My old man has an IP in Mount Waverley worth about 650k and currently getting around $400 per week.
My plan is two go halvies with my brother and put two townhouses on it.
Cost to develop (plans, permits, stamp duty, etc) = 50k
Cost to Demolish, Build, Subdivide etc = 600k
The block is 750sqm so id say two 30sq townhouses would be close enough.
Approximate market value: 800k EACH (Once complete)
Total Net Worth (myself and brother) = 800k + 800k – 650k (Loan) – 650k (Owe Dad) = 300k
We'd most likely rent both out and use that to cover interest as well as pay dad his ongoing rent of $400. In the current market, a nice 4 bed townhouse in Mt Waverley fetches around $600-$650 a week
What do you guys think?
How are you thinking it will be structured? Your dads owns the land so he will in turn own any buildings you put on it.
You'd be hard pressed to get a bank to lend you money to build on land that you don't own (what's their collateral?).
Interest on $650K = $750-875pw + dad's $400 = $1150- 1275
Rent = $1200. That won't pay off the loan. It will only cover the interest. Plus there's rates, agents fees etc etc.
Are you planning to purchase the property from your dad and then develop it?
Regards
Shahin
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Dad will transfer the current house to me and my brother as a gift. We will only have to pay stamp duty, fees etc. Anyways, loan will not be an issue as we have that covered.
We only want to use the rent to cover interest as well as $400 per week we owe dad. Just let it sit 5-10 years until we are required to start paying principle.
I just wanted to see if other people had the same opportunity, would they take it?
We will purchase it without paying for it initially if that makes sense. We will only pay stamp duty based on market value to get ourselves onto the title. Obviously we still owe dad 650k. But when it comes the time that he requires it, we would either sell one of the Townhouses, or just take out a loan.
Ok that's fine. I think 2 things – firstly you have underestimated the build and secondly you have not included all the additional costs such as site costs, stormwater drainage, retaining walls, fencing, rainwater tanks, selling agent fees, etc.
In theory though its a great idea.
Will you get the DA prior to you buying the house or after?
Regards
Shahin
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I think it sounds like a great idea. Where you need to do due diligence is with the builder you use do not go with the cheapest but look at whether it is a fixed price quote or not. Also ask for customers that have been happy with their work.
Nigel Kibel | Property Know How
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It sounds good in principal. I would speak to a lawyer first though. Are there spouses or significant others. If you and your brother own it and get divorced for example ex is entitled to half. What if one of you dies? Who's entitled to your assets?
I'd get legal documents drawn up to show who owns and owes what (just to cover all bases). And have a valid will.
Thanks for your advice.
I don't think I have underestimated the build. We have some significant advantages with my old man being a builder and my brother working for a large building materials company. Basically get 20% of wholesale price for plaster, timber, bricks, concrete etc etc. Anyways, I really appreciate all the advice!
Thanks for your advice. Yes the legal part will be something we need to look into if we go ahead with it.
At this stage it is just an option that we are tossing up and doing some feasibility studies.
We're fortunate in that our parents bought IP's in some great areas when they were very affordable. Now that they are hitting retirement, we can purchase these properties with no interest and develop to start building our own net worth.
If you are in the building game then different story but if you were going to get a builder to construct the above the obviously it would be much more.
Good strategy though – have you validated the sale price with a few agents?
Regards
Shahin
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ksun1985 wrote:Thanks for your advice. Yes the legal part will be something we need to look into if we go ahead with it.Hi there
Where are you located? You might be able to get some recommendations for good legal people in your area.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
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Yes, having people in the building game helps a lot.
I haven't validated any pricing as we don't have plans. I'm going by research on current townhouse prices in the area and concluding that we'll build something similar.
It's a good area that I believe will continue to grow in the long term. We don't plan to sell, it's very much a long term investment.
Hi firstly good are to develop
that area always has a strong demand, when are you planning to start building?
Take your time as you know the building game is quiet in Victoria.
So of your in the game your going to save a whole heap of cash..
also speak to the councils and see what there building requirementsare
Also it might bee a good idea to speak to a Local drafter
AlSo get in contact with a broker who understands building loans etc
Jpcashflow | JP Financial Group
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I think you need to tighten these figures up big time. The project looks marginal at best once realistic numbers with some slack are built in.
$800k per property is absolutely top of the market (with 330sqm land) as is rentals of $650/wk. You need to budgeting at Val's of $700k and avg annual rentals in the $450-550 range.
You have a sliding value problem at the moment and glut of rental properties. You also have historically low interest rates which never last. There are some pretty skinny margins in this deal as far I can see.
Have you also considered your dad's possible CGT and possible other issues in regards to gifting you the property.
The ATO wont wait until you eventually pay him back.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
I read your previous responses and it seems like you have everything covered. Since you have connections and experience in construction industry, it seems like a great idea. Let us know how it goes with building. Good luck!
Thanks for the feedback. I don't really have a time frame of when we want to start the project. It would be at least 2 years away as I have some other projects on the go. But we will definitely be speaking to drafters, council etc when we are ready to turn the project on.
Thanks!
Hi Freckle,
Thanks for your opinion. So based on your expected figures, you wouldn't consider this project if you were given the same opportunity?
Keep in mind that we have no intention to sell as we are both young on good salaries more than capable of paying interest should the rent not cover it.
I know most developers look at margins, turning over properties quickly etc. This is just an opportunity where I see it as a long term investment. I'm not overly concerned about margins just yet, as long as the rent can cover the majority of the interest.
Thanks mattsta. It will be some time before we take this project on. If we decide to do it that is. I'd be fairly keen to take it on in 1-2 years however it depends of my brother's situation too at that point. I'd be sure to keep everyone posted.
At the moment I'm about to start a townhouse project in Box Hill South, so I might create a "project feed" and inform everyone on the progress.
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