Forums / Property Investing / Value Adding / Help! About to purchase an investment property

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  • Profile photo of CallumACallumA
    Participant
    @callumansell
    Join Date: 2016
    Post Count: 1

    Thanks in advance.

    I am a young investor starting out and about to purchase my second investment property.

    My first is a posivtively geared courtyard property I built two years ago.

    I am not about to purchase an older home with dual road frontage to subdivide. My question is, how much will the front house drop in value once I chop the block in half? I am worried because I am only just on the 80% LVR and im afraid that any drop in value will cause me to pay LMI once the property is split.

    Could anyone provide some insight on this issue? or if it isn’t going to be an issue to explain to me.

    Cheers,

    Callum

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,366

    Hi CallumA,
    “I am not about to purchase an older home….”

    I presume that was a typo, and should have read “I am now about to purchase an older home….” ;)

    Any answer to your question re “How much would the value drop?” would require a lot more knowledge about the initial block – size, value, location, size after subdivision, etc. Depending on comparables surrounding it, it could be that any value change might be minimal – or not.

    However, assuming your borrowings from the lender are secured by that house/land, you would be duty-bound to notify the lender – indeed, you might need their permission to go ahead with the split. So, yes, it is likely to be an issue of some kind.

    Then again, since you already own one IP, if you are using the same lender, it could be that they are aware of you and your history, and they may well be more lenient because of this. Or any equity in your first IP might be utilised as extra security for the extra risk to them as you subdivide. So, I am sure there would be a path through this.

    Maybe our MB’s on board can come up with examples of similar cases that they have been involved with. I am sure it would be a fairly common event.

    Benny

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Hi Callum,

    Once you’ll split the block, the overall value should go up.

    Since the mortgage will then be on both titles, the total LVR should be lower than 80% so LMI shouldn’t be required.

    I’m actually doing something similar now (strata titling a dual residency house). Lots of fun 👍😎

    Hope this helps?

    Cheers,
    Ethan

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
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    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of Jess PeletierJess Peletier
    Participant
    @jaylou
    Join Date: 2009
    Post Count: 12

    Hi callum,

    ‘Normally’ when you split a block, the front house does drop but the new block is usually worth a good amount more than the drop in hte first property.

    The two properties will be both securing the existing loan so unlikely to need LMI. That said, once the new titles come through it’s a good idea to create new loans for the properties so they’re both securing one loan each. You still should not need to pay LMI if this is structured correctly.

    Jess Peletier | Seed Financial
    http://www.seedfinancial.com.au/
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    Mortgage Broker - Perth and Australia wide

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    As jess mentioned, the overall development should increase in value than it’s previous amount, so you shouldn’t have any issues. What this means if most division its just a case of untying the securities so they’re not cross collateralised and adjusting the LVR on each so it balances out.

    If your value decreases overall from developing, you’re doing an unprofitable development and losing money, so avoid!

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Only real way to tell pre sub division is to look for comparable sales of similar properties and attempt to guesstimate the end value and then work out the LVR.

    This is not an exact science and is where things can go realy well if you get it right and realy bad if you get wrong and everything in between.

    Knowing the local market is what will dictate the success of your project and timing a market upswing is the sweet spot for development, if not you may have to hold for an extended period which isn’t necessarily a bad thing if holding costs are minimal or better still non existent or even better cash flow positive :)

    • This reply was modified 3 years ago by Profile photo of Colin Rice Colin Rice.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

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