Hi all,
I’ve been doing some thinking lately. I’m currently looking to purchase 1 or 2 residential properties in inner Melbourne over the next few months. My aim is to purchase properties with development potential, where I plan to sub-divide and build on down the track. My goal is to build equity quickly in the short to medium term which will allow me to increase my portfolio.
Given that the Melbourne market is fairly static at the moment (in most areas) and probably will be for some time, I’m not sure which of the following 2 options would be most profitable:
1) Buy as many of these properties as I can now (before the property boom arrives). Hold onto them and start sub-dividing/building when the market is starting to boom.
or
2) Buy one property now and begin the process of sub-division/development as soon as possible. Once the development is complete, use the equity to fun the next project.
I am leaning towards option 2 because:
a) I think this will allow me to create equity much quicker than option 1. Waiting for prices to increase in the short term is unlikely, hence I’ll have a lot of equity tied up not earning me maximum profit.
b) Sub-division/development costs will only increase in the future, so it will be cheaper to develop now instead of in 5 years time.
c) Doing the developments now would allow me to sell 1 or 2 along the way, release the profits, then duplicate the process.
What are your thoughts on this? What do most developers do? Do they tend to buy as much as they can in a flat market and develop when prices start rising, or do they buy now without overextending, then start developing and do 1 project at a time (or however many they can manage simultaneously). I know it takes time getting approvals, etc… so it is a waiting game. I’m guessing most developers would have a few projects going at the one time.
Any comments would be appreciated.
Kind regards,
OziHo ozi
all sounds good to me….
just a quick question…
when this next boom happening
because according to……
Bernard Salt is a trendspotter for KPMG
“There’ll be another weak boom in 2018-2020 and then the property market will hit the wall as the baby-boomers start dying off in droves in the 2020s.”do you know something we do?
if that gurus right, i reckon 15 years is a long time to sit don’t you, ?
hi hb
interesting reading mr salt.
it was him who announce about a month ago that he was of the view that nobody would want to sea change and live near the sea and that weekenders were a waste of money and that you shouldn’t in his opinion invest in them,
and then he looked at the stats and all his friends made money out of tasmania and the coastal belt of lower sydney and melbourne and then he said he wasn’t going to prodict like that again,
I did have the article it was just before christmas,
It is a very wise man that can prodict a market in 5 years never mind 15.
But with response to ozi post you are asking if you should land bank or purchase and construct
land banking is good but it costs alot of money to buy and hold and yuo need very high growth to make it work.
as for construction well mr salt may say we are in a falling or flat market but one thing that doesn’t fall or is flat is the cost of raw building materials so if your going to build the best time to build was yesterday as it was cheaper then so i’d be running on number 2 unless you have very big pockets filled with lots of cash.
And I know a little bit about building.here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]you know grossrealisation
there’s just to many experts
try this one……
BIS Shrapnel chief economist Dr Frank Gelber believes the economy will now pick up pace
“Business investment will take over as a driver of growth.â€However BIS forecasts a downturn in 2008.
“We’re looking at CPI inflation rising to 4.5 percent. That’s more than the Reserve Bank will wear, and it will start raising interest rates again. Next year, in the 2006 calendar year, we expect rates to rise by 1.5 to 2 percent.
“Housing interest rates will go to 9 percent. Bill rates go to almost 8 percent. That takes the head off the upswing, off the regional boom.
“In other words, we think that in a strong economy, demand inflationary pressure will cause rises in interest rates. That will put a ceiling on the upswing. If we don’t see the interest rate rises – the Treasury line – there will be a more sustained recovery, a more sustained boom and a bigger bust at the end of it.â€
make of that what you want……
but commercial property’s are looking good…..go dazzling
and shares in companies…….
Hi hb,
In regards to when the next boom will be, who knows? Your guess is as good as mine [eh] I am guessing it won’t be for a few years yet. I don’t really take much notice of all these predictions by gurus as I find it hard to believe anyone can accurately predict the markets in 15-20 years time. Its a bit like a weather man giving accurate weather predictions for the next 3 months.
Thanks for the comments grossrealisation. What you say makes sense to me. I thought it might be the case that option 2 would be the way to go. I should point out that I won’t be buying bare land, rather I’ll be buying land with an existing dwelling, so there will be some income coming through. However, I can see that not developing the sub-dividable land in a flat market will not produce the most profitable outcome.
Reading back on my goal which I quoted above, i.e. “My goal is to build equity quickly in the short to medium term which will allow me to increase my portfolio”, it makes sense to create the equity NOW instead of LATER (using the above methods).
Regards,
Oziozi…..
i don’t really care where the market goes either….but i do care where my money goes…..
and what fool would put money into an investment thats going no where today..
i’ll keep it simple
buy a median house in melb 12 months ago 370k
sell today 360k (thats what it worth) rent 1 year 300/wk
total profit/loss ..LOSS $61k
buy bhp shares (i read the newspaper it say resources going up) same price
sell today , make $140k PROFITi’m no einstein…but blind freddy would tell me properties going nowhere FAST
so the gurus might all have there own opinions where it s all going….
but at the end of the day its your money
Hi Ozi,
If you are planning on developing in the future, I would suggest that you go through the planning stage as soon as possible as it is going to take anywhere from 6-12 months to get a permit. Once you have the permit it lasts for 2 years and can be extended for another year.
It is good that you will be in a position where you can choose to sit on the land for a while. Most of the people who lose money from developing do so because they can’t handle the holding costs.
One thing you should be aware of too is that it is quite difficult, in the current climate, to find small developments that are offering a good return if you plan to sell as the end of the project, I would suggest not developing unless you are able to hold the end product. This doesn’t mean definately don’t sell, just don’t put yourself in the position where you have to.
Regards
Alistair PerryHi Alistair,
Thanks for your input. As I’m trying to increase my portfolio and equity, my immediate plan would be to hold onto the properties and not sell. Instead I would refinance at the end of the project and use the equity to help fund the next project. I agree that if I was to buy-develop-sell in today’s climate, the stamp duty and CGT would more than likely chew into most of the profits.
Regards,
Ozihi hb
couple of things
1.there’s just to many experts
yes there is and they get paid to be.
the only problem is if they are wrong ( and they are a lot of the time )its not there money.
most should be used as reference material just like the weather man says it will rain in 2 weeks I don’t run out and by a new umbrella.
2. buy bhp shares (i read the newspaper it say resources going up) same price
sell today ,
shares are a more liquid product and can be traded alot easier but also they have very sharp movements and the are relatively easy to trade and cheap,
but the costs in being a property trader are huge to the bottom line compared to return. so the are very different markets and should be viewed that way.
3 i’m no einstein…but blind freddy would tell me properties going nowhere FAST.
This one is a little more difficult to answer as I can only speak of Sydney but my understanding and research tells me that we will run out of over supply within 8 months and if so now is a very good time to be looking at real estate.
example you buy a block as ozi has posted (this is nsw councils so not sure for else where) and you have got yourself a bargin you think.
build time line
6 weeks settlement (1.5 months)
it takes upwards of 6 months in and out of da
then it takes upwards of 3 months for cc
build min 6 months (the true figures will blow out from these as these are mins)
sell campaign if you are not holding 2 months
total time to complete is 18,5 months and I’m working on 8 months for demand to return even if I’m out by another 8 months I’m still on target put you must be confident that your own research is correct.
this is not taking into account that if demand is increased so is rental.
and yes I agree with APerry that you must be able to hold the end product or have a backup plan in place.
I would suggest before going into large developing go for a owner builder with a builder as a partner to assist with the planing and overseeing it is very good learning and gives you a base to build from(again this is nsw not sure if you can in other states).
my.002here to help
If you want to get involved in some of the projects I’m involved in email to [email protected]Hi ozi..,
,,….just another thought for you is maybe an option between 1 & 2 ….to buy and get the DA approval sorted out and done.
then as you say..it isn’t just land, it does have the house on to return rent…..but now you have the option to sell off the land at any stage or even find buyers and build a house with their tastes/colors etc..in mind ….thats gotta be worth a tad over market price??
whow knows?I’m just a beginner,too….but I’m trying to think of more creative options as it seems you need to in this market .Hi Rumin,
That is also an idea I have considered. The land with DA approval could be sold off for a profit, but I think there is more in it if you develop it. I believe maximum profit = maximum use. Putting the land to it’s best use will release the most profits. Selling it to a developer will release the profits to someone else.
I like your idea of finding a buyer and building to their tastes though. Has anyone had experience doing this? I’m not quite sure how you would strike up the deal though.
Cheers,
Ozi
You must be logged in to reply to this topic. If you don't have an account, you can register here.
