Turning PPOR into townhouses

We bought a cheap and nasty house in a good street in a Northern NSW coastal town three years ago and have lived in it since. The 609sqm gently sloping north facing block some 450 metres from the beach is on a hill (no sea view unfortunatley) and is zoned medium density. Preliminary investigations suggest 2 X 3-4 bedroom townhouses could be built on the site. We are attracted to the idea of demolishing the existing house and building two towhouses with the view of living in one and renting out the other for the long haul. I read somewhere that a rule of thumb of a project is that the site should cost no more than one third of the expected final value but imagine this includes the cost of holding the land which we would partially offset.

Does anyone have any thoughts about the idea in principle? We are somewhat cautious as you can tell from our handle!

Thanks in advance for any contributions.

Some details:

We bought the property for $500k and owe $70k - we are currently paying out $560 a fortnight in mortagge replayments to clear debt more quickly
My guesstimates of developing  (planning, surveying/changing title,demolishing, construction) are in the order of $650-700 but these are shaky.
New high spec townhouses in this area are on the market for $550-$650k
On current income basic mortgage calcualotors suggest we could borrow $650k

Hi Fence (luv the handle by the way)

Firstly welcome to the forum and hope you enjoyr time with us.

If the margin is there and I would want a minimum of 20% then certainly why not explore it further and go for it.

In saying this you need to be aware of a few things in relation to both the financing of the project and the Tax implications if and when you sell the property.

I am assuming the property is currently located on a single Title and many lenders will not allow mutiple properties on the 1 Title.
It is likely the Council wont allow you to Strata Title them until the construction is complete so financing might be an issue.

In saying this there are many lenders who do welcome such applications on residential terms and conditions and understand the set up required in funding.

Ignore the online calculators as these are worthless when it comes to a specific project like this as there are too many variables.
An investor related mortgage broker can provide you with a more accurate idea of what your options are.

Now i am unsure how you purchased the property or in what entity but hopefully did so allowing for the Margin Scheme when it comes to GST. If you intend to sell the properties once they are complete you would want to consider the timing of the sales contract
to see if you cannot differ the CGT into the following Tax Year. (Remember CGT is based on Contract date and not Settlement date).

All in all if you have covered these points and you can locate a good fixed priced builder i cannot see any reason why you would not proceed to the next stage.

Cheers

Yours in Finance

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Want to live of your rental income? 0-40 properties in a decade. Email me for a copy of my API Magazine interview

Thanks for getting back, Richard,

We purchased the property on a single title as private citizens. I have been googling what I can about GST and margin schemes and it seems to be about cash flow when constructing and delaying paying back GST if you can't sell right away - is this right?. As the plan is to develop and hold long term (at the very least more than five years - we are established and like being here) I am hoping this would not apply and we would only be liable for CGT on 50% of the profit of one townhouse  - the other being our PPOR replacing our old house that we're living in now.

Regarding profit  margins - in a nutshell are we talking about spending $700k to create two properties worth say $1.1mil from the same block of land that we already own? Or am I missing something blindingly obvious?

Cheers.

New residential premises are subject to GST on their first sale. "New" means premises which have not previously been used a residence. New residential real estate can consist of subdivided land, a newly built house, a newly built apartment, and even a newly built house-boat. It makes no difference whether the developer of the new residential real estate is an owner occupier before sale - GST is payable on the sale including the first sale of new residential real estate.

GST is calculated as 1/11 th of the Gross sale price of the property you sell.

Purchasing the property under the margin scheme could have softened the blow.

CGT is then payable on the profit made on the sale of the unit.
 
Margin lookes healthly enough.

Cheers

Yours in Finance

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Want to live of your rental income? 0-40 properties in a decade. Email me for a copy of my API Magazine interview

Richard,

New residential premises is defined at s40.75 GS Act
http://www.austlii.edu.au/au/legis/cth/consol_act/antsasta1999402/s40.75.html

Premises up to 5 years old could still be classed as 'new' under this definition if they have not previously been sold.

This is a very complex area.

Regards

Terryw

Terry totally agree with you.

The question of GST also offer arises on renovated properties and the "substantial renovation" wording is key.
When is an existing property a new property = when substantial renovation takes place.

Course the definition of "substantial" is an interesting one.

Certainly a trap for new players and hence if in doubt obtain a PBR. 
Cheers

Yours in Finance

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Want to live of your rental income? 0-40 properties in a decade. Email me for a copy of my API Magazine interview