Worth building large development in Kelmscott WA?

[mrdobalina]

Hi all

I am new to Somersoft and am extremely impressed with the wealth of knowledge and the eagerness of members to share that knowledge.

I was hoping to get some advice for a large development site I have in Kelmscott (4000m2 R40 - 16 units). This was bought at the peak of the GFC. It has a crappy rentable house and the CF is heavily negative. However, it has not caused stress as my total portfolio is CF+.

Option A - Sell the block (has a house that's been rented out). Could get around $1m, but will take a capital loss of $200k. The loss would be offset against the gain in a property sold earlier this financial year.

Option B - Build 16 units.
The rough financials look like:
Land value: $1,000,000
Demolish: $30,000
Sewer run: $140,000 (not currently connected to deep sewerage)
Western power: $80,000
Build basic 3x2 units (16 x $170k): $2,720,000
Holding cost: $248,500
Total cost: $4,218,500
Value per unit: $320,000
Total value: $5,120,000
Profit: $901,500
Margin: 21.4%

The banks would regard it as a commercial development. However, if need be, I could fund the whole development using cash.

Thoughts on risk and feasibility?

Thanks in advance.

 

[sanj]

if youre selling you need to take into account GST and selling costs too and you need some sort of contingency imo and they will erode your margins significantly.

have you done a development before? what is your experience level?

alternatively, the market is desperate for land at the moment, what if you subdivided and sold lots off? might be an option too

 

[mrdobalina]

Thanks Sanj.

Thoughts are to sell half and keep half. So I will have to factor in gst and selling costs.

The number of developments I've done to date are.... Ummmm.... 0.

The plan was to start the survey strata subdivision process for this big mamma, get titles, but not build for a couple of years. In the meantime, I've got a few other developments to start and finish, to get some experience under the belt (3, 4 and 8 unit developments).

Selling off the subdivided land is a great idea. Less profit, but less risk. I'll speak to some local agents to gauge the market for this. Alternative, team up with a spec builder and offer house & land package deals.

 

[HD_ACE]

Thats a big development for your first, but you look experienced in investing so that will help.

The numbers dont lie so if it stacks up with the extra costs as sanj mentioned plus a reasonable buffer for a development of this size then i dont see why not.

Just think worst case ( lower sales price or having to rent them out etc) and be prepared.

The other thing is i think site costs could be hefty if its clay so research that or get tests done. But that shouldnt effect you if subdividing and selling.

Your in a good position if you can pay for it all by cash.

If i was in your position i would look at removing some of the risk by selling at least half as land or house and land packages depending on demand and then looking to develop the rest to either sell or hold.

Just my thoughts.

Cheers

 

[paulie]

Hellomr d

You might have missed a few costs

Agents selling fees, settlement cost and advertising.

Also Have you included site works and finishing costs in the build costs? $175k each could be $140k build + 20k site + 15k finishing, which is bottom shelf stuff. But if $175 per build is just the building contract then forget that builder, it's too pricey for Kelmscott.

Kelmscott has a lot of clay in most areas, so if your site is an S class you are looking at at least 20k per villa for extra engineering and site preparation and finishing for basic bottom spec 3x2's is at least $12k each, still have to do yourself ac landscaping and fencing in most cases.

Overall the deal Problem with Kelmscott is you are not likely to see much growth in likely sale prices over the next 12-18 months, it will take to complete project, so if your likely expenses on the creation costs blow out by 35k each x 16 - your profit margin is too small to go ahead In my opinion, because if the worst case happens and prices drop 10% before you sell, you are in the hole.

Good luck

 

[mrdobalina]

Thanks for the advice guys.

For the kelmscott market, I'm probably looking at about $180k finished plus $20k site works. The soil report came back as S class.

To factor in contingency and a higher rate of return for the increased risk, it's probably looking pretty skinny.

If I build, then will probably sell half and keep half to rent out. The problem I've got currently is that the cashflow is a $50k per year drain :/

 

[TMNT]

Hi all

I am new to Somersoft and am extremely impressed with the wealth of knowledge and the eagerness of members to share that knowledge.

I was hoping to get some advice for a large development site I have in Kelmscott (4000m2 R40 - 16 units). This was bought at the peak of the GFC. It has a crappy rentable house and the CF is heavily negative. However, it has not caused stress as my total portfolio is CF+.

Option A - Sell the block (has a house that's been rented out). Could get around $1m, but will take a capital loss of $200k. The loss would be offset against the gain in a property sold earlier this financial year.

Option B - Build 16 units.
The rough financials look like:
Land value: $1,000,000
Demolish: $30,000
Sewer run: $140,000 (not currently connected to deep sewerage)
Western power: $80,000
Build basic 3x2 units (16 x $170k): $2,720,000
Holding cost: $248,500
Total cost: $4,218,500
Value per unit: $320,000
Total value: $5,120,000
Profit: $901,500
Margin: 21.4%

The banks would regard it as a commercial development. However, if need be, I could fund the whole development using cash.

Thoughts on risk and feasibility?

Thanks in advance.

some explain this me pretty please

unless you are going to keep all of them, wouldnt every sale be classifed as a GST inclusive purchase??

using the original figures of $5,200 in sales, I know GST is not quite 1/11 based on land purchase etc, but for arguments sake,

wouldnt 5,200 = $4727+GST

there for making his profit drop from $901k to $427k!?!!?
thus his return is only going to be about 10%????

I see lots of mag articles saying joe blogs has built 2 town houses and intends to sell off, he can sell both for $450k each, thus returning him a profit of $150k in 12 months, but that figure doesnt include gst and if he sold it, minus gst, minus agents fees, his profit would go down from 150k to 30k

what am I missing here? am I doing it wrong?

 

[mrdobalina]

If all were sold, Gst is collected on the sales (say $465k), but you also get reimbursed for the gst paid out for costs (Say $381k). So the net gst payable is only about $80k.

 

[Daviid]

Kelmscott Unit development

Mate I'd also consider keeping that existing house you're assuming you need to knock over. Even if it's really (and I mean really) crappy, you can do a cosmetic reno on that thing and subdivide it off from the development. You then just sell that house back to the market. You're probably going to lose a couple of unit sites but you'll be lowering your exposure by what you get for that house. It looks like this:

Current cost per site.
Land value $1,000,000
divide by 16 units = $62,500 per site

No with keeping the existing house
Reno and sell existing house - sale price (for example) $300,000
For the house you lose (for example) 2 unit sites.
Remaining land value (or owing) now $700,000
divide by 14 units = $50,000 per site

For the sake of 2 units you're taking back $300,000 worth of risk. This works every time.

The problem will be your acceptance of having an old house out the front of your development. I'd encourage you to get past the aesthetic of that and just let the numbers do the talking. You can even hedge the thing out with trees or tall bushes. So, for the $30,000 you were going to spend knocking it over, do a cosmetic reno (paint and carpet ONLY), fences, trees then sell it off.

 

[mrdobalina]

Thanks for the tip Daviid. The house is certainly a knock down job. I am guessing it will take a lot to renovate it. More crucially however, is the positioning of the house on the block, which would hinder the development quite considerably.

I'm thinking of getting the subdivision approval, getting titles, then consider the options of selling off the blocks individually, offer H&L packages or financing the whole development myself.

 

[HD_ACE]

Thanks for the tip Daviid. The house is certainly a knock down job. I am guessing it will take a lot to renovate it. More crucially however, is the positioning of the house on the block, which would hinder the development quite considerably.

I'm thinking of getting the subdivision approval, getting titles, then consider the options of selling off the blocks individually, offer H&L packages or financing the whole development myself.

Best of luck with it. Hopefully it all goes well for you.

cheers

 

[Colin Rice]

Any updates available on this thread?

 

[mrdobalina]

Any updates available on this thread?

Hi Colin

I ended up selling the block. Drew up plans for 15 units and good to go. But I figured I could get a higher rate of return at less capital outlay on other projects. Might be the wrong call in the long run...

 

[MTR]

Hellomr d

You might have missed a few costs

Agents selling fees, settlement cost and advertising.

Also Have you included site works and finishing costs in the build costs? $175k each could be $140k build + 20k site + 15k finishing, which is bottom shelf stuff. But if $175 per build is just the building contract then forget that builder, it's too pricey for Kelmscott.

Kelmscott has a lot of clay in most areas, so if your site is an S class you are looking at at least 20k per villa for extra engineering and site preparation and finishing for basic bottom spec 3x2's is at least $12k each, still have to do yourself ac landscaping and fencing in most cases.

Overall the deal Problem with Kelmscott is you are not likely to see much growth in likely sale prices over the next 12-18 months, it will take to complete project, so if your likely expenses on the creation costs blow out by 35k each x 16 - your profit margin is too small to go ahead In my opinion, because if the worst case happens and prices drop 10% before you sell, you are in the hole.

Good luck

You bring up some very good points.



MrM
I am relatively new to developing myself, your project above would scare the hell out of me.

I personally think this is a very high risk project because

1. Inexperience
2. $ value
3. Building time
4. Ongoing Capital required
5. Market conditions in this area

Is there are market in this area for selling plans and permits, offloading to a builder for profit??

 

[MTR]

Hi Colin

I ended up selling the block. Drew up plans for 15 units and good to go. But I figured I could get a higher rate of return at less capital outlay on other projects. Might be the wrong call in the long run...

Sounds like you made a very wise choice

 

[mrdobalina]

Is there are market in this area for selling plans and permits, offloading to a builder for profit??

I ended up selling to another developer. Got a ok price for it. Ended up breaking even on the capital outlay. Considering I bought it at the peak of the gfc, breaking even ain't too bad.