchase whether or not they are going to approve x units (let alone with with y bedrooms) and you won't find out about subtle problems like interpretation of street character until you have already paid the premium for the land and paid for the design and the coucil submission and a lot more. Council can only advise you on general matters like if there is a canopy overlay affecting the area. Things like easements can easily be found in the Section 32, but how far to design away from the easements is not fixed, it depends on the location of things like sewer man holes... and to get all this info you will need to purchase reports and pay for advice.

Even though I'm relatively inexperienced, I'm starting to side with the others in suggesting that planning a multi-unit development as your first ever property purchase is probably be more risk than it's worth. Being young means you will probably want to keep your options open and sinking money into a development is NOT a very liquid way of storing your assets, especially if that's the only property you have - you won't realise profit until years down the track and could even make a big loss.

 

[Wunderbar]

The risk increases due to his inexperience. Costs blow out, bank won't even lend to you because you don't have experience. It's a massive hurdle

 

[Ms Jade]

MattC, the configuration of the house sounds like it may give you a pretty good yield. Do you know what it would rent for? Most of the time with developing, unless you can do it with cash, you just need to be patient. I'm unfamiliar with the suburb but I know the general area & think it's a great long term bet. Looks nice on the outside, walking distance to the station.. You'll just need to spend some time painting out that light blue!
If you can be patient & the property doesn't cost you too much in the interim, I would consider buying & holding for 5 years until you can develop it (or on-sell with DA). There is already a subdivision in the street & another one behind you. Go & see the council for a general opinion. There are no guarantees, but they should be able to tell you in principle if they foresee problems with easements etc. I know sitting around for a few years is not exciting but I think it will pay dividends.

 

[Mattc]

Hi All,

I have taken everything onboard and come to the conclusion I'm not ready to jump straight into development, specially financially without any equity behind me.

With this in the back of my mind I went looking at properties on the weekend and didnt find anything that jumped out at me. I did have a look at the property I linked to in the previous post and it looks as though it has potential.

Ms Jade, thanks for your response.
The house is in averge condition but can be touched up quite easily. Its a 2 bedroom and would probably only fetch 300-320 per week rent. There are some bungalows out the back which have either students or family members of the owners living out of.

The agent had approved plans and permits for 2 units from late last year which the owners apparently wanted to build for them and their parents to live in. Owners have since they have changed plans and looked at other options. This is positive as it layed out exactly where the easement was on the block (first quarter of the drive way) and showed that approval may be easier.

The question now is do I sacrifice an pretty crappy rental return for better capital growth potential and future (5 Years) development options? Or do I look at something in better condition which will fetch better rental return?

The way I see it, if i purchase a townhouse/unit in these areas it will cost me 450k-500k and will get me 360-400 per week rental return. The issue i have with this is that capital growth will be slower and i have no options down the track.

What are your thoughts on my thinking?

Cheers
Matt

 

[jingo]

Matt,

I'll preface this by saying that I don't know the area at all. But, would it be possible to buy the property, spruce up the Bungalows and rent them out with the house? This will improve the yield and make it more possible to hold until you are ready to develop them.

I think buying the house on a large piece of land gives you more options in the long term than just buying a town house and waiting for growth to occur.

What do the figures look like if you rent out the Bungalows and the house? Would be interested to know.

Regards Jason.

 

[Ms Jade]

Ms Jade, thanks for your response.
The house is in averge condition but can be touched up quite easily. Its a 2 bedroom and would probably only fetch 300-320 per week rent. There are some bungalows out the back which have either students or family members of the owners living out of.

I agree with jingo. I'd look at cost & return of sprucing up all of them & seeing what it would add to the rent.

The question now is do I sacrifice an pretty crappy rental return for better capital growth potential and future (5 Years) development options? Or do I look at something in better condition which will fetch better rental return?

The way I see it, if i purchase a townhouse/unit in these areas it will cost me 450k-500k and will get me 360-400 per week rental return. The issue i have with this is that capital growth will be slower and i have no options down the track.

that's a question only you can answer. I have taken the crappy return option myself, in exchange for future flexibility and potential to capitalise on the land. As I said, this is not a 'get rich quick' scheme so it may seem boring & tedious - especially when it costs you $ for few years. You'd have to be prepared to stick with it. If this is not for you, or you can't afford to hold, then the townhouse option is better than buying nothing.