how long is a piece of string?
it all comes down to costing. how much can you get the land for? how much would it cost to knock down and rebuild (factor in holding while rebuilding)? what would the property be worth at the end?
versus - the same questions applied to a reno. how much can i buy the house for? how much would the reno cost (factor in no income while reno-ing)? what would the property be worth at the end?
are you planning to hold or sell? if holding, how much would they rent for?
and work on today's dollars. don't use guesstimates of how much the market might/might not rise.
and be very careful of overcapitalising, however, if in sydney region, i think now is probably the right time to start such a project as we are at the beginning of a rising market.
gotta watch that timing. we got caught financially at the end of the last boom with a knockdown/rebuild. at the time that we started the project similar houses were selling for $x, so we factored in that we could sell our property for $x - then the market tanked severely in 2004, 2 months before our project was finished.
end story is that we couldn't sell for what we expected - actually couldn't sell at all! - and had to rent the property out. we've just sold the property now (18mths later) and will barely cover costs (building and holding) with the current market value. the properties similar to those that were selling for $x 3 years ago are currently still selling for about $x-$100,000.
that $100,000 was supposed to be our profit! a very very very useful (but financally painful) lesson.
