Hi all,
The strategy – Buy a house on land that can be subdivided. Subdivide and sell back of block. Keep the house at front. Your IP is now neautral or slightly -ve.
Does the value of the house you keep now drop (compared to original purchase price) given its parcel of land has halved?
PJ
yes. The land components do vary in value, the front being higher than the battleaxe but the access handle, stormwater rights & right of way also have their value. Generally, the sum of the parts will substantially exceed the value of the whole.
Agree with SNM
Front property will drop, by how much depends on the market. Also remember that rear battle axe properties are usually harder to sell then street forntage blocks.
The strategy I am looking to adopt is to purchase quality properties with an existing house on a large land parcel. Subdivide the land solely for the purpose of generating cash to reduce the debt. Later on, I will renovate the house I retained to increase rental returns. I will not be building units on the subdivisions. No time or equity for that.
I do not make a riduculous salary so have no need to use property for -ve gearing. I am solely looking to control enough property for long enough to produce cashflow equal to what I am making in a 9-5 salary.
If the value of the remaining house and land has devalued less than what the sale of the subdivision has contributed to reducing the initial debt, then I am infront. I suspect the rental return on the remaining house will not be effected by much at all.
The goal in the begining is to remove the -ve gearing factor. This gives me maximum ability to retain the property and repeat the process. Do this 15 or 20 times. 15 years from now I sell the first bunch of properties and use the CG to pay off the remainder. Hopefully removing all debt on a small collection of IPs producing +ve cashflow.
Well, that's the idea!
PJ
Another take on that strategy that you could consider, if cash flow is tight, is to sell off the front property and use the rear property as your investment.
As Lockymac says, the rear block is often times harder to sell than the frontage block… So if cashflow is a problem for you, then perhaps a more viable solution would be to:
1. Buy the lot;
2. Do a quick tart up;
3. stick a tenant in it (but make sure they are aware of the situation to avoid having to recycle them);
4. Subdivide the block (and make any adjustments necessary to the rental agreement);
5. list the property at the front for sale.At this point you will have cash tied up for purchasing the first house + any renos required to get it rentable + the subdivision costs. (including any services to the rear block, and driveways etc.)
This is the worst point for your cashflow… and as mentioned above, it can be difficult to sell a battle axe block… So you could find that your cashflow problems stretch over a year or longer.
But the front block may sell faster (albeit at a slightly reduced price due to the loss of a portion of its land). so: IF you sell the front house, with tenants in place for a ready investor, and IF you do manage to sell it for a reasonable price then you may find yourself sitting on a block of dirt aqcuired at a greatly discounted price.
From there you have two or more options:
1. Build a new dwelling (or multi-dwelling if permitted); or
2. sell the vacant lot… Now that you have eased your cashflow, you should see a decent enough return within a far reduced timeline to waiting for capitol growth from the first house.Then you can take your profit out, and pump it into another project or investment.
Try running your numbers on this sort of deal, do your due diligence, and see how you come out…. not suggesting you go with this method, but it's something to think about.
Thanks grimnar,
I appreciate the perspective and the brainstorming. It makes forums such as this worth while.
I will take a look at this angle as part of my thinking through how I should tackle property investment.
This will be my first time venturing into property investment and I do not want to storm down a path only to find I have wasted my time and money and need to start again.
Money I can get back. Time is gone forever!
If selling the battleaxe is difficult, should I be building on the subdivided land straight up and selling?
PJ
Hi PJ,
It really depends… As in life, there are too many variables!
If it were me, I would be looking at how much potential profit there is in the deal either way, and what my goals are. Then weighing up whether its worth the risk/stress.
As for the pros and cons, some I can think of:
Building a house:
Pro:
– Easier/quicker to sell than vacant land,
– depreciation benefits if you intend to keep it,
– heaps and heaps of equity (if keeping it, you don't chew up tens of thousands in fees and taxes from sale), and
– tenants don't know how much you actually paid for it, they just pay retail rent.Con:
– Risks, including schedule and cost overrun,
– Takes a while to get some cashflow coming back in from the rent when you will be hurting most.
– If you were planning to build and sell, then you are also at risk of market fluctuations over the short term, which could go one way or the other! Planning to hold longer would not be such an issue.Building a multi-dwelling (if permitted):
Pros:
– Everything that comes with building a single dwelling x2…
– Cheaper construction cost per dwelling,
– After selling the house at the front and one of the units (assuming 2x units), the last unit may only have cost 1/2 or 1/4 its retail price!!Cons:
– More cash tied up in the deal will hurt cash flow (pre-selling or finding a partner could help),
– Higher risk and exposure,
– More complicated and more professional services required (i.e. town planning, etc.).Selling vacant land:
Pros:
– Easy for cash flow,
– Can take on more deals while waiting to sell (cashflow permitting),
– low risk, low stress!! Get your cash out, and you can pump it into the next deal.
Cons:
– Selling costs and taxes eat into an already lower profit margin.As I mentioned above though, it's all variable…
In some areas these pros and cons change a bit… I.e if you are in a development area, then selling the land 'as is' may be just as profitable as building a single dwelling on it. Where as, if you are in the sticks somewhere you're probably more likely to make more money from selling a single dwelling than vacant land.
Need to do your homework on what can be done there, how much it would cost to do it, what the market would pay for each option, and what the market forecast is for that area…. All of this should help you work out what your risks are, and the rewards, and make your decision.
Oh, I should add too… Part of the problem with selling the rear block is the appearance of the front block… If you have sold it to someone and they decide to park half a dozen car bodies in the front yard, it's not going to do you any favours!!
If you enter into a strategy with the intention of keeping a rear block, you can mitigate that risk by installing clever landscaping/screening BEFORE you sell the front house…. And it doesn't have to be expensive either… i.e. if you put in a big rock garden bed next to the driveway, and a fence, it'll be mighty difficult to use the front lawn as a parking stip for their spare parts car… Plus the fence will screen off any unmowed lawns, and you can mow the nature strip yourself any time you like… it's council land, after all.
Thanks grimnar for your time effort in discussing my questions with me. It is appreciated.
Your persepctives have all crossed my mind. I have created a few spreadsheets to help run the numbers in a realistic way.
What I am begining to see though, you can talk about different strategies until the cows come home. If you do not have the cashflow to service the debt a particular strategy will produce, then your options a limited.
The strategy that will win me over is the one that will allow me to quickly (within 12 months) reduce the initial debt loading on the IP purchase to about neautral gear. CG will take care of itself in the long run. Keeping it for the long run is the catch.
PJ
Exactly right… it's easy to say "I'll go with the one that'll make me the most money", but the practicalities are often prohibative.
But you have to start somewhere!! : )
Grinmar,
Is subdivision the only way to inject cash into the initial debt of the IP?
I have looked at vendor financing from the angle of improving cashflow instead of reducing debt. Thus allowing me to keep control of the prime asset. However, vendor financing is more difficult than it is described. not to mention tying up equity.
I have the technical skills to design, document and gain approvals for developing properties (my day job) however, I do not have the cashflow to support the process. Potentially a 2 year time frame.
Can you think of any strategy that will help me achieve my goal (replace my active income with a passive one in 15 years) which keeps my cashflow pressure very low? Or is what we have talked about pretty much it?
Would love to hear from others also who have walked the path?
PJ
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