Hi Everyone,
Quick bit of advice for a novice, I am currently doing the property training and have not got far yet so I cant answer these questions myself yet.
I have been approached by a real estate friend that has been given a 2 day option on a development site with approved plans and permits for 4 units, the price seems good and the area is close to schools and public transport. It is in the outer Eastern Suburbs(vic).
From what I have been told and if the figures work out we could walk away with a hopeful profit of around $200,000.
Start up cost would be 535,000 with building fees etc on top of that.
What are the main considerations I should be looking at ?
There is a rush on making a decision due to the time my frind has been given to sell the property.
I would appreciate any thoughts on this.
Thanks
Simone
If you can answer these questions I can assist you with a general idea of whether its an ok deal.
What size is the land?
How many stories are the plans?
How many sqm is the build?
What is the expected sale price of each unit?
How much money do you have to invest?Thanks Mattnz
Land size is 960sqm
2 stories total 422sqm
Each unit cost will be Build
Just some details plans, permits. Total build cost per unit should be between 180k and 185k. Total cost per site inc stamps is around 140k. Plus 35k in working plans and open space charge. Resales for the 2 bedders is around 380 – 390k and the 3 bedder 420 – 440k.
Toatal costs for build 1.3 m and total sales 1.57m.
Give or take 30k on totals so worst case profit of around 210k best case of around 280k.
Money to invest as in money or cash is around $100,000 if needed , we are in the middle of selling our other IP and should hope to have around $30,000.
Hard to crunch the numbers when you are not 100% sure of what they should be.
Thanks
Simone
Hi Simone
Dont want to put a spanner in the works but you will not finance a deal like that with only $100K to put down.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I have just quickly run your numbers and they sound about right. Don't forget interest holding costs (allow 2/3rds of the annual interest holding cost of the total build cost), GST (based on the difference between your costs and sale values) and any demolition of existing buildings.
This would see a margin on costs of around 15%, which is pretty slim. Many developers wouldn't do a deal for less than 20%. I personally won't do one for less than 40% (I currently have 3 developments that meet this criteria).
By my calculations you are short of the funds required for this development as you would need approx $250-300k cash in hand to see you through to the end. If you can find another project with a higher profit margin, the amount of cash needed decreases.
Hope this helps.
Cheers,
MattThanks Heaps Matt and Richard,
Do you think you could explain how you come to the figures you need ??
Just so I can get me head round it all, I had a gut feel this was too big for our first go at it to begin with without having more cash behind us. I was also thinking about the demo costs involved..
I think we are better to start from scratch, subdivide a smaller block and build on back to get more cash behind us first.
Simone
Lenders will typically finance either 80% of build cost or 65-70% of completed valuation.
Based on your required 20% of $1.3 million costs that comes to $260k, but you would want some buffer just in case
At 70% of completed valuation that comes to you needing 30% of $1.57 million less the $200k profit = $471k – $200k = $271k. So they have similar results.
$300k would really be the minimum to allow for unforeseen costs along the way, delays etc.
Thanks Heaps Matt,
Well turns out we have more cash than I thought ,m hubby controls the finances
. and we have Equity in our home also.If we are going to use this as a learner , would it still be viable considering the plans and permits are all done, the house is currently tennanted also.
Sorry for all the questions.
Sim
Where is the property located? Many developers are struggling to sell, especially at their expected prices. When the project is completed in the next year or so, the market may have dropped further.
I have been asked to keep the location on the downlow for my friend who is the agent. He only has a 2 day option to sell it as the Vendor has an arrangement with another agent and he is afraid of getting issue with them, all a bit messy.
Its in the outer east of Victoria, a well located suburb with growth potental and near train stations and schools, shops are within walking distance
Hubby is the figures man and he cam up with the following, what are we missing if anything? Are there other amounts to be taken into consideration ?
Matt you seem very right , really does not seem worth it and if the agent is overestimating the sale value it will be even lower.
House and Land $ 530,000
Stamp Duty $ 26,870
Legals Etc $ 5,000
Rent 12 mth -$ 15,600
Interest year 1 $ 40,736
Interest Year 2 $ 48,333
Demolition $ 12,000
Misc Costs $ 15,000
$ 662,339
Building cost $ 740,000
Total Cost $1402,339
Building sales $1550,000
Less commission -$ 31,000
Net Sales $1519,000
Net Profit $ 116,661
ROI 7.53%
Thoughts ?That is far too tight and not worthwhile. You will always have unexpected expenses also.
I just sold in Melbourne, had to drop the asking price by $100k and was on the market for over 8 months. Not an easy market at all.
mmmm, Yes It does add alot of risk doesn't it.
I can not thank you enough for your help, this alone has tought me what to look for.I think Hubby is being very conservative as he says as I can not see it taking 2 years but you never know do you.
Our plan was to sell off the plan but again you are not going to cash up until it built in the end are you
.Sometimes it just helps to have those that do already have a look at it.
I think our friend had our best interests at heart but may have been a little to close to it , if you know what I mean
.Thanks again
Simone
Not quite sure whether you've factored GST into your calculations…if not, the picture would potentially be around $50K less, depending on margin scheme or not, etc. etc.
Great exercise to work through though – every time you do one of these you are one step closer to finding a deal where the numbers work.
Cheers, Tracey
Thanks Tracey ,
Again that I am not sure of , this is all a major leraning curve for me and yep baptisim by fire LOL !!What do you factor the GST on for interest sake ?
In the event of sounding completley stupid Margin Scheme ??
I am sure I will cover all of this in the course but as I said I have only just started it and was not prepared for this to come up so quickly, dont want to miss out on opportunity if its there but also dont want to make massive mistakes by doing so
Regards
Simone
Check out these couple of threads as they might explain it better than I can.
https://www.propertyinvesting.com/forums/property-investing/help-needed/4335989
https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4338836?highlight=margin%2Cscheme
Also do a search on margin scheme and a whole lot of other threads will appear.Don't worry about sounding stupid – we only learn if we ask!
Cheers, Tracey
You are wonderful Tracey, thank you. I will have a read
Hi Simone,
I’m trying to send you a private message to discuss further, but it appears to be switched off at your end.
Cheers,
MattHi Matt, I have checked my settings and they allow PMs , not that I have any clue how to send one
Yikes !
. and we have Equity in our home also.
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