Forum Replies Created
If the amenity is good – transport, shops and activities.
And the area is close to the CBD.
Then great things often happen.
The artists are attracted to cheap rents.
The artists bring the commercial creatives.
They, together, bring the people who want to be near the action.
Then, off it goes!
This happens in most cities, and it's a moving feast.
Once it takes off, the artists can't afford it any longer and they move onto the next hot spot.
Footscray, to me, looks like this type of area.
If you were to successfully project manage you can certainly save money.
If you don't get it right you can lose just as much.
Put your energy into establishing a good team to deliver your project.
The $1,500/m2 is a built form cost to which you should add and amount, say 10%, for site costs.
Built form costs will regularly exceed this amount but rarely come in under.
A good exercise to establish if a project is worthwhile is this:
Aim for 3/3.
1/3 = Land costs
1/3 = Development costs
1/3 = Gross margin
Expect to pay at the very least $1,500/m2 + peripheral costs for landscaping and the like.
Get good advice early so you make the best decisions for the least amount of money.
Put some work into getting the sizes and density right. A disciplined 150m2 is every bit as useful as a lazy 240m2.
You can suggest 2.2% + 10-20% for any amount beyond the reserve.
If you wish to build a house, townhouses or units, the first and most important issue is that the property is within a Residential 1 Zone (R1Z) as this is the primary zone for residential uses.
Most R1Zs also have overlays that provide further details on how the land may and may not be used.
Terry, is this some sort of third party equity?
The difficulty in this type of equation is a the cost/effect. Building is one part of that equation, and certainly an important one. I'll preface what I am about to say by letting you know I am not an architect, but I do work with architects.
Firstly, if the concepts aren't right then the project may be off-track from the start. For most proposed developments yield is central to the equation. If an architect can design a yield of three, where a builder might propose a yield of two – for example – then there is probably a good argument for paying for better design.
Where the yield is not important, there may still be a benefit in using an architect. That's because any proposed development project requires a permit (TPP/DA) or it's not a project at all. It has been my experience that architects are best at proposing designs that are attractive and useful, and so usually generate municipal support.
Planning approval is becoming more complex and the use of a (private) town planner, along with an architect (or draftsperson) is becoming more necessary than optional.
It's possible to build a second dwelling on an allotment, and not subdivide the land. Be aware however, that most municipalities will rate both properties anyway, especially if the services are connected and/or metered separately.
In Victoria a "granny flat" is to be constructed only for the purposes of housing a dependent person. There are rules around construction type, size, location and set-backs to consider. Of course, when that dependent person no longer requires the granny flat it may end up either unused or rented out. Technically, I believe this is a breach of one law or another, but it seems to happen.
If the second dwelling is not a granny flat, then a planning permit will be required. Generally speaking I think the benefits of subdividing outweigh the pitfalls. Notably, two properties, on separate titles, are more valuable than one. There is also the benefit of being able to sell one if necessary or desirable.
As an aside, one strategy I have seen work well is this:
An investor purchases land with a dwelling that is in good condition.
They then build a second dwelling behind the existing dwelling.
Because depreciation benefits are greater for the new dwelling, the old one is sold.
Proceeds from sale are then used to reduce debt and a cash flow positive investment property results.
I have seen several of our clients add some momentum by doing dual occupancy developments. It's not necessarily at the glamorous end of the property spectrum, but it is often lucrative and has some peripheral benefits.
In terms of financing, there is the benefit of an "inherent asset", that of the existing house. If purchase is made of a property which is big enough to subdivide into two or more allotments while retaining the existing dwelling, then the asset maintains a usefulness that is reflected in the bank's valuation. It also provides income to help with debt servicing. That is to say, even after subdivision of the land, the existing house on its (now smaller) allotment is still a valuable asset.
The figures are usually something like this:
At purchase:
-$500,000 purchase price.
-$50,000 planning and subdivision
After subdivision:
$450,000 value of existing dwelling on smaller land
$250,000 value of newly created allotment
The asset(s) is now worth $700,000, which makes financing of the second dwelling more secure.
After constructing the second dwelling:
-$500,000 purchase price
-$50,000 planning and subdivision
-$200,000 construction costs
$950,000 property value (1 x $450,000, 1 x $500,000)
Net position before adjustments is then $200,000.
It is perhaps something to consider.
$200,000 in capital gains takes a while to accumulate.
Good financial advice will see you get the best out of this type of scenario.
The only issue I see with a money back guarantee is the possibility that they may choose the "quickest way home" rather than getting the most they can out of the land available. Commercially speaking, if I was to offer a money back guarantee I would need to consider the surest outcome rather than the best outcome.
And a hello to DWolfe. I am just getting the hang of navigating the new site, and have as ever been looking and learning for myself, rather than posting. You know, we have been getting a lot of enquiry from people who are alarmed about the proposed new zones in Melbourne and are seeking reassurance, and I think this makes a money back guarantee seem more appealing. It is unlikely there will be any particularly tough outcomes from the future (at least 12 months before we see any draft amendments) re-zoning, and it is my feeling that it will lead to greater rather than lesser density.
It seems to be an issue of semantics. What you are talking about is building an additional dwelling of modest size and finish. A dwelling of say 75m2 is adequate for a modest 2br dwelling, and at a construction rate of say $1,500/m2 with planning and design costs on top of that, you can establish a budget fairly simply.
75m2 x $1,500 = $112,500
Plans and permits = $20,000
Total = $132,500.
From there you have a starting budget and you can use that to establish the prospective yield (ROI)
$132,500 x 8% = $10,600 / 52 = $204/week.
If you believe you can rent for $204/week, then you have a yield (before depreciation) of 8%
The only sure way is to buy all four. Any other plan is a little "hit and hope".
You can approach the local council about any notion you may have of redeveloping the block and they will be able to give you some zoning advice and maybe some advice around council's strategic objectives.
We have clients making their own apartments and town-houses in St Kilda West, and it seems well worthwhile. Land is expensive, planning and heritage issues are a pain, but the end values are impressive.
The historical benchmark builder's margin adopted by insurers is 16% gross margin, which id probably pretty close to the mark. This margin is built into the builder's pricing and is generally not expressed explicitly.
This margin is, of course, nothing to do with the developer's margin which is generally targeted at 30%.
So, if you as the developer purchase land for say $600,000, engage a builder to deliver three townhouses for $600,000 ($200,000 each), and sell the completed dwellings for $1,800,000 ($600,000 each), then you will have achieved a gross developer's margin of slightly greater than 30% and the builder will have made his (or her) margin within the building price.
Sounds like a great spot.
Perhaps you should consider building two buildings, rather than one. If the land will accommodate this it will almost certainly be more profitable. It may also be less risky as you will be hitting a lower price point.
A change of use application – as you are proposing – brings with it a fairly high level of scrutiny. Council will be anxious to understand the underlying demand for your proposed use and tha impact on your neighbours, before they will consider the level of detail you are asking about.
So, firstly go and see your local council and talk to them about your plans. If they are generally amenable get a decent planning consultant on board so you get it right.
Jim,
Regardless of the planning device, there are often ways to improve the yield (or otherwise improve the outcome) by working with the municipal authorities to come up with a solution that makes the proposal commercially viable and provides a positive outcome for the council at the same time.
Zem,
I regularly assess properties for clients before they purchase. I also find properties for clients that fit their investment and development parameters. Here's some of the things we look for, and look out for:
- The property zoning
- The state and municipal planning schemes
- Local and general overlays
- Covenants or caveats on title
- Proximity to services and infrastructure
- Density pattern in the area
- Precedents and preclusions
- Price pointing trends
- Buy in, sell out and exit points
- Land value/development cost ratios
- Feasibility fundamentals
- Proposed municipal strategies
There's quite a bit you need to know in order to find the right property. So you either need to understand these things yourself or find someone who understands and can advise you.
I hope that's useful, and I wish you luck with your plan.
Jim,
You could also consider increasing the density and yield by using a "design led" application for development and subdivision. This costs a little more in planning but will almost certainly be more profitable.
What it means is that you need to put some work into describing how the land will be used. This might be as simple as nominated building footprints or as complex as full design documentation for each proposed lot.
