Hello !!
After reading so many posts with such good replies, it was only logical to join in and get some advice on what I should do! My boyfriend is very pretty but not the brightest cookie so I have been given the line of ‘Whatever you want to buy hunny’. Although with that, a strong opinion from my mother on what I SHOULD buy and no one for trusted advice, I would appreciate as much help as I can get! I am only in the initial stages of research and are looking to buy in 4-5 months.
We are looking at buying our first home. Our current situation
My income – $60k (government job)
His income – $120k (miner)
Savings – 50k (we both have just started our roles in the last year, before that I was at uni and he was single partying his life away)
Debt – my HECS debt only
Max limit to spend – $440k (plus will get FHOG)
My strategy is to make capitol gains to move into a better area. I would say that with both our incomes, no kids and a career ahead of us (both 25 years of age), I would like to pay as much of the mortgage as possible.
I am struggling to decide on whether to buy a 2×2 unit within 3-7km of the Perth city centre or a large block with an older style has with zoning, within 10-15km of the Perth city centre.
I attended a subdivision seminar and spoke to a property investor to try and figure out my strategy. He pointed me in this direction –
2×2 unit – that newer 2×2 units are becoming more preferable for people rather than a older 2×1 unit.
Subdivide – to buy an older house and renovate it. Subdivide the land. Sell the renovated house off and build at the back and live in it. *My boyfriend is handy and his friends are tradies so renovating wouldn’t be as high as market rates. The area we are looking is zoned R40.
My mother is CERTAIN that I should buy an old unit in one of the affluent suburbs in Perth (Western suburbs). She keeps telling me that it will go up much more in value in the short term.
I would say that I would be happy in the long term with a small portfolio (3-4) investments. Would anyone be able to point me in the right direction or have any real life experience on what approach may be better.
I know I have missed a bunch of info out, so I’m more than happy to fill in on more details if required!
I would personally go down the subdivision route.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
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Hi Jenna
Welcome aboard.
A lot of it comes down to how active/passive you're willing to be.
A subdivision and build out the back will take time, effort and money. If your boyfriend's handy than that's a good start.
The unit doesn't sound too bad either – but there's limited scope to add value.
Personally, I prefer a house with a yard – whether it be for investment or a PPOR but if the numbers stack up, a unit can be fine too. I have both types in my personal portfolio.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks Shahin and Jamie. The area that I am looking to subdivide in is 12km from the city. The area is picking up however there are still a lot of state housing and affordable homes (under 300k mark). The areas to the north, east, south and west are all a lot more dearer and I would hope the stigma of the area goes. Would you mind sharing your journey of how you started and what investment choices you made?
My first purchase was at the age of 18 and it was a unit due to the lower entry point. I have made excellent money from it but in hindsight I kick myself for not buying land and developing the hell out of it. Of course I couldn't buy a house due to many restrictions but if I could I would buy a house.
The potential on land (not just any land) outweighs the yield you get from units.
At the end of the day do the cashflow numbers and marry that against the potential of CG.
If the property is within 12km of the city then that's gold. Get yourself familiar with zonings and what you could do with the property.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
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Unless your mum is minted from property investing, probably best to set her advice aside and seek to copy what people are doing who are indeed in the game in a successful manner
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi
Many people make great short term gains subdividing, gives a good kick start to your equity.
regards
D
RPI | Certus Legal Group / PRO Town Planners
http://www.certuslegal.com.au
Email Me | Phone MeProperty Lawyer & Town Planner
Hi Jenna
I got into property investing for the same reason as most – wanted financial freedom and the ability to retire early.
I became a bit of an IP nerd and studied up heaps! I built some good contacts and my wife and I started to build our portfolio – most properties have been purchased around our home town. We like properties that we can add value to easily with cosmetic renos.
Property investing led me to mortgage broking and establishing my own business – now retirement is the last thing on my mind! Staying productive and busy is what I need.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks guys! It's so nice to have a breath of fresh air on the subdivision strategy. The whole suburb is zoned R40 which is quite peculiar. If we were to go down that road, most blocks are 700sq+. I would prefer to retain the house and build. Although if it is a triplex potential and only have 2 houses on it?? My mum grew my brother and I up in Perth's western suburbs and she just doesn't realize there are other areas in Perth which are still ok!
You want to get the most you can out of the block – build as much dwellings as you can. Don't limit yourself to 2 if you can do 3. Do you DD – speak to a couple of agents, show them concept plans and finishes and get an idea of resale and what things work and what doesn't. For example, single storey villa's or double storey townhouses, units, etc.
Regards
Shahin
TheFinanceShop | Elite Property Finance
http://www.elitepropertyfinance.com
Email Me | Phone MeResidential and Commercial Brokerage
Another vote for the subdivision route. It is the ideal place to start with small developments. Often the numbers will stack up better to leave an existing house, even if it becomes a lower density development, rather than knocking a house down and building 3.
Just run the numbers and see which works best and that you can get finance for. The simple subdivision should cost alot less to do and be much easier to finance. Definitely chat with the council, to confirm if they require you to build to the higher density. I have experienced this before, where I enquired to the council if they would allow subdivision and they advised that they would prefer units.
Also for a simple subdivision, a corner block will work best, especially if you can get separate entries off different streets.
Cheers,
Matt
I should add that the ideal scenario may be to do a corner block, with existing house remaining and add 2 x 2 storey townhouses. I did one of these last year on 868 sqm.
How exhausting is the strategy process! I really appreciate the comments. I hadn't thought about if the council would prefer higher density to maximize the space. Matt did the council 'prefer' you maximize the space with the option to decide what you wanted eg 2 dwellings or 3? i will definitely look into this. The real estate agents are definitely selling the land based on its development potential (I don't think there are many naive agents on this area) so corner blocks are a lot more expensive. The only corner blocks in a reasonable price are those ones on a slope. Is this a very bad move to get blocks on a slope?
Hi Jenna
Second try, I lost the first post before I could save it…
I tried exactly what you are suggesting in the same council it sounds like. 11kms from Perth, R40, $300k+ for 728m2. I got stuck on the finance and ended up selling for $20k less than I paid for it (I bought March 2008 and sold August 2012 – bad timing, I know). I was unable to get the $600k required to build 3 villas as the banks believed there wasn't enough equity in the deal.
I'd suggest seeing a consultant or advisor to get the right setup from the get go. I've recently seen someone who enlightened my about how it could have been done before even the property was purchased.
Anyway good luck with whatever you decide. If you want some further advice about what I did wrong pm me (much better to learn from someone else's mistakes rather than your own).
Tom.
Hi Jenna,
Another vote for the subdivision option.
Western Suburbs option does not, generally speaking, have suitable rent returns.
Concur 2 X 2 units are better option than 2 X 1.
Seek a corner block or block which you can battle axe, thus leaving the original house there for as long as you can.
Talk extensively to the relevant planning department to find out what they require and what restrictions are in place.
Make sure you do your numbers subdivisions/developments can blow out, especially during your baby steps stage. Some companies do offer a project management option which may be a good place to start for you both. While this will cost more – it may also save a bit, especially if you choose wisely.
Finance is the key issue – generally speaking banks see developments as riskier propositions and your inexperience may count against you. Having said that if you really want to move forward you can get there.
Hope this helps.
Thanks for your opinions Derek. It is lovely to see a site with people in the industry and with experience. What do you mean by suitable rent returns? I am amazed that a lot of comments received from this lean towards a subdivision strategy! I am trying to wrap my head around why there is not as much capitol growth potential in a inner city unit- I understand it is harder to add value and development options are nearly non-existent but isn't there that old saying location, location, location?
I would definitely be keen to retain the original house as long as possible. I do not think in the interim we would be able to afford demolishing it. I am setting up a meeting this week to talk to the local council about restrictions to make it a little clearer. I am also looking at the City of Wanneroo with the proposed new zoning that may come into effect in the next 2 years. Is that risky business?
Derek, do you think if we have paid a significant amount off the mortgage + its growth in capitol and with funds in an offset account that development may still be refused?
Hi Jenna,
It is great you have come to be online forums to ask about where you should go from here. Despite the overwhelming support for subdivision, it is not the instant rags to riches that most people suggested it to be. I will try to debunk a few myths and hopefully share with you a clearer direction.
Well selected inner city villas and townhouses still have strong capital growth and in some instances I have seen this growth to be superior than development sites. However, when selecting these high performing properties you still have to apply some sound fundamentals. these fundamentals include:
- Purchasing a villa with a higher land component value. despite the land size been generally smaller than a subdividedable block you could still purchase villas where the land value is 70% or more. Historically, properties with high land component value tend to outperform the market as land price growth is greater than property value growth.
- Seek areas which are going through a demographic enhancement. The areas which are already nice probably will market perform in terms of their upside. I like to purchase in suburbs where there is plenty of future demand which will drive growth. This future demand is often attributed to improvements of infrastructure and gentrification of the area.
- Look for suburbs where the supply is limited. in most inner-city suburbs there will be no further greenfields, however look to the suburb zoning and see if there is going to be a steady stream of future villas and townhouses coming onto the market. This continued supply will hamper capital growth.
- You can still add value to villas through renovations and refurbishment or strategic acquisition. This is when you purchase in a complex where the land size justifies a development significantly larger then what is on the complex.
Sub division generally has higher capital growth because the land value that you are purchasing is normally high. For novice investors, they attribute the land price growth as there development margin but in actual fact this may have just been organic market growth. When selecting development sites I would urge you to consider the following:
- Many development sites at the low end of purchase price are actually unfeasible to develop in its current form. Taking Morley as an example if I was to purchase a subdividedable block around the $530,000 mark this is what my figures would look like (these are very general, but give you an idea):
Purchase price: $530,000
Buying costs: $22,000
Finance net rent: $15,000
Renovation costs: $30,000
Subdivision costs: $25,000
GST: $10,000
Selling costs: $15,000
Reno house value: $400,000
Block Value: $230,000
Net equity created from sale: $13,000
Basically after all the costs, risk and headaches for 9 months you would be making $13k and then paying a portion of that in tax. There are two things which will make these numbers look better, firstly you'll have to pay duties and holding costs regardless and secondly you might get some market growth which will boost these and sale values.
In saying all this, well selected development site are great investments (probably marginally better than inner-city villas and townhouses) but the development is not what makes developer sites great. It is the land banking which will pay off in the long run! You can still get great capital growth from villas just make sure you apply the same fundamentals – high land component value and value add through renovations.
The gst wouldn't be 10k if you were selling the development on the margin scheme, it that scenario it would more like 1.3k
Correct me if I'm wrong I understand the margin your calculating being 630k-530k – 100 k 1/11th being 10k.
but there's going to be gst credits for alot of the work to get that piece of land up for sale.. So a lot of that 10k payable being able to be claimed back after bas statements sent in
Hi Kent. You excited my boring Friday! I am so excited to see everyone's replies
The points you made a very logical and i can see how the $$$ result of a property choice can vary upon various factors.I am a little confused by what you mean by higher land component value. Would you mind elaborating on this in a simpler way?
Also, when you speak about villas, I will not be able to afford a villa's within an inner city location (0-3km) from Perth CBD, so i would be looking at villa's or most likely even units 3-7km (or even up to 10km) from Perth CBD. Do these fundamentals still apply? By that i mean, is it wiser to use these fundamentals on an inner city unit over a villa a bit further out?
thankyou!
The points you made a very logical and i can see how the $$$ result of a property choice can vary upon various factors.You must be logged in to reply to this topic. If you don't have an account, you can register here.
