Forum Replies Created
“Has anybody done this before and would it work out in todays market?”
— depends on the location, product and supply/demand [market conditions].
“Would it cost very much more to build than a normal brick and tile spec home?”
— a multi-dwelling i.e. duplex, is generally more cost effective than building two spec homes, for example – economies of scale.
“Are there zoning issues with the council?”
— as pointed out, you need to contact your local council and/or city planning department to assess zoning issues.
“Is it legal to have it on one title and rent it as two seperate leases?”
— generally the answer is yes, but again this needs to be clarified with your local council.
The first red flag that stands out when reading your post is your emphasis on “cheap”. This often extends from limited access to capital and/or experience – although I could be incorrect.
But if finance is an issue, then be very cautious before proceeding, especially if your strategy is to build then sell – which I wouldn’t recommend if access to capital/finance is or could be restricted.
From an experienced developers perspective, focusing on cost-cutting and building “cheap” dwellings, can compound your risk significantly.
If you are going to develop property – any size or shape, then do it right.
Find a site which conforms with quality, spacious dwellings – which is where sales trends are heading. Finance will follow and you will likely find your profit margin increases substantially.
The time and capital you personally commit will not likely change – compared with a “cheap” development – and the risk you incur should be much lower.
The key with development, alongside due diligence and having an exit strategy, is investing as few of your own dollars as possible – which can be achieved no matter how high quality or large/small the project.
Furthermore, quality attacts other people’s money [OPM]. OPM is easier to secure, as is bank finance, when the project is of a high standard and the outcome is more predictable.
— Michael
“what is the general consensus about blocks that are hills at the back, what do you do.”
– what do you want to do – your objective?
— Michael
I am unaware of a “developers license” in Victoria – or anywhere for that matter.
A “developer” is typically someone who conceives a project, then employs licensed people/companies to implement specific phases of that project, i.e. architect, quantity surveyor, building contractor, etc.
For tax and liability reasons it is advisable that the developer conduct such projects under a company structure – you would need to discuss the most beneficial structure with your lawyer and accountant.
— Michael
The advantage of lease option agreements is there are no specific rules – because every circumstance is different.
Aside from general provisions which protect both/all parties, an LO is often structured in accordance with what the parties have ageed too.
The only “WATCHOUT” is not employing a qualified lawyer.
— Michael
“you can dispute the new rate however then you must pay for an independant valuator to determine the current market rate!”
— The hotel chain will maintain a room rate that they are confident will sell – and achieve the required occupancy.
The rate can decline – or discounts apply throughout the year, to achieve target occupancy and revenues.
There is no guarantee the rate will increase – and unless stated otherwise, there is no guarantee it will not decrease.
If the hotel chain restricted itself in either case, the risk would be too high – because they cannot predict market conditions including competition.
“it will be very difficult to rent the apartment out, and if you did, would receive such a low yeild competing with all the other major apartments nearby.”
— A prime reason sophisticated investors stay clear of these investment scenarios.
“another hotel chain took over the whole complex. does that mean they will take over all the existing lease? if not, will they want to negotiate another deal?”
— Any hotel chain experienced in these lease arrangements has sound exit strategies which can be implemented at any time at minimal cost.
It is almost certain that any other chain/group acquiring the head lease will have the option to restructure this lease.
However, this should be disclosed to the property owners in the purchase contract – it is often a small provision which is easily disregarded but very important.
“there is nothing in the contract regarding spending more money in the future for furniture.”
— Furniture is only one expense. Rooms occupied on a nightly or short-term basis require regular maintanence.
Aside from general repairs, who covers the bill if the room is trashed?
“the deal is that they (the tenant) will pay for all maintenance”
— How do they define “maintenance” – make sure who pays for what [taking everything into consideration] is clearly defined in the agreement.
“and if they replace anything, they will own the new item.”
— I understand you are referring to “chattels” i.e. furniture, appliances, etc and based on your comments the apartment is furnished.
If the lessee replaces an item then retains ownership, this adversely affects the value of your property because you paid for a furnished apartment which includes these chattels.
Needless to say the chattels generally incur a premium with these transactions.
“i am really interested to know why the hotel chains dont buy the apartments themselves. why on earth would they sell the rooms off to private investors and then lease them back.”
— There are hotel chains which only lease because they specialize in managing hotels and not owning property. Or they do not have the financial resources to acquire the property.
However, the above scenarios generally coincide with one party/partnership owning the property.
The managed apartment scenario discussed here often reflects “risk management”. The developer is handing over his risk to the apartment owners, and the lessee is handing over their risk to the apartment owners.
If the market turns due to oversupply, etc, the developer is clear and the lessee has the option of selling or terminating the lease – which can result in a loss. Either way the apartment owners generally incur the greater cost.
“its obvious that these apartments will attract very little if any capital growth and that you’re limited with what you can do with it.”
— This comment in itself is a key reason why the apartment is not a good investment.
Forget passive cash-flow which may cover your outgoings over time. If there is no capital growth, there is no point investing.
Wealth derives from “capital growth” not passive income – although both can be realized in an investment.
— Michael
First red flag – “Melbourne apartment”
Second red flag – “leased as hotel/motel rooms” = minimal to zero upside in terms of capital growth.
Third red flag – apparently reliant on 3-4 percent annual rent increases [which is not likely on an ongoing basis].
Fourth red flag – the “major” hotel or serviced apartment chains are handing the risk over to independent owners. If the property was a solid investment, they would want ownership.
Fifth, but not final, red flag – thinking this investment would/could be “hassle free”.
Having experience in hotel lease/ownership – and working with some of the biggest brands in the business, I can assure you there is no “guaranteed” rental/room rate increase [revenue] on an annual basis. The rate is very much reliant on occupancy trends and competition, alongside other factors.
The length of the lease, i.e. 15-25 years is somewhat irrelevant. To remain competitive at best, the property will need to undergo an upgrade/renovation every 5-10 years. Is this cost incurred by the lessee or apartment owner?
Who is the “established hotel chain”?
I don’t mean to insinuate that this is a bad investment, but based on the information provided the reality is it will probably end up this way.
You need to track down some of the large number of unsophisticated [term used in the business] investors in Melbourne who have lost money in these deals.
Conduct in-depth due diligence, be very cautious moving forward – in terms of their contract provisions – and most importantly, have a clear “exit strategy” [before handing over a cent] which can be implemented at any time without losing the shirt off your back.
— Michael
You are moving in the right direction by considering who should assist you with this project at an early stage.
But first, you mention buying land by way of vendor finance, and building 7-9 units. Then you add “I do not have a site in mind yet”.
If you have not located a suitable site and commenced discussions with a vendor re: finance, then this should be the priority.
You may find it difficult securing land under this arrangement, and unless there is an alternate finance option, time and energy spent locating advisors in the current phase would be wasted.
[remember, time = money/opportunity].
Second, forget using anyone who positions themselves as a “consultant” – unless you are prepared to pay unnecessary costs.
Consultants generally provide input/recommendations at an early stage – but do not participate from start to finish.
You want people involved who are responsible for their recommendations from day one through until the project is completed.
This is why the typical development team is comprised of an architect, quantity surveyor, engineers, project/construction manager, and other professionals who contribute to the overall planning and success of the project during various phases.
In terms of the 7-9 unit preference, until you have located a suitable site, there is not much point focusing on a specific number of units.
You may find a suitable site capable of building 7-9 units is not feasible. Or a site which allows 15 units, for example, is within your budget.
Keep in mind the perfect site could be located, with positive discussions underway with the owner, only to find there are planning issues preventing x number of dwellings or other zoning restrictions.
The feasibility study will help determine a sites “best use”, which conincides with what you are able to build by right, as determined under the zoning regulations.
A “risk management report” is not necessarily what you require before meeting with a financier. Furthermore, a “risk assessor” is not who you require to prepare this information.
You will need to conduct a lot of the ground work yourself, i.e. researching zoning issues, market research and getting a feel for the cost involved. If you were to hire people to do this, it can be very costly – when there is no guarantee the project will move forward.
The next step is working with an architect – I don’t recommend a draftsman/builder for a 7+ unit development unless they come highly recommended.
The architect will discuss what can be built on the site, subject to further research, [this assumes a site has been located] and provide an idea of possible concepts. The architect will also assist with and advise on zoning/planning issues.
If not proficient yourself, you then require someone to conduct a “market feasibility study” and cost analysis [cost feasibility study], to determine 1. if there is sufficient demand for your product, 2. if the project is feasible.
This stage typically follows discussions with the architect, although if you feel confident in your experience and planning, you can move on to the feasbility stage without an architects input.
But do not cut any advisor out as a cost saving measure if you are not proficient in any aspect – this is a recipe for failure.
If you have someone conduct the feasibility/cost studies, I recommend using people who work with the architect you have chosen. Either independently, or part of the same office. Aside from architects, quantity surveyors generally offer this service.
Try to limit the number of people/firms involved in your project to as few as possible. And as noted above, it is beneficial to use people/firms that are contributing, and therefore responsible, from start to finish.
Once you have completed the feasibility studies – and assuming the outcome is positive, you will work with the architect on an intial concept – to determine the general scope of the project, which should include drawings.
This information is then handed over to a QS [quantity surveyor] who prepares a cost breakdown. Again, it is recommened that the QS has worked with the architect in the past.
When you have the land secured under contract, feasibility studies completed, a scope of work including concept drawing, and a detailed cost breakdown from a registered QS, then you can approach a financier – if an institutional lender.
It is strongly recommended that the QS has a very good reputation and track record – ahead of the architect, if you plan to approach a bank.
In terms of a builder, this is the least of your concerns until the above has been completed.
Locating a builder generally conincides with the completion of the QS report. The architect will prepare contracts, etc and submit the job for tender to a select group of building contractors.
My recommendations are based on conducting a multiple dwelling development in a way that limits your risk as much as possible.
There are of course short-cuts and ways to avoid certain costs, but as noted, each short-cut or cost saving which is important to the overall success of the project i.e. professional services, will increase your risk and chance of failure.
— Michael
“I suppose that story is applicable to any inner city apartment development in any Aust city as well ?”
My comments do reflect typical trends in any location which has experienced substantial short-term growth – more specifically apartments and other larger scale developments, and is now on a decline due to over supply.
— Michael
“Our current quoting rate for our clients for Sydney mid to hige rise apartments is $1500 to $2000 per square metre.. as usual, depends on level of finishes.”
In terms of mid to high-rise developments, the construction cost varies subject to the number of floors/levels. The higher the building, the more costly it gets.
[$2,000 square is on the very low end for a high-rise in Sydney, if sustainable at all.]
Back to the original question, what is being overlooked in these responses is the square meter rate [typically the “construction cost”] is only one component of the cost involved in any development.
Furthermore, it is generally a lower risk component [if the project is cleary feasible] because it is leveraged via a lender, i.e. bank.
The highest risk phase, which is where the developer/development company invests its own capital, is the preliminary phase. This includes securing land, planning/survey, design, feasibility studies, professional fees, etc.
Marketing costs may also be an important factor in the equation.
Asking others for an estimate on the cost of this phase is the same as requesting estimated construction costs without disclosing the details of the project – there is no magic number.
— Michael
” michael – i think kay was just trying to make sense of it all. it is a property investing forum btw and not everyone has studied economics.”
My response was not an economics lesson, the tone reflects my dislike for backhanded generalization directed at Americans.
— Michael [Washington DC]
“i’m really trying to determine is an acceptable IRR for a property over its investment life.”
This is a very subjective question and you should not proceed on the basis of someone else’s preferred IRR [internal rate of return].
For many reasons an investors IRR target can be quite different, i.e. leverage, interest rates, market conditions.
— Michael
Capital growth is the key element of obtaining “wealth” – I am not referring to passive income.
If there is limited or no upside in a CF+ property, then in my book, there is no point acquiring it.
Real estate investment is all about risk management and your acquisition and exit strategies.
An investment strategy focused on capital growth – versus CF+, is not necessarily a higher risk strategy if approached correctly.
— Michael
Unfortunately I don’t have time to read the entire article in detail at this time, but a couple of comments regarding the Auckland market – specifically apartments.
The influx of apartment development continues not because of demand, but rather the fact that these projects transpire over a period of 12-18 months or more – high-rise projects typically do not break ground for two or more years.
Developers/investors are in a position where they have to decide whether to lose capital invested during the preliminary phase, or take a risk and move forward as planned.
Many of the developments underway in Auckland transpired when demand exceeded supply and the market was in top gear.
The powerful dollar counteracted common sense and foresight.
The typical Auckland apartment is a very high-risk investment for those who cannot afford to sustain a short to medium term downturn – which in many segments is now evident.
The problem facing investors/owners of a “typical” Auckland apartment is the standard of development is low to mediocre resulting in limited upside [capital gains].
In saying this, if the apartment can be retained through the current cycle [3-5 years], then there is still potential to generate a return on investment.
The New Zealand real estate market is undervalued.
Auckland developers in general are overlooking the fundamentals in an attempt to maximize profit. They are delivering the same product – small low to medium quality dwellings, poor design, combined with cost-effective [cheap] materials.
The objective was/is to sell for top dollar, but unfortunately supply is now leading demand, which can result in lower valuations across the board as they attempt to “dump” their product.
Auckland is certainly a viable investment location in the long term. But there needs to be more focus on larger, high-end/quality apartments which satisfy buyers/investors who are being overlooked – in an attempt to make a quick buck. This in turn will stabilize the market and increase valuations across the board.
The trend in Auckland today is nothing more than detrimental to the wider market and therefore high-risk for the short to medium term investor.
— Michael
“They still have a pissily small official interest rate. Why do the Americans make such a big deal of everything?”
As someone who actually understands the adverse effects of rate hikes has highlighted, raising the “pissly small official interest rate” has far wider economic ramifications than Americans paying “a bit more interest”.
In fact, if you took the time to understand the US economy, you will have noticed mortgage rates have declined on the back of weaker job data.
The main purpose of the rate hike is to stem inflation. But as [aussierogue] touched on, the impact this “pissly” hike has on [the world’s] stock markets, currencies, trade – imports v. exports, oil prices, needless to say the millions of people and companies effected by the US economy, extends well beyond American’s paying a bit more interest.
“Imagine if we had such low rates here – you could buy up everything in sight. Investor’s paradise with those kind of rates.”
Need I say more.
— Michael
I am interested to know where you got this advice – and whether you have an accountant willing [or able] to find a solution.
Firstly, you need to speak to a qualified and motivated accountant – someone with knowledge and experience in cross border tax issues [btw NZ and Australia], and a lawyer who can advise on the appropriate company structure.
A LAQC [which is a standard company type] is only beneficial if you plan to offset losses against future income, but it may not be the best structure now that your circumstances have changed.
1. There is a way to avoid paying 10% resident withholding tax to the AOT.
2. You should not have to pay capital gains on income derived and remaining in New Zealand under the appropriate structure.
3. I have never heard of having to pay CGT [in the country you now reside in] on assets acquired and retained in another country when you return to that country. Maybe because my accountant has found a way around this.
In a nutshell, forget looking for books on the subject. If you are concerned about the financial ramifications, seek “professional” advice.
— Michael
To reiterate, the reason I pointed out a difference between a developer and someone who subdivides land is if a location is limited to land that has been subdivided into smaller parcels, then a developer will locate and acquire adjoining lots for the purpose of conducting the proposed development. Whether the lots are improved [built on] or not – if the numbers stack up.
If the intention is to simply subdivide land, but all desired locations have been subdivided, then it would appear the only option is to look elsewhere.
— Michael
As I have touched on in earlier posts, “guarantees” are generally nothing more than a marketing ploy.
You are likely to find there is no solid “guarantee” due to the developer/lessor/guarantor having an out-clause or contingency to protect their interest.
If there is no out-clause or otherwise, then I would avoid the deal because the party promoting the guarantee is open to debt/liability issues which may lead to their downfall and any guarantee becoming null and void.
— Michael
“Anyone got any bright ideas on how to source a property?”
Either a local buyers agent, or research land/property of interest then approach the owner directly.
Personally, I prefer to have as much information at hand as possible – about the site, local market, sales trends, etc. We then approach the owner with the intention of negotiating a favorable [win-win] outcome.
“(or owners think that it will be dead easy, and thus ask a higher price).”
If you consider the price too high then move on to the next property. But keep in mind, what may appear a high price at first, may in fact become a very profitable transaction.
It’s all about due diligence; how you negotiate the transaction; and your exit strategy.
— Michael
“May be pointing out the obvious, but if there is no land left on the central coast… look somewhere else?”
There will always be land – whether you can obtain a parcel or two depends on how much you want the land and your ability/willingness to negotiate a feasible deal.
— Michael
“I am interested in the answer to this too.”
Two townhouse [apartment, high-rise, etc] projects can be developed within 100 meters of each other and vary in cost substantially.
There is no magic number.
There is more to the cost of any development than bricks and mortar.
As noted above, contact a local builder or QS [quantity surveyor] to discuss the concept/scope of work and get an idea of indicative costs.
— Michael
