I paid $90,000 plus $15,000 costs for a 3/4 br weatherboard house in good order on a 911SM block 4 years ago, I have an interest only loan of $95,000
the rent has met the costs over the 4 years, and current sale price approx $280,000, the block in Bassendean close to the river, has been rezoned for a duplex.My question is do I sell and take the capital gains now, or should I consider building the duplex and selling, they should fetch around 260,000 each.
I would need to borrow the building costs over and above the $95,000.Any advice would be appreciated thanks.
only you can answer that question patbc, depends on your own risk profile and circumstances.
selling now is safest and has a high chance of profit.
developing may give you more profits but comes at a higher risk.
because you have so much equity in the property already, your risk of losses are much smaller to a developer buying now to build.
Why don’t you do some feasability studies projecting profits after development and see how much higher the profits will be vs selling now?
We buy properties in Adelaide. Immediate Cash Settlements, No Agent Fees.
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phone 0412 437 582The obvious answer would have to be ‘it depends’.
Depends on your circumstances.
You are in the box seat since the value of the property has increased so much, that you now have more choices open to you.
What was the plan when you first purchased the property? Was it to hold as a long term rental, or to develop asap ?
If it was me, I would go ahead and develop.
Then you would have two properties able to generate rental income as well as maximum depreciation benefits( they’re brand new).
You could then sell one if you really wanted to, to lock in some profit, or better still, keep both & refinance based on the new market value, and use the proceeds to ????? ( reinvestfor example.?)Some consideration you need to take into account:
Holding costs while you subdivide and build ( rent stops and you have to keep meeting repayments for the duration, maybe 12 montrhs or more)Subdivision costs and demolition costs to clear the site before commencing.
Subdivide as a green title or a strata title.Green takes a bit longer and costs more but is worth it in the end as a seperate title is better than a strata title.
Finding a builder who can deliver in a reasonable timeframe( construction in Perth is running red hot at the moment as you would know)
Based on your borrowings $95k/$280k, your lvr is down to an incredible 33.9%, so you should have no problems borrowing the full amount required to complete the building as well as for the initial subdivision.
In fact, if your cashflow is tight you could also borrow the amount required to fund the repayments for 12 months.( effectively capitalise the interest)As an exercise, do a quick calculation of the market value for the 2x new dwellings, take off the cosat for building and subdivision as well as the holding costs, and your original purchase price, and see how much better you are compared to selling now for $280k.
My guess would be that there is at least another $80k gain to be made if you go ahead with the duplex option.You’ve done really well to get property at such a fantastic price, now just follow through and maximise to return you can get out of it.
kp
Hi Patbc
At a quick glance, if I where to buy the site from you and sell the finished product at $260k each I would offer you around $150k for the site with the house removed.
Any developer who looks at this property will be working with similar figures in mind. Therefore, if you can get $280k for your property then it would be a good price and you may be better off accepting such an offer.
If you developed the site your profit will naturally be a lot higher considering the price you paid for the site.
Sailesh Channan
http://www.developersedge.com.au
“Helping you select,develop and profit from property”
Hi,am new to forums so here goes . In response to the question weather to sell or develope , i agonise over this one quite a bit ,i mainly do two and three lot subdevisions ,sometimes i sell two blocks and build on the third ,and sell ,or sellone build two etc .Recently while going over GST issues with my accountant he suggested i build all three(in the case of a three lot sub)sell two and retain one and rent it out this way you can take advantage of tax and GST positions by absorbing them into the retained property …cheers john…
patbc,
I think you are in the enviable position of being able to take on a development and not be risking a great deal.
If KP is correct and there is a potential to make 80k it would be worth it. If say you can afford to cover costs during construction and made only 10-20k would it still be worth it? Have you done a development before ?and, how much would you learn by doing a development ? Doing or being involved in, is the best way to really learn.
Getting that first development out of the way will open you eyes up to a whole new area of property investing, that can have significant returns.
Either way, I don’t think you can go wrong.
Good luck.Mal
Getting out of your comfort zone, can help you become comfortable
Originally posted by whitelaw:out this way you can take advantage of tax and GST positions by absorbing them into the retained property …cheers john…
Hi John – welcome to the forum. Curious about this statement… was the accountant hinting at fiddling books a bit or is this a legit strategy? I am unaware of any way you can juggle costs from the other two to the remaining one… the costs would need to be apportioned on a reliable measure such as per square metre I would have thought?
http://www.megapropertygroup.comINVESTMENT SALES * RENTAL SOLUTIONS * STRATA MANAGEMENT
Hi patbc
Welcome also from me.
Couple of things.
First AUSPROP nop its not unusual to hold one, two or three unit depending on the development and as for (was the accountant hinting at fiddling books a bit or is this a legit strategy?) well this is the norm as long as the structure has been setup at the start I am currently hold 3 in a development that is about to finish, whitelaw accountant is correct you take the profit in the form of product and you have a lower base value but because there is no profit at the end as its neutral, there is also no capital gains tax its a little more complex but whitelaw accountant is right as long as its is a trust structure but I will get back to the post and that is.
hold hold hold hold and if possible hold I would put in capitals but dazzling would tell me I’m shouting.
If I was in your shoes I would fix price contract( build price) the site, build, refinance, and hold,
check out your medium price return for that suburb for the last 5 years.
you can sell as a couple of indians have just done with me but then I develop and hold, your in the driving seat its risk against return.
As for capital gain not sure because you don’t have to worry about it if you never sell.
unless you have another project that will return a higher return then this I would consider it and even if you did the cash flow from the end product after refinance will be more so my 002 is develop but not sell and get hit with cgt but hold.here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]Hi again Patbc
You are in an interesting position here. Assuming it costs you $250k to build a duplex and resale value at $260k each then your nett equity position would remain unchanged.
My guess is that your cashflow position would remain unchanged as well…depending on rental estimates of the new dwelling. However your depreciations will increase giving you better cashflow. This is beneficial if you are in the higher tax bracket.
Therefore the benefits of developing would be better cashflow and gaining experience. Although, the lessons learnt here will be valuable remember, each project you undertake will present new challanges. In the last 3 years alone I have been involved in around 50 small development projects and you learn something new each time.
Good luck
Sailesh Channan
http://www.developersedge.com.au
“Helping you select,develop and profit from property”
Lots of assumptions there Sailesh.
First one being that the resale is $260k each.
What if it was $350k each ?
Would it be worth going ahead then ??I would suggest that resale in this suburb of Perth WA, is quite different to what you are used to in Bogan ( oops…I mean Logan)so making the assumption that the market value of each @ $260k when you don’t know the market is misleading.
Better to get and then use, a more accurate market value for this particular suburb than to guess at a figure, before making a comment.
kp
“First AUSPROP nop its not unusual to hold one, two or three unit depending on the development and as for (was the accountant hinting at fiddling books a bit or is this a legit strategy?) well this is the norm as long as the structure has been setup at the start I am currently hold 3 in a development that is about to finish, whitelaw accountant is correct you take the profit in the form of product and you have a lower base value but because there is no profit at the end as its neutral, there is also no capital gains tax its a little more complex but whitelaw accountant is right as long as its is a trust structure but I will get back to the post and that is.”
Interesting… I will ask my accountant for an opinion. I have never heard of ‘taking your profit as a product’ as the costs etc need to be apportioned across each of units. However, I hope to have missed a big loophole as this would be an incredible eye opener and opportunity for me.
http://www.megapropertygroup.comINVESTMENT SALES * RENTAL SOLUTIONS * STRATA MANAGEMENT
hi AUSPROP
not sure of it being aloophole but If it is a unit trust the the end product is distributed to the trust members this is for me the norm and most of the developers that I deal with.
I am holding 3 units in the last development and have setup the same mirror structure for the development that settles on the 6th dec and have already organised the distribution of the end product it save gst, sellers margin and any capital gains tax, the structure must be setup as single stand alone structure so no cross collat and I have trusts under each section for the properties to go into.
Not sure if ypur accountant will understand but if he works with trusts he will have no problem.
I get the people that get involved in the projects that I get involved in to get their own separate legal and financial advice and mario( the builders) accountant that also does trusts has given my system also the green light.
It may not be what your system is and each is separate but it is available and is nothing dodgy about it, I carry multipul trusts and companyies for this reason.here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]I think I have misunderstood. What whitelaw was suggesting I believe was (as an extreme example) that you could build 3 units for $200k each, sell 2 for $300k each and transfer the last to yourself. sales = $600k, costs = $600k, presto, no tax payable.
I certainly agree that there is no problem retaining units without formally transferring them.
http://www.megapropertygroup.comINVESTMENT SALES * RENTAL SOLUTIONS * STRATA MANAGEMENT
Originally posted by kp:Lots of assumptions there Sailesh.
First one being that the resale is $260k each.
What if it was $350k each ?
Would it be worth going ahead then ??I would suggest that resale in this suburb of Perth WA, is quite different to what you are used to in Bogan ( oops…I mean Logan)so making the assumption that the market value of each @ $260k when you don’t know the market is misleading.
Better to get and then use, a more accurate market value for this particular suburb than to guess at a figure, before making a comment.
kp
kp,
Thank you for your wise words of wisdom.I was simply quoting the $260k resale value given to us by patbc in his initial post in this thread. I am sure that he has done some homework on this before coming up with this figure.
However if you know more about this property then feel free to enlighten us.
Sailesh Channan
http://www.developersedge.com.au
“Helping you select,develop and profit from property”
Originally posted by Sailesh C:Hi Patbc
At a quick glance, if I where to buy the site from you and sell the finished product at $260k each I would offer you around $150k for the site with the house removed.
Any developer who looks at this property will be working with similar figures in mind. Therefore, if you can get $280k for your property then it would be a good price and you may be better off accepting such an offer.
If you developed the site your profit will naturally be a lot higher considering the price you paid for the site.
Sailesh Channan
http://www.developersedge.com.au
“Helping you select,develop and profit from property”
Hi all in response to whoever suggested i or my accountant fiddle books!!! well you need to look at your setup prior to purchase !!use a trust as grossrealisation suggested, but first, use an accountant with a background specific to property developement!!you will be suprised ….cheers john…….
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