Residential Subdivision in Adelaide

[arg821]

Hi guys,

I have adopted a buy & hold strategy now since my first IP purchase in 2001. This now equates to 7 IP properties, however I have to say I'm feeling a little "left out and in a rut" by just owning rental properties and doing nothing else.

Just over 12 months ago I purchased a property in Kilburn, roughly 7kms north of Adelaide. Just over its back fence is a new development, now in its 3rd stage of selling house & land packages on generally <500sqm blocks, lots in the 300-450sqm range. I purchased this property for $199,500 and is a 50yr old house on a block size of just over 700sqm (16x44m). Our original idea was to rent for 12 months or so while we are working out the best strategy for its use, and then most likely bulldoze and subdivide into 2 3br houses.

I have approached Homestead Homes and spoke with a consultantant who has done exactly this, in the same council area and the block dimensions are almost exactly the same (my block is a fraction bigger, so we know the plan they had will work with us). We can look to divide the block lengthways, and build 2x 3br detached homes.

My question is, this seems to be going on a lot in Adelaide, no matter what suburb you drive through you see these "two new thinner houses" amongst the regular stock of the suburb so its a popular thing to do. Are there any forumites willing to share some basics in terms of $$$ spent and profits made?

Whilst I might be quite confident in my ability to invest in r/e in a buy & hold pattern and do that well, I've not yet delved into this "simple dubdivide and build" strategy. You could build 2 and rent 2, build 2 and rent 1 live in 1, you could build 2 sell 1 or sell 2 etc. Any general info on this type of activity would be welcome!!

Thanks,
Andrew.

 

[Xenia]

Hi Andrew,

Have you done a feasability study of your proposed development to determine what your profit margin would be?

I find that profits are maximised on blocks where the original house does not need to be knocked down ie where the driveway is wide enough to allow a hammerhead subdivision and development of a new dwelling at the back. The original house can be renovated and left as is.

Our rule is that if we need to knock down a house, the block has to be large enough to allow the building of 3 dwellings, the risk/reward profile is too high if the block only allows 2. But thats us, others could be different.

We like to have at least 25% profit in the deal before we even touch it, we don't seem to get it on 2 dwelling blocks if both houses need to be built from scratch.

Look also at west torrens and charles sturt areas, there are pockets within these areas that allow 270m2 per dwelling. The average block size is 1000 m2 so blocks are large enough for 3 dwellings.

You also need to factor in holding costs while building. I haven't used homestead but have heared they could take 18 months! We had a quote from them and asked them to add penalty clauses to the contract if they go over the amount of time they proposed. They would rather lose your business than stand by what they quote!!!

Feel free to contact me anytime, I'm (obviously) in Adelaide too

 

[quoll]

add penalty clauses to the contract if they go over the amount of time they proposed. They would rather lose your business than stand by what they quote!!!

G'day Xenia

Have you found any builders willing to write in a penalty clause. I don't think any average residential builder would.

I wold be interested in knowing which ones will?

Rossdale will offer a fixed price contract but no absolute time frame is attached to it.

Cheers
Graeme

 

[arg821]

Hi Andrew,

Have you done a feasability study of your proposed development to determine what your profit margin would be?

Hi Xenia,
Not anything in any detail at this stage. It is just something I would like to look at, however at the moment I'm waiting to be accepted into the RAAF (next 2-3 months should see me in) as the more money I have on hand, the less I need to borrow thus maximising profits.

I find that profits are maximised on blocks where the original house does not need to be knocked down ie where the driveway is wide enough to allow a hammerhead subdivision and development of a new dwelling at the back. The original house can be renovated and left as is.

There is a house on there at the moment that is renting at 190/week, and although it is not a very good house, it is rentable so therefore helping out with the loan at this stage so I do have time on my hand.[/QUOTE]

We like to have at least 25% profit in the deal before we even touch it, we don't seem to get it on 2 dwelling blocks if both houses need to be built from scratch.

If once the subdivion is done, the existing house bulldozed, two new places built and finished and sold, if I was to come out with $50K net profit after the whole deal I would be completely happy with that. That represents only a 25K profit from each house which I think is quite a resonable amount to expect. This is the equivalent of me working for well over a year so I'd be wrapped with that.

Juts putting some feelers out at the moment, and would love for people to post some examples of doing this sort of thing as it is happening everywhere.

Andrew.

 

[duncan_m]

Juts putting some feelers out at the moment, and would love for people to post some examples of doing this sort of thing as it is happening everywhere.

I havent done any building yet.. I've done one small subdivision. I plan to develop 3-4 sites in the next 2 years..

My advice is get some Sales Data Agleave.. I and 4 friends share an Upmarket Sales Data subscription (like RP Data.. in fact owned by RPData now).. you can do some really interest forensic searches on the data to uncover exactly what other people are doing.. you see the site purchase and the subsequent sales data of the new dwellings (including the land and building size).. factoring in a reasonable amount for building ($1000sqm) you can derive their likely profit from the site..

I wouldn't even consider launching into a development "career" without having ready access to detailed, up to date sales information.. So you MIGHT get some examples here.. but if you get Upmarket you could get 100's of actual examples..

 

[TommyR]

Hi Agleave,

I think your line of thinking is in the right direction but you need to lift your expections of the amount of profit you would need. Xenia is right, you need to have a minimum of 25% profit or it's just not worth doing - your building cost will be about $1000 per sq m so even a modest sized dwelling of 100 sq m will be at least $100k add the cost of your land and you are already at $200k! How much are similar developements selling for in Kilburn ? - I know it's a suburb which has dramatically increased in popularity in recent years given it's proximity to the city - if you can sell them for close to $300 each you could be in business.

How much is your current property worth? You may be able to sell it and make the profit you would be happy with without needing to embark on a development which would only provide marginal returns anyway.

You need to consider other costs which you will incur such as demolition costs, holding costs during construction and sale, your tax implications inc gst, selling costs(agent fees, advertising) all of which will impact on your bottom line. If you were only making $25K it would soon be eroded by these charges.

If you would be happy with a small profit, $25k is after all $25k, consider also the process will not be stress free, so even if you don't get your hands dirty you will not be getting your profit for nothing .

Tom

 

[arg821]

I think your line of thinking is in the right direction but you need to lift your expections of the amount of profit you would need. Xenia is right, you need to have a minimum of 25% profit or it's just not worth doing - your building cost will be about $1000 per sq m so even a modest sized dwelling of 100 sq m will be at least $100k add the cost of your land and you are already at $200k! How much are similar developements selling for in Kilburn ? - I know it's a suburb which has dramatically increased in popularity in recent years given it's proximity to the city - if you can sell them for close to $300 each you could be in business.

Hi TommyR,
My basic scenario and guestimates are as follows:

Land - 200K (house was for free, really - bought for land value)
Bulldoze & Subdivide - 35K
2x 3br/1ba houses - 340K (got figures from someone with identical lot plans)
Holding costs - 25K (assuming a full 12 months construction)

Unless I've forgotten anything else - 600K total

Blocks in the area for around 300-450sqm are selling for 150-165K
I've not seen any 3br houses selling for under 300K (inc small block).
By this, I would assume (guestimate only) that each house should be worth in the low 300s (310-330K)

So if you were to sell both for say 315K (conservative), then profit of 30K would exist. It isn't a lot, and thats why I'm only considering this as an option and trying to get some ideas/figures off people who have done this before to see if I'm completely out or not.

Andrew.

 

[TommyR]

Hi Andrew,

At $30k profit you haven't got enough to cover any cost blow outs, one slight hiccough and your margin is gone. Don't forget the property already owes you money, there are the costs of purchasing and holding the property for 12 mths over and above the purchase price, probably at least 15k.So that cuts your profit in half,then there is tax & possibly gst to come out of that remaining $15k - what if it takes 3-4 mths to sell and settle, that could take care of the rest!
I'm not trying to put you off, just trying to suggest your proposal may not be the best one for this property at this time. I think with property values not increasing rapidly at present, value adding through redevelopment is a good way to go, but the figures need to stack up - either more on the block or cut construction costs - smaller size or a different builder
If blocks are selling for $150-165k on your figures you would be better off just subdividing and selling.
If your build costs are accurate you would need to be able to sell for $350k+ ea just to improve on potential profit from selling the vacant land only - is this possible?
Are the 3br properties which you have seen comparable to the ones you are proposing, if they have paid $150k+ for the land and $170k for the build it seems unlikely.With building costs of $170k will you be falling into the trap of overcapitalising.

One other thought which just occured to me was the width of your block, if you subdivide down the middle you would only have a width of 8m each, before you get too excited perhaps you should check with the council regarding minimum width permissable, if your block is too narrow for a side by side you may have to consider creating a battleaxe configuration - which on the bright side may allow you to retain the existing house and save on costs there.

There are a number of scenarios which you need to work through to decide the most profitable for you, don't be dismayed if the best one at this time is to hold for a while longer, when the time is right you won't even have to think about it, just don't fall asleep and let it pass you by!

Cheers
Tom

 

[arg821]

If blocks are selling for $150-165k on your figures you would be better off just subdividing and selling.
If your build costs are accurate you would need to be able to sell for $350k+ ea just to improve on potential profit from selling the vacant land only - is this possible?

G'day TommyR,
I did think about subdividing the block into two and selling with no construction. I'm setting up some meetings with R/E agents to discuss "reasonable" sales data for land/houses to give me more accurate "selling" figures. The other thing is simply to hold onto it, while being negatively geared, I believe the CG will certainly outstrip holding costs in the mean time.

One other thought which just occured to me was the width of your block, if you subdivide down the middle you would only have a width of 8m each, before you get too excited perhaps you should check with the council regarding minimum width permissable, if your block is too narrow for a side by side you may have to consider creating a battleaxe configuration - which on the bright side may allow you to retain the existing house and save on costs there.

Yep no worries there. While I have not put any applications through to council on my particular block of land, I know a lady who is currently building 2x3br houses in the same plan as myself, and her land is 3M shorter with identical width and she is in the same council area. BattleAxe is not something the council is too keen on, and whilst I may be able to get it through, Adelaide seems to be far more friendly to sidexside.

There are a number of scenarios which you need to work through to decide the most profitable for you, don't be dismayed if the best one at this time is to hold for a while longer, when the time is right you won't even have to think about it, just don't fall asleep and let it pass you by!

That is it - I may just have to wait a bit for now. Just having a look at my options and putting feelers out to see if there's a worthwhile return in various options. If it becomes "all too hard" right now, I'll continue to rent it out until the area grows further. Today they released 12 more blocks in their "stage 2", and I know Stage3 is coming from the signage further down near Churchill Rd. I think even land banking would work for those interested in the area. 8kms from Adelaide CBD. Can't get much closer than that!!

Andrew.

 

[Merovingian]

If blocks are selling for $150-165k on your figures you would be better off just subdividing and selling.

Or even getting a DA on the two blocks and selling the plots as DA-approved blocks — if possible.