Good afternoon.
I'm after some property development advice.
I have over $200,000 in cash and $1000 net per week income and I'm looking at doing some property development.
I sort of work in the industry, so I know about most things, except really the financial side of things. I know about the processes involved – its just the profitability/business side of things which I know very little about.
What I would like to know, from property developers and people who have done this before – If you were in my financial situation, what kind of development would you look at doing? I know there's a few things I could do, but I want to know, what would be the MOST profitable option? Things I'm looking at are dual occupancy, subdivision, buying vacant land and building a house, buying a house and adding a granny flat, etc.
My benchmark is currently the returns I get from the stockmarket, which in recent years have been between 12% and 20%, so if the profitability of a development is not at least within this range, then I'll forget about it.
Would appreciate any advice, thanks.
Where do you live?
The returns on developing vary greatly depending on the market you are developing in.
I aim for 30-40%+ margin on costs in the markets I am developing in, but you may be lucky to get 15-20% in Melbourne or Sydney and they are currently very soft markets to sell into. The lower the margin, the harder it is to finance and the more money you need.
Less than 4 units will be residential loans which can assist financing, above this you are looking at commercial lending which has stricter requirements.
If you send me a private message, I’d be happy to discuss various options further with you. Your private messages are currently switched off.
Hi Matt
I live in Sydney (southwest) and I'd like to invest around here as the land is cheap.
I'll send you a message.
Can anyone else provide some information about the first ever development they did, what it was, how it went, what kind of margins were involved, etc?
Thanks.
Below are some thought I have. I have been investing in property for 20 years on any off and have used buy & hold. CF+, renovations to add more value than costs, completed a remote and locla renovations, relocated a house and completed a subdivision. Next I'd like to do a duplex or multi dwellgn site where I can make enought profit to retain one for income.
My first developement was a hands on relocatable house where we purchased the land, relocated the home and rennovated. It was something I always wanted to do, and it was fruitful in adding equity and we still hold that house three years later and value can still be added in the desiign in the right market in the future.
Where I am at now is delveloping to add value without relying on the market to rise. I think that works in any market. I purchased a house sometime ago on a corner block where the rear yard had a street frontage. After my due dilligence, among other things I knew it could be subdivided. We held the place for five years and have only just finsihed the subdivision only having started that last year.
To give you an idea the value of the house on the larger block was approx 320k, The cost of the subdivsion was $40k. I choose to outsource the project management as it was the first one I have done, and to be honest that was about 20% of the costs, and meant I completed it much quicker then me doing all the liaising as I also work full time in a busy corporate environment.
The block is currently on the market for 140k and the house on the reduced block is now worth approx 270k. I am looking to onsell the block to a developer who should be able to get at least a15-20% return. So roughly its a 50k equity gain, but I should realise 100k in cash, and based on discussion with my accountant, there is no CGT when we worked out the cost base. I run a trust structure so I could distribute the cash in a tax effective way if I needed to, so structure is something you must get advise on before you buy a block etc.
If I find the right market I could possible churn out a few of these scenarions where I buy something I could do similar to, perhaps get the subdivision done while reovating the house to be sold for a small gain to cover my subdivision costs. Then I could either sell the block, develop it, get a line of credit against it to do another deal while continuing to holding it if I thought it may increase if value in the short term. Depending on zoning and size I might even be able to build multiple dwellings.As you can see there are a few options.
Until you get a couple under your belt I would strongly advise doing something small and simple without risking too much capital.
Its more about learning when you start. My first foray was a 75k town house with a buy and hold strategy in the early 90's in another state, as when I lived in Sydney its was three times as much then and I did not feel comfortable with that exposure
Cheers
SimonI think the best way to make money from development still remains to over-estimate your market. In other words .. produce a product that sits in the right position .. provides the right criteria PLUS a bit more … at a margin that remains competitive.
Items like this sell well and sell quickly. A dud position or improper product can have your wait times increased anything up to 200% over the right items.
This is where the market knowledge of your area remains paramount. When purchasing land .. make sure its enough for your idea, and you leave yourself room in your budget for cost overrun.
Personally I think 200k is not enough for anything more than purchasing a house and building a unit (or more) at the back. Its a good starting figure and great deposit .. but you remain limited on what you really can do.
With that sort of budget and 1000k net income .. i'd stick to renovating older style places purchased under market value. Its a good starting position and will get you familiar with market demands. Do a couple of those with a decent margin and you'll have a real bank to work with .. allowing you to achieve a lot more.
Remember with development .. your two enemies are holding costs .. and loan repayments. If you create something and get a 'close enough' value … dont be afraid to take it. Good money is better than fighting holding costs and having not enough money.
Also see if you can build a bank / lending institution trust relationship before heading to the big stuff. The more reliable you are as a consistant repaying customer .. the more flexible the financial institutions are with their lending capabilities for you.
Simon C wrote:Below are some thought I have. I have been investing in property for 20 years on any off and have used buy & hold. CF+, renovations to add more value than costs, completed a remote and locla renovations, relocated a house and completed a subdivision. Next I'd like to do a duplex or multi dwellgn site where I can make enought profit to retain one for income.My first developement was a hands on relocatable house where we purchased the land, relocated the home and rennovated. It was something I always wanted to do, and it was fruitful in adding equity and we still hold that house three years later and value can still be added in the desiign in the right market in the future.
Where I am at now is delveloping to add value without relying on the market to rise. I think that works in any market. I purchased a house sometime ago on a corner block where the rear yard had a street frontage. After my due dilligence, among other things I knew it could be subdivided. We held the place for five years and have only just finsihed the subdivision only having started that last year.
To give you an idea the value of the house on the larger block was approx 320k, The cost of the subdivsion was $40k. I choose to outsource the project management as it was the first one I have done, and to be honest that was about 20% of the costs, and meant I completed it much quicker then me doing all the liaising as I also work full time in a busy corporate environment.
The block is currently on the market for 140k and the house on the reduced block is now worth approx 270k. I am looking to onsell the block to a developer who should be able to get at least a15-20% return. So roughly its a 50k equity gain, but I should realise 100k in cash, and based on discussion with my accountant, there is no CGT when we worked out the cost base. I run a trust structure so I could distribute the cash in a tax effective way if I needed to, so structure is something you must get advise on before you buy a block etc.
If I find the right market I could possible churn out a few of these scenarions where I buy something I could do similar to, perhaps get the subdivision done while reovating the house to be sold for a small gain to cover my subdivision costs. Then I could either sell the block, develop it, get a line of credit against it to do another deal while continuing to holding it if I thought it may increase if value in the short term. Depending on zoning and size I might even be able to build multiple dwellings.As you can see there are a few options.
Until you get a couple under your belt I would strongly advise doing something small and simple without risking too much capital.
Its more about learning when you start. My first foray was a 75k town house with a buy and hold strategy in the early 90's in another state, as when I lived in Sydney its was three times as much then and I did not feel comfortable with that exposure
Cheers
SimonThanks Simon. Its great to hear that there is a decent margin in subdivisions. This is the kind of thing I am thinking of doing as I don't have enough money to build townhouses yet.
I have a question for you. If the house on the land you have subdivided has a tenant, and then you reduce the size of the land through subdivision, is it normal for a lower weekly rent to be negotiated? And how would this happen?
xdrew wrote:I think the best way to make money from development still remains to over-estimate your market. In other words .. produce a product that sits in the right position .. provides the right criteria PLUS a bit more … at a margin that remains competitive.Items like this sell well and sell quickly. A dud position or improper product can have your wait times increased anything up to 200% over the right items.
This is where the market knowledge of your area remains paramount. When purchasing land .. make sure its enough for your idea, and you leave yourself room in your budget for cost overrun.
Personally I think 200k is not enough for anything more than purchasing a house and building a unit (or more) at the back. Its a good starting figure and great deposit .. but you remain limited on what you really can do.
With that sort of budget and 1000k net income .. i'd stick to renovating older style places purchased under market value. Its a good starting position and will get you familiar with market demands. Do a couple of those with a decent margin and you'll have a real bank to work with .. allowing you to achieve a lot more.
Remember with development .. your two enemies are holding costs .. and loan repayments. If you create something and get a 'close enough' value … dont be afraid to take it. Good money is better than fighting holding costs and having not enough money.
Also see if you can build a bank / lending institution trust relationship before heading to the big stuff. The more reliable you are as a consistant repaying customer .. the more flexible the financial institutions are with their lending capabilities for you.
Thanks Xdrew – great advice. I will definitely stick to something small first off, and I'm trying to save a bigger deposit than $200k.
I have a question. When you mentioned holding costs, what do you have in mind besides loan repayments, opportunity cost, and council rates?
Cheers
alfrescodining wrote:Simon C wrote:If the house on the land you have subdivided has a tenant, and then you reduce the size of the land through subdivision, is it normal for a lower weekly rent to be negotiated? And how would this happen?I had a subdivision in Adelaide, and I expected the tenants to ask for discount as they just lost their back yards, to my surprise, both of them were just happy backyard is gone, as they no longer need to mow the lawn
hector1534 wrote:alfrescodining wrote:Simon C wrote:If the house on the land you have subdivided has a tenant, and then you reduce the size of the land through subdivision, is it normal for a lower weekly rent to be negotiated? And how would this happen?I had a subdivision in Adelaide, and I expected the tenants to ask for discount as they just lost their back yards, to my surprise, both of them were just happy backyard is gone, as they no longer need to mow the lawn
Cool I didn't think of it like that.
alfrescodining wrote:Thanks Xdrew – great advice. I will definitely stick to something small first off, and I'm trying to save a bigger deposit than $200k.
I have a question. When you mentioned holding costs, what do you have in mind besides loan repayments, opportunity cost, and council rates?
Cheers
Holding costs includes everything outside your loan repayments .. opportunity cost .. council rates .. possible land tax inclusions .. advertising (all formats) presentation (furniture and plants) .. real estate advertising (if dealing with an agent).
When graphed out onto a spreadsheet it enables you to work out how long you have before you NEED to sell. And how long you can support them without a sale.
Case by case with the rent. Look at the market and comparable properties or discuss with current tenant to understand their circumstances. My tenant acually like to mow the extra grass as it keeps them fit. They are even continuing to do so, so I intend to send them a voucher as thanks.
Simon C wrote:Case by case with the rent. Look at the market and comparable properties or discuss with current tenant to understand their circumstances. My tenant acually like to mow the extra grass as it keeps them fit. They are even continuing to do so, so I intend to send them a voucher as thanks.I would send them to my house… all the mowing you can take, no charge!
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