Subdivision - sell or build?

[SLT]

This is my first thread so I hope I'm doing this right!

I bought a 1012sqm block in Boondall, Brisbane a year ago with an old 2 bedroom cottage at the front. My initial plan was to subdivide and sell the land at the back and use the profits to convert the front house into a positive cash flow property. Subdivision is now complete.

However I am now thinking about whether it is better to build it out to rent as I can now use existing equity to build with none of my own additional money. I plan to keep it as an investment so I avoid GST and income tax.

My question is - what considerations should I be looking at to make this decision?

Purchase price: $370,000
Total subdivision costs (headworks, survey, town planning): $72k
Holding costs: $21k
Total costs: $463k

Current value of land plus house: $555,000
Increase in equity if I sell the land now: $92k or 19.8% (not including CGT or real estate agent sale costs) Not quite the 20% most people strive for but close.

If I build, build costs will be around $209k. However, the area does not have a lot of new builds so I am struggling to come up with a final figure, I'm guessing close to $500k which is not too far away from value of land plus build.

The new house can probably rent out for around $500/wk and the old house for $320/wk which will make it slightly negative which I will find it difficult to claim as it is in a trust. There are also land tax considerations if I keep both.

I am conscious that some people advocate building and keeping so that I have an investment at a discount since I have already paid for the purchasing costs, and that some advice to sell so that I can use the cash flow for my next investment. Return if I build is lower than selling but should I take into account potential future growth as well?

 

[Tim86]

I'm not too sure if this would be feasible. But maybe moving the existing house to the back block and getting a removal house put on the front block?

Move the existing house back would cost about $10k for the move, $5 - 10k to stump. Putting a 3-4 bed weatherboard removal house onto the front block can come in as low as $60k stumped plus $5k-$10k diy reno.

Total cost would be lower than a new build. But then you have to figure out if it's worth it with the loss of rent in the front house while you move it, plus lower sale figure as you won't be selling a brand new property as one of the houses will be a removal one instead of a new build.

Personally I'm splitting one block into 3, keeping the existing house on one of the blocks then selling that off and putting removal houses on the other 2 blocks and holding onto them as student accommodation with high yields (about 16%). This works out a lot better for me given my situation but your own situation will have it's own set of considerations.

 

[SLT]

I'll need to re-run my figures and see if it's worth putting an old removal house.

Is there a reason why you suggested moving the front to the back instead of just putting a removal house straight on the back block? Unfortunately I can't fit 3 on the block as it is only zoned for low density. Which area are you doing that split into 3? Since it is student accommodation I assume it is somewhere near the university?

 

[Tim86]

I'll need to re-run my figures and see if it's worth putting an old removal house.

Is there a reason why you suggested moving the front to the back instead of just putting a removal house straight on the back block? Unfortunately I can't fit 3 on the block as it is only zoned for low density. Which area are you doing that split into 3? Since it is student accommodation I assume it is somewhere near the university?

If you can get a house past the front house then by all means put it on the back block. Or maybe you have back access? I just assumed that you wouldn't have access to fit a 7mx15m house on the back of a truck past your front house and would need to move that first.

My block is low density as well, but it's a big corner block (around 1400m2)

My block is in Salisbury not far from griffith university.

 

[mgs4]

This is my first thread so I hope I'm doing this right!

I bought a 1012sqm block in Boondall, Brisbane a year ago with an old 2 bedroom cottage at the front. My initial plan was to subdivide and sell the land at the back and use the profits to convert the front house into a positive cash flow property. Subdivision is now complete.

However I am now thinking about whether it is better to build it out to rent as I can now use existing equity to build with none of my own additional money. I plan to keep it as an investment so I avoid GST and income tax.

My question is - what considerations should I be looking at to make this decision?

Purchase price: $370,000
Total subdivision costs (headworks, survey, town planning): $72k
Holding costs: $21k
Total costs: $463k

Current value of land plus house: $555,000
Increase in equity if I sell the land now: $92k or 19.8% (not including CGT or real estate agent sale costs) Not quite the 20% most people strive for but close.

If I build, build costs will be around $209k. However, the area does not have a lot of new builds so I am struggling to come up with a final figure, I'm guessing close to $500k which is not too far away from value of land plus build.

The new house can probably rent out for around $500/wk and the old house for $320/wk which will make it slightly negative which I will find it difficult to claim as it is in a trust. There are also land tax considerations if I keep both.

I am conscious that some people advocate building and keeping so that I have an investment at a discount since I have already paid for the purchasing costs, and that some advice to sell so that I can use the cash flow for my next investment. Return if I build is lower than selling but should I take into account potential future growth as well?

Thanks very much for the post, I thought the subdivision costs would be less than that, was there any particular reason it was $72k? Did you also have to get DA approval for a specific house design for the second block?

 

[WattleIdo]

All of this info is very useful to me - my house is too close to the fence and I'd like to move it back and sub-divide.
The house is brick veneer so think the bricks need to be taken off first and new ones put on after the move.
Have been wondering about all the costs, so thanks for this.

 

[SLT]

Thanks very much for the post, I thought the subdivision costs would be less than that, was there any particular reason it was $72k? Did you also have to get DA approval for a specific house design for the second block?

No, the DA approval doesn't include a specific design. I think the costs would be council specific, I'm not sure about there in NSW but the headworks at Brisbane City Council (sewerage, contributions for roads etc) are around $27k per lot plus costs to build a driveway, run conduits to the back lot, provide stormwater drainage etc so it adds up. Also, as it is a freehold, I had to run the back lot to the existing sewer and water line. Mine was actually quite straightforward as there was a sewer line that ran through the lot. If your sewer line or water main is in the wrong place, the costs can actually increase substantially.

 

[mgs4]

A question on these subdivision, does the sale of the newly subdivided property give you any obligation to pay back part of the debt.

Eg lets say you buy a property with a large block for $550k, using $100k equity and $450k debt, do a subdivision and sell part of the block for $250k, and hold the other part of the block with property as a retnal. Are you obliged to use part of the $250k proceeds to pay down your debt, how does it work with the bank's title of security being changed?

 

[letiha]

What sort of value are you putting on the rear block if you were to just sell it on its own.

We are looking at subdividing in a suburb close by and it seems just selling the block is easier...not having to worry about tax implications of being classed as a developer if you were to build then sell the new build.

 

[mgs4]

The value of the subdivided block which is around 600 square metres is probably around $250k.

 

[letiha]

The value of the subdivided block which is around 600 square metres is probably around $250k.

I'm sure its more than that...I'll buy it with cash tomorrow if someone was selling it for $250k

 

[SLT]

A question on these subdivision, does the sale of the newly subdivided property give you any obligation to pay back part of the debt.

Eg lets say you buy a property with a large block for $550k, using $100k equity and $450k debt, do a subdivision and sell part of the block for $250k, and hold the other part of the block with property as a retnal. Are you obliged to use part of the $250k proceeds to pay down your debt, how does it work with the bank's title of security being changed?

For some reason I wasn't getting notification emails for the post. Yes, i will need to pay back part of the debt so that the leverage is 80% of the current value of the front block (or 90% if you want to pay LMI). The bank will just do a variation when the titles are issued.