Gday Nathan

Good luck finding development land at a reasonable price now in Perth, there’s no room for development margin (for small players anyway) and all the risk is on the downside as I see it so be careful. Remember your product won’t be available for 18 months, what will the market be like then?
I have been working on a development for 2 years and haven’t even layed a brick yet. There goes my profit eaten up with interest payments. It’s not necessarily the easy money you might think. 1st builder went under so have had to go through all the hoops again. There is a shortage of materials at the moment as well, particularly bricks.
Regarding CGT on developments, assuming you subdivide and strata you have created new land, so there will be GST to be collected and payed by you the developer. This is offset to some degree by the input credits from cost of construction.
As a simplified example;
Purchase land = 210K.
Closing costs = 10K.
Construction of 3 townhouses = 600K.
Interest @ 7% = 28.7K (Total time = 18 months)
Less GST credit = 10% of 600K = 60K
Total cost = 788.7K

Sell townhouses for 350K each = 1.05M
Less GST = 10% of 1.05M = 105K
Proceeds from sale = 945K
Profit = 156.3K

Hope I haven’t put a big dampener on your enthusiasm, just be careful and diligent that’s all.

Regards

Clive

Don’t know any websites but you can get a good idea by looking at advertised new house prices in your area from a variety of builders. Better yet phone some builders, quantity surveyors, valuers or even draftspeople.
You didn’t mention house size or fitout quality but here in WA a single story good quality single level home may be $700 per m2 and a 2 level home of similar quality say $900 per m2.
With 2 level houses things like external render finish instead of face brick can add to cost because of extra scaffold time.

Regards

Clive

Gday Keith

As Bill said, not a lot of info given, however my general opinions are;

Interest Only – Pros
Improve cashflow
Certainty of interest and payments
Can service more loans.

Interest Only – Cons
Lack of flexibility
Costs to pay out early
Rely on asset appreciation to build equity.

Principal and Interest – Pros
Flexibility
Pay out early without penalty
Build equity by extra payments
Can be lower interest rate

Principal and Interest – Cons
Exposed to interest rate hikes.
Principal payments not deductible.

For me Int Only has worked well as it has enabled me to purchase more properties (all -ve CF mind you) and maximise my leverage to the growth in values over the last 15 years.
If investing for +ve CF then I would look at P&I as growth would most likely be negligible, at least in the areas I have researched.

Regards

Clive

Gday Kelvin

If it is Karratha or perhaps Port Hedland then it would not surprise me that the rent was that high, given that it is furnished.
Karratha in particular is enjoying strong rental demand at the moment with LNG train 4 on the go, but like a lot of resource towns, it can change. Already a number of mooted projects for the Burrup have been canned. However I still feel quite bullish about the long term prospects for gas and LNG.
If it were me I would either fly up or hop in the car, it will give you a feel for the area, speak to some locals etc. Certainly at first glance the numbers look good.

Regards

Clive

Hi Deborah

You could always enquire with the tax office.

Regards

Clive

Hi Allan

Regards paying off principal vs int only. If one wishes to pay down principal then they take out a P & I loan. Extra payments etc can be made to speed up the process. Remember though that these payments are made from after tax money, so if you are on the top tax bracket then effectively you must earn $2 to pay off $1. Also remember that a dollar today is worth more than a dollar tomorrow or five years time. All of my loans are fixed interest only (all the properties are -ve geared). This gives me peace of mind with rising interest rates. When the loan periods have expired I have taken up a new fixed interest only loan, unless I believe rates are going to fall. This has worked well for me as I have been able to control more property than if I had taken out the equivalent loan amounts on P & I.
With int only, surplus cashflow can be reinvested elsewhere, eg shares, cash management, other property to build up a sinking fund to pay down the balance upon loan expiry.
If property price growth is non existent or low then yes, paying down principal is necessary in order to allow further borrowings. With many positive cashflow properties this well may be the case.

My experience with banks has been that they have tended to want to lend me money on P & I terms, and I have had to insist on fixed interest only products. Conservative managers I think.

Regards the 10.4%, the book doesn’t specifically state how this number was arrived at. My guess would be that after extensive research on a number of property deals that it became evident to Steve that this was the gross yield required to make most properties cashflow positive. As an exercise examine a bunch of properties and see what the gross yield would need to be to make them cashflow positive.

Sorry about the long winded reply, hope it helps.

Regards

Clive

Hi Allan

Here is my interpretation

1. I believe To and Put are accountancy terms, double ledger accounting perhaps.

2. Paying interest only loans improves your cashflow, therefore increasing the number of loans you can service and therefore the number of properties you can hold.

Also only the interest component of an investment loan is tax deductible.

You are correct in that the balance will be the same at the end of the loan as at the start.

Typically an interest only loan will be 5 years max (10 years is available at some banks). On a typical Principal and Interest loan you will find that the balance after five years will be nearly the same.

Also the balance in five (or ten) years on the interest only loan will not be worth the same in real dollars due to inflation. Hopefully the investment property will have appreciated as well.

3. The 9.3% is the Cash on Cash Return. That is the return on the actual cash you put into the deal. This is not what the 11 second rule calculates. The 11 second rule is a first pass calculation of gross yield, ie rent versus price.

4. I suppose the 11 second rule is set at 10.4% as this is the figure which should ensure that most properties are cashflow positive after outgoings etc. Also it is easy to work out. If the rule was 11% or 13% then it would probably be the 57 second rule or the calculator rule []

Hope this helps

Clive

quote:

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Hi,

I have a question for all you ‘experienced’ investors out there.

After much thought re PI, we’re seriously considering buying a block of land and constructing two townhouses.

The reason for this decision is due to the fact that it is so hard finding an exisiting property to buy with a respectable rental yeild. So, we figured we’d go out and build our own, which seems to be a cheaper option than buying an exisitng property.

We haven’t researched the cost of construction yet (any advice on this would be appreciated!), but we would be looking at 2 or 3 bedroom w/ensuite. Cost of land is about $100k. Rental would be around $180-$210 p/w per dwelling. As it’s a regional area, CG wouldn’t be too great.

If any one can offer any advice on this, we’d be most appreciative.

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Hi There

My advice is to take time and do a thorough feasibility study before doing any development. I am midway through my first and there are many unforeseen costs involved.
These include the cost of the finance for the 18 months or so from start to finish which is not deductible, plans, clearing, filling, applications, any delays with development and building approvals etc to name a few.
This is not to dismiss your idea out of hand, just be sure to go in with your eyes wide open.

Regards

Clive