Building a Duplex

Good evening Robby,

Well done on wanting to get into property development, it's exciting – you are right if you have the starting capital and plan well you should do well – there are always risks in any line of business but by understanding the risks and how they can be mitigated you can decide on whether a project is worthwhile and minimise your exposure.  You've done your initial numbers and they look good, yet you are right to research them further.  Too often people go into their first development only considering the raw numbers (cost of land, build and sell) and not ALL their costs – even many 'professional property advisors' won't take the whole picture into account as often they are paid a buyers agent's fee on your purchase of the property and if they went thru the full numbers with you (if they know them) the picture wouldn't be as rosy.

From the indicative figures you've done I'm guessing you are looking to purchase the property in a regional rather than metro area?  We are not one-eyed on either regaional or metro – there are opportunities in both – just make sure you are doing normal research ie.:
– is the property in an area that is growing (what is causing this)?
– is the type of development you'd like to do suitable to the area (do people like to live in duplexes there)?
– what is the general rule of thumb with time on market post completion?
– what is your fall back option if sales don't eventuate at the figure you'd like – what is the rental return and demand for that sort of property – will it help or hinder your ongoing goals if you had to hold them?

We have done a number of unit developments for both ourselves (built and held in rental portfolio) and clients.  By far one of your biggest costs will be time. 

Contributors to the Time in Project:
– DA (Development Approval) – unless you buy a property with a valid DA already in place you will need to go thru the process of getting one, if it is approval for the property you are considering buying.  We always use a private town planner as it stream lines the process and is definately worth the few extra dollars.  During the last year we have been fortunate to pick up two developments in a regional town where DA's were already in place that normally would have taken around 2 years to get (we know from experience with this particular council).  The first property was a bare block with plans already approved for two detached 3 bedroom units and the other had an existing house on the front with a DA for a second dwelling to be built at the rear.  While your proposed development property is in the DA application stage you will still need to meet all the costs of owning the property – you will need to factor in interest (or opportunity costs), insurance, rates, council and town planners fees.  Obviously if you buy a property with an existing dwelling you can offset some of the costs with the rental income from it while you wait.  Not all councils take that long or are as difficult to find out where your application is at however.  For example if you were applying in the Brisbane area you can track your application thru the council's PD online system – and things seem to move alot faster:
http://pdonline.brisbane.qld.gov.au/MasterView/masterplan/enquirer/default.aspx

If you are considering the purchase of a property without a DA in place then contact the local council and find out what the general guidelines are over the phone, let them know the exact address of the property you are considering and potentially even make it a condition of purchase that it be given approval prior to settlement (this will be a negotiating point in the purchase – so you could go either way here).  I'd always recommend also talking with a local private town planner before signing any paper work.

Builder:
Let's assume you have approval to go.  You will need to factor in the time from settlement or DA approval date to when you can actually put the properties back on the market.  Again you need to calculate your holding costs.  We aim to start our projects whetherever possible on or before settlement of the land.  If as part of your negotiation on the purchase you have a long settlement period then you can use that time to have your plans completed and BA (building approval – this comes after DA if one is required) in place.  Sometimes you may even be able to arrange access to the property between the time that it has gone unconditional and settlement however this wouldn't be for any major works but could include such things as trimming vegation, having soil tests completed, even doing the site set out.  Before signing a contract with a builder ensure that you have agreed start and finish dates.  Too often we see people choose a builder based on them being cheap and then half way thru the project they wonder why its taking so long and why they can't get hold of the builder.  Cheap is not always cheap.  Big is not always better.  Make sure that you agree on every detail possible upfront and have your finance in place so that there are no hold ups from your end.  With your developer's hat on it doesn't make sense to make unnessessary (some unexpected ones inevitability occassionally arise) changes during a project, if you have to leave that for when you are building your own PPOR (primary place of residence).  Changes once a project has commenced cost you time, money and frustration.  While we are on the Builder topic it is really important that everything required to complete your project is identified in your contract / proposal as to whether it is included or not.  Doesn't neccessarily matter if it's not included but you need to be able to factor that cost in if you are comparing more than one (ie., one builder might quote you to include looking after all permits, landscaping, tv antennas, window furnishings and plans etc., and another will keep their upfront fee appearing low as it won't include those things)

Time on market:
You can find out the average time on market for an area from some of the major property magazines, rp data, local agents and valuers.  Unless you are financing the project from cash, your bank will likely require a valuation 'as if complete' before approving finance for the project – this will be under their instructions but you could ask the same valuer, even if it costs you extra for them to reassign a copy of the valuation to you extra information in it about how long they would expect the property to be on the market at a certain price.

Strata Fees:
As you plan to see the properties individually to maximise their value you will need to factor in the cost of a Surveyor, potentially a lawyer (unless you tackle it yourself), body corporate organsiation and government fees.  Without knowing the specific project you might like to work off say $5K for this at a preliminary stage.

Some of the other costs that may or may not apply depending on the project and where it is (you may have already factored some or all of these in):
– government and bank fees (aside from the interest) such as establishment, progress draw costs, discharge
– transfer (stamp duty) check out the Office of State Revenue for costs
http://www.osr.qld.gov.au/duties/transfer-duty/index.shtml

– conveyancing costs allow $1200 – $1500 to a law firm in Qld (unless you do your own – I do our's and it costs me about $300 in search fees plus administrative time and attendance at settlement)
– draftsperson / architect plan fees
– engineers (now generally always required to design footings)
– soil tests
– surveyors to both confirm boundry of property and in some instances to confirm site setout
– permit fees for things such as capping of a sewer, demolition permit, build over sewer, plumbing and drainage permits
– traffic control and associated permits (we have this on our current development of two houses in Brisbane)
– land titles office fees 
– coucil rates
– insurance 
– contingency costs (important no matter how good the planning always plan for some unexpected, if you don't dig into your contingency bonus!)
– staging the properties to sell (furniture and decor)
– advertising on completion
– agents costs on sales (commission)
– conveyancing costs (law firm) on sales

In terms of what sort of structure you plan to do this thru there are pros and cons.  I'd definately recommend having a chat to a couple of Australia Accountants who specialise in property.  There will be many but here are a couple of links to firms that state they specialise in it (I haven't met either Sharon Plant, came across her website yesterday or Tony Lee, but Carl has met Tony at a property seminar and said good things about him) – hopefully you might also get some replies from other Accountant that are up to speed in property:
http://www.plantandassociates.com.au/
http://www.leeandlee.com.au/

With your first project, you may decide to put your toe in the water of developing without setting up a company and can always set one up down the track for a future development.  We personally have a mix of what is held in personal names, what our building business builds and sells in company name and what is held thru a trust which the company acts as trustee for.  As a general guide my understanding (I'm not an Accountant) is if you do it in your personal name, with the intent to sell the properties and do so in under 12 months from their purchase date then you will pay capital gains tax on the full profit at your marginal personal tax rate.  If you hold the properties for more than 12 months your CGT will have a 50% discount applied.  ie., tax at your marginal rate on $47,250.  Company tax is currently 30% and there is no CGT discount applied unless in specific situations the company is acting as trustee to a trust.  Definately get some professional advice in this area if not on your first project then on your second if you decide to pursue property development ongoing. 

Hope the above is helpful rather than daunting.  I do full blown cashflow projections for our developments which is both for our own and banks' purposes.  I update these on at least a weekly basis thruout the project.  We are currently considering adding a service to our business that will be charged out separately to the building being assisting people like yourself undertake initial project feasibility and then walk thru the process including taking care of everything required from cashflows for you and the bank, obtaining approvals etc.,   Let me know if you would like to discuss further.  The key thing is that as builders who specialise in property investment and developing, we want our clients to make money so that you'll benefit from working with us again and again.  Until then, all the best and again well done!

Kind regards

No problem at all Robby,  let us know if you are currently investigating any particular sites and we'd be happy to take a look for you from here.  Feel welcome to give me a call to discuss if you'd prefer – contact details are on our website.
Kind regards
Meg

Would you recommend a duplex than an apartment? Would you rather recommend a triplex than a duplex? What do you think would be a great project?