Hi guys I am thinking of sub dividing as well just wondering how do u guys determine if a particular deal is worth chasing or not do u look at the cash in hand only, i.e like I will have 150K in hand after subdivision cost and selling fee so its a good deal or u would do the maths as if u were going to sell the backyard(even u may not)and exisitng house, i.e income=selling existing house(which would be devalued abit after subdivision due to smalled land..+new lot in the chopped backyard cost=purchasing price+purchasing cost+subdivision+renovation cost to bring the existing house up for sale+subdivision cost+selling fees and you wont proceed if income-cost= was less than 20% profit Just would like to which method u pick or there is another way to look at a particular deal?
Hi there,
Subdivision has so many varying factors which determine the outcome. Your best bet to determine feasibility would be to talk with a private town planner. There’s a few on the forums here who I’m sure will be happy to help with your questions. Spending a small amount before the development on getting a complete run-down of your costs and projected profit can save many headaches and large costs down the track.
Cheers,
Wow I got really confused trying to read that.
I think you are asking do you determine whether a project is feasable based on either a % return target or a cash profit target. You probably should work on a combination of both, but instead of just basing all your figures on one set of sell prices and build costs, base your calcs on a number of scenarios of lower sell prices and excalating build costs.
So you could calculate the return based on a scenario of higher than expected build costs and needing to sell at lower than expected sale prices. This would be your worst case result, and of course you need to plan for what you would do and know what to expect under a worst case scenario.
Purely judging whether something is feasible based on a % return only is not really considering everything, as a project with a cost of say $1.5m returing a likely 10% after costs with next to no downside risk might be more attractive than the same project with a likely 25% return with large downside risk. Similarly a $$ return only target is not really considering everything for similar reasons.
Cheers,
LukeHi all
Ashley (or others), I don't suppose you could list some of those more important factors to take into account. We have a builder that is helping us evaluate potential development properties but it seems a bit of a secret black art.
Cheers
ShaneHi Shane,
I’m not a financial expert so can’t give you much information on that part, but can help out with the subdivision/surveying questions.
– Check zoning of the site. There’s so much free information available on the internet explaining which zone means what.
– Talk to council. Arrange a meeting to discuss any concerns they might have. Arrange Pre-Application meeting. I can’t emphasize how important this is.
– Check if there’s any covenants or easements which will be a problem. Copies of title aren’t expensive – I can get them for $12.50 if anyone needed one.
– Look at the neighborhood characteristics- are there any subdivisions in your LP already? What are the houses like? (old/modern etc)
– Look at the area of the site, will you need to have something designed first? What type of subdivision suits best? Check driveway width etc. Will there be any issues with trees, setbacks, neighbour houses?These are just some things off the top of my head after what has been a long week. There isn’t a “blanket” solution to finding the correct site- you’re much better off looking at a particular property(ies) and then going to a surveyor / town planner and asking what they think about it.
It is something that comes from experience, but does get easier with time, constant exposure to the process and a good knowledge of development.
Cheers,
Let me ask you a question:
Would you be willing to accept payment of $30,000 for a job that requires about 5 hours work a week for 3 months? Most people would probably say yes.
Now would you accept a cheque every year for $1,000,000 if you had to work 60 hour work week, move your family interstate, have a commute of 1.5 hours to the office and be tied to the job for 5 years? Most would probably say no…
What I’m trying to get at is that don’t make a decision based on a $ value.
How much $$ you putting in to get $150k out?
How many hours are you putting in to get that return?
What are you paid just to turn up to work each day?
How much do you value your time?
How much work are you personally putting in to get that return?
Would I take a $10k profit from a two week reno project? Sure! Would I accept a $60k profit off a reno + subdivide deal stretching out over 12 months, involving DIY and all my capital? No. So am I saying $10k is better than $60k? nup, but the factors surrounding the figure make it appealing. Same applies with % return. don’t work on a fixed % and not look at a deal if it doesn’t meet some arbitrary figure.
Hi, Everyone,
There is some great info here already! I'd say work on both a $ return as well as % return, as well as looking at how much your time is worth to you. I personally wouldn't consider a profit of less than 25% worth my time, but…….. if that was $25,000 and it took 2 years then no.
The more risk there is in a deal, there should also be more reward, so if there is more cash in the deal then you should be looking at a bigger profit. The more time, and complication in a deal you should be looking at more profit. Smaller deals, maybe you can squeeze your profit margin down a bit.
There are plenty of people who would spend a million to make $150k, but as everyone has said above there is more to it.
Also factor in if your costs went up by 5-10% and if your end sales price goes down by 5-10% then you will have a very realistic profit figure to work with. Then look at your profit over the length of the project, if the profit is $100k and it takes 2 years, then is 50k per year a good deal to you?
The black art is, today's end sales price – ALL costs = profit ($320k -$220k = $100k example only). The trick to getting the numbers right is being so sure of the sale price you will achieve in today's market, all costs such as land, construction if any, council fees, selling fees, fencing, moving power, telstra pits, tax, anything really. It's all about the numbers!
Good luck, keep us posted
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email MeWork everything out on an "as if complete" value. This is what the bank does, and really it seems to make sense. So, you have the current value of what you own – or are intending to acquire – and then the value of your proposal as if it were completed right now.
That's always a useful starting point.
As a quick feasibility tool consider this equation:
1/3 for the land
1/3 for the development
1/3 for your pocket (margin)It doesn't cover all possibilities, but it is quick and reliable.
The equation works backwards and forwards.When subdividing, would you be better off just selling the new block, or building first? Considering the time it takes to build, and the $ of the building loan…
I think it depends on the profit and time/cash in/risk that it will take to make the profit.
For instance if you were going to make $50k by just selling the land, and it will take 3 months to complete the deal or you were going to make $100k and it would take 12 mths to finish it, then what would you choose?
Everyone is different, what is a huge profit to some is a small profit to others. Depends on time it takes to make the money, cash in, and what profit can be had. It really does depend on the goals of the person.
Cheers
D
DWolfe | www.homestagers.com.au
http://www.homestagers.com.au
Email Me
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