Forum Replies Created
Thanks all for your comments, that's great feedback. A few things I did not realise, like the council charging twice for rates even on the same title… so that is definitely something to investigate further!
For a bit of background on my specific situation:
My PPOR was a bit of a rundown Queenslander in Ipswich QLD (about 40 mins west of Brisbane).
It's in a great spot close to transport and shops, above the floodline, and zoned for units. The plan was always to keep it long term as a rental while we moved on to the next one. Then 'maybe' in 10-15 years time sell the house off for removal and redevelop the site into units…. but that seems less and less likely to ever appear on the radar, being 3 years into it now without even finishing the renovations!
The main reason I am considering this over a full subdivision, is that we only have limited access down the side boundaries. The maximum distance between the house and the side boundary is 3m on one side, and the eaves overshoot that by 500mm.
Plus, the council contributions and fees for a subdivision in our area, as well as the negative impact it would have on the existing house value, would quickly wipe out any profits above our existing equity… i.e. robbing peter to pay paul.
If we can get around the driveway width issue, then building a new house out the back should create even more cashflow and deductions.
… I guess I see it as an opportunity to use my available land to build my second investment property for considerably cheaper than it would cost me to build the same house on any other land in the area, but with the added benefit that it will rent for the same amount or slight discount.
What about sliding the house into another location on the same block? I.e. move it 1 meter this way or 30 meters that way…
All fair points, SWOT analysis is a good idea too. Thanks for the feedback.
Ahh Freckle. I've gotta say, I am a fan of your responses. People may find them a bit confrontational sometimes, but I think it provides a bit of perspective that others overlook. And that is exactly what I am looking for here. A perspective that I have overlooked.
And good advice for anyone looking to find out about an area, by the way.
In truth, I have not spoken to the chamber of commerce people, or the council directly on this topic specifically… However, I have hunted down every bit of data and media release I can find, and acted on it in part.
But it's more like when you're writing an essay and you think it's great, but then you get your mate to proof read it and find you've just left out an entire paragraph… I am looking for any angles that I may have overlooked.
So far as I can see, here are the good points:
- Employment under the national average;
- Relatively low vacancy rates;
- Recently upgraged Ipswich motorway cuts travel time to Brisbane significantly;
- 40-odd percent of available industrial land in the state (some of which is currently occupied by businesses with direct benefit of the "mining boom", such as Bradken);
- $1bn being injected into the city centre by Ipswich City Properties for business and commercial use, expected to see some results of this by 2016;
- A population increase forecast over the next 20 years over 200% (currently at 170,000 odd);
- Expanding activities at the local RAAF base for RAAF, Army, and civilian contractors. Including some talk years back of an aerospace park… but I haven't heard much about that for a while now;
- A clear plan for urban development in Ripley valley and also clearly defined development areas within the inner suburbs… My current PPOR is located in one of these development zones, and that's not by accident;
- As noted above, I see cultural changes in motion also.
Basically, I can't see the downside to the fastest growing city in QLD… However, others may have more information about the success or failure of the business parks to attract… well… business? I dunno dude, that's why I'm asking.
______________________________________________________
That said… it was a one off event in 15+ years owning that and other properties.
My folks had a similar situation several years back.
The tenants didn't pay rent for a few months, then did a midnight flit. After we eventually got up there to check it out, there was several thousand dollars worth of damage done.
The bloke used to run stock cars, and drained the sump oil directly onto the garage floor… it was all pooled up in a corner somewhere. He also used to work on bits of the engine on the lounge room carpet (where the tv was) without drop sheets. On the way out, they smashed holes in every door and lots of walls, ripped fans from the ceiling, smashed almost every third tile in the bathroom, slashed every flyscreen, and stole every lightbulb from the house… including the one from the oven.
That's just the stuff I remember… pretty sure there was more though.
Oh yeah, and the RE agent gave them their bond back 2 weeks before we even knew they were gone.
Worst part was, my folks had always had insurance, but my grandfather (who used to own several unit blocks he built through his business) told them "they will never do enough damage to make insurance worth while". So on that advice they canned it a year or two before all this happened. Ooops.
It took years of rent to recoup the expense.
I should add: that 40k sitting on the mortgage would also make a pretty big difference to your cashflow situation later on when you DO rent the place out… we are talking a full 10% of your target purchase price. Or it could be drawn on to fund other investments if you are in a position to take advantage of them, further down the track.
Also, do you lose any of those benefits if you just buy an investment property now? Because that would suck.
Well, it takes a woefully long time to build 40k in either capital growth or savings… so that's a pretty tasty carrot.
But as you say, a budget tighter than a ducks bunghole is no fun (nor smart).
Can you get a housemate (or two) under those arrangements? or does them 'paying rent' affect the FHOG or other grants?
Yeah there are a bunch of places that offer low introductory rates on balance transfers. Which I think (have not tried) would be great to try.
I guess from my recent experience, there are two questions that I would ask myself if going into the same situation again.
1. How quickly can you get it done and access the equity for other profitable activities. i.e. what is your opportunity cost of waiting?
2. How much disruption are you willing to deal with when you live there?
In terms of disruption, I recall my first house, we were getting the floors polished and had to move the whole house full of furniture and junk into the back yard to do the floors… Slept out there in -2 degrees for 3 nights while they dried… not fun. just got my carpets done in our current place last weekend and spent 2 whole days worth of moving stuff in and out of rooms. Seriously, it seems we spend more time moving stuff out of the way and putting it back together than we ever do 'actually working' on the house.
And for opportunity cost, I'll give you a hypothetical example for a devils advocate point of view.
How much dearer does it work out to get your kitchen from someone else than to buy and install flatpacks yourself? And how much does it cost you in lost opportunities while you wait to save up?
For example: Say it's hypothetically $200 a week you are putting into the reno fund. After 12 months you're only 2/3 of the way to your goal total goal on 15k…. allow for some cost overrun and for new tools you need to buy, and hope nothing gets in the way that requires your cash (in my case, it was a wedding that put us back about 18 months… but it was the RIGHT choice, if she is reading this… hahaha)
If you said that the kitchen was half your budget for all those activities, would you be able to put away enough cash to pay for the carpet, paint, floorboards, and garden, within 9 months, and then use interest free terms to buy a kitchen from a supplier to get it all done in half the time?
In the following 9 months (when you would have still been saving) could you have bought and renovated your second house using your manufactured equity?
Would the profit from a deal like that make paying an extra couple of grand for a kitchen worth while?
Just something to think about.
Hi Hannah,
I am in a similar position to yourself. So far, we have just used cash for everything we have done to our PPOR (which will eventually become an IP). But living in the house rather than relying on getting it rented out ASAP makes a big difference to how you approach it.
For us, it doesn't matter if it takes a few years to finish (3 so far), because we are comfortably living in our construction site and paying less on the mortgage than we were for rent. Also, our risk profile is very low… But when relying on the rental income or wanting to 'move quickly' maybe a different tact is required.
As for 'how' to get the money, there are a number of ways you 'could' do it.
Kitchens, for example, can be bought from some kitchen companies and installed on 0% interest repayment plans over a few years. Some carpet places do similar plans also. In most cases you just need a 10% deposit.
Materials, I read somewhere on this forum that you can get store credit with bunnings, or use the credit card.
Labour for electricians, plumbers, tilers, etc could be financed with a personal loan or whatever cash you can put away… some trades also take credit cards.
Other options, I think citibank at the moment have a personal line of credit at a low introductory rate for balance transfers, like 2.9% for 2 years… so if you were to rack up 15k credit card debt, you could look at getting one of these to keep the interest down while you finish things off… In this case, 2.9% sounds like pretty cheap access to money. Cheaper than your average mortgage rate even.
But doing any of these things need to meet with your risk profile. I would recommend you seek professional advice before doing anything. Some of the forum members here would be able to provide good insight into this if you speak with them directly.
Hopefully I have cooked up some food for thought for you.
Great information gents. This forum is a brilliant resource that benefits greatly from your participation.
In your experiene, who would be the most common client for a VF home? i.e. Self employed, seasonal worker, poor credit history, first home buyer, etc.
I presume this question may be dependent in some way on the location of the property. Brisbane city for example may be one thing, but Armidale may be another.
*edit* and another question:
Would it be viewed beneficial to some buyers to pay interest only on the VF loan until refinanced?
I guess where my head is at with this question is: What is the goal that you are helping the client to achieve?
Interest only repayments would be lower, and closer to a P&I loan from a traditional lender. I can see where this could bring some higher price/quality properties within reach for some clients, but the downside being that the buyer is reliant on capital growth or manufactured growth in the properties value to gain any equity above their deposit.
Generally speaking, how reliant is the buyer on growth in value to refinance?
Yes, a bit vague on the structure at this point. More looking from a holistic point of view at 'what could be done' if operating as any of those entities. The specifics of which would need to be thrashed out in consultation with quality professionals I absolutely agree.
At the moment this is really information gathering on a subject I find interesting… But I am also trying to put together a strategy for the coming 5-10 years, of which a business operating VF would be the focus. It seems some of the things I thought were roadblocks may be overcome with the right strategy, advice, and a fair bit of patience.
Thanks for your time Paul. As always you are most helpful! You have some interesting services and products available on your site that I will be sure to look into also.
Cheers,
ScottThanks for the quick response Paul!
For question 3 the idea would be to sell houses that the business/trust/individual owns, as opposed to assisting others sell through VF (at least initially).
Would a credit license be required for this?
Again, thanks for your help.
Just throwing it out there.
What about putting the extra cash into some bonds with a yield over or on the interest rate of the home loan. That way the borrowings are all still ‘borrowings for investment’ and you can claim tax. Also, if interest rates go down you could make more cash (which you would pay tax on) that could be used for some of your non-deductible expenses, or to help supplement repayments if the property is negative geared.
Haven’t thought much beyond that… Just a bit of a brain dump.
Thanks Aaron, that gives me a bit of confidence to dig a little deeper.
I suppose another thing in our favor is that the properties, along with house on my other side were previously approved for 16 units a few years back.
Thanks menunes for your feedback also, initially I think we would want to keep it pretty simple. I can see higher risk if we don’t find a buyer, if we combine the titles and have to pay a bunch of fees. Though I suppose we can look into it if that becomes a roadblock.
If it can be avoided initially, I would prefer not to fork out for DA or any other fees not associated with selling. Particularly as I’ll likely sweeten the pot for my neighbor by covering that myself. Bit of a “I’ll take care of everything, just sign here” kind of deal. No-one likes moving, but everyone likes to make money!
Cool, thanks for the feedback!
Will definitely have to get a solicitor to handle contracts then.
any potential problems for the buyer on that??? I mean if they are dependent on finance than would there be issues with valuation as the properties independently would likely not be worth as much…
G'day Ozlat,
I wouldn't be so worried about your borrowing capacity just yet. Or your credit rating.
At this point in time it is probably more important to focus on developing good habits and money management, and getting your situation sorted out before you start worrying about investments that carry risk and commitments above what you could reasonably support if they draw 0 income.
Make sure you have a roof over your head, food in your stomach, and give yourself realistic (but not easy) targets from day 1.
Maybe start with 10% savings, for example. And if you can do that alright for a few months, bump it up to 15%, and so on.
I guess the point being, if you rush into it and start trying to dump 40% into your savings, you will probably break and pull it back out to spend on other things that 'come up'. And once you dip into it, it's hard to stop!Maybe even have a look at something like 'smartypig' to drive it for you. I think it's offered through ANZ, but just google it.
Basically you give it a goal for an item you're saving for (i.e. deposit for a house), a $ amount for that goal, and a timeframe you want to achieve it within. It will then dictate how much you need to contribute each week to make it happen, and you can set it up so the money automatically gets deducted from your account each week. It gives you a progress meter, and other tools and things to keep you motivated, all the while earning a bit of interest. In exchange, they pretty well treat it like a term deposit. i.e. you can't access the money you put in there until you reach the saving target.
Once you have done that, maybe look at asset classes that you can buy with your savings. Like corporate bonds on the ASX, which are fixed income investment types that offer good yields and low entry cost.
These sorts investments can help you boost the earnings on your savings, and put together a reasonable deposit quicker than leaving cash in the bank.
Plus, I am not sure on this one, but I believe you can use Bonds that you own as leverage too, which would probably help your borrowing capacity situation.
Anyway, you're cutting your own path here mate. But hopefully some info here on what you could possibly do to get it off the ground.
Re the cash out function, be careful. Sometimes your interest free periods do not apply to cash advance…. Different banks, different cards, etc.
Thanks luke,
That is certainly true for the subdivision option. Selling the original house would likely provide a significant amount of equity in the remaining dwelling. However, on my initial tyre kicking estimates the cost of doing the subdivision versus just selling our place as-is left me with around the same amount of cash but exposed to a much higher risk. (due to shifting the original house)
Not to exclude the option though, I wonder if the same result could be achieved with a strata title after the build? Save the cost of a full blown subdivision including the cost of shifting the original house on the block…
Then the questions become how much creating a strata title would cost, what conditions we would need to comply with (given that one would be a queenslander and one a single story brick), also how much less the strata would be worth compared to proper subdivided.
You are right about the valuer too. I will definitely look into that before making any decisions.
I still like the concept of the dual occupancy, as it would provide a close to cashflow neutral position. So would be interested to see a ballpark from anyone’s experience or knowledge, it is extremely hard to find comparables!
mining may only account for that small amount, but support industry is extensive… everything from train and truck transportation of mined materials, construction and maintenance of mining infrastructure and facilities, ports operation, catering and camp housing, recruitment, training, manufacturing of replacement parts, yada yada yada… stats can be misleading.
That said, is mining alone enough to hold up the whole economy? I think not.
Coal is the new sheep! This time with added tax, which should just about keep the gubbermint going…
