First development 8.65% ROI and $100pw cashflow positive

Well, not the amazing 20% ROI developers look for but better than a poke in the eye, for a first try anyway...

Project: Retain front house and subdivide off the back yard then build a new house on the hammerhead style block, long term holds.

Timeline: 3 years to completion (thought it'd only take 2yrs)
Lesson 1- it will take longer than you imagine!

Costs:
Purchace price 3 bed brick house on 820m block $290,000 Morphett Vale, SA.
Stamp duty & closing costs $15,000
Subdivision costs all up $40,000 (budget was $30,000, but with a sewer main extension which was not forseen, cost blow out)
Lesson 2. have a nice big line of credit available if you plan to undertake subdivisions.
Construction $170,000 full turn key, low level project home with SA builder, 3 bed, 1 bath, 1 carport
Holding costs $5,000 cash flow negative (front house tennanted the whole time, 5% interest rates, some good depreciation on the front house)

Total spent all up: $520,000
Bank valuations : $565,000
NET capital gain: $45,000 (8.65% ROI)
Lesson number 3. do not count on market gains during the time you take to subdivide and build, this suburb had a slide backwards in prices over the past 3 yrs, from my initial ROI projections much less.

Both properties tennanted for combined rent of $680 per week, which makes them $100pw cash flow positive.


OK, I've shared, over to you guys for a critique of my strategy.....
 
Sounds like you gained a lot of valuable experience to make the next one profitable.

Questions:

1. Was it worth it? Could your money have gone further elsewhere considering that profit was over a 3 year (not-easy) period.

2. By taking longer, other than holding costs, what else cost more?

3. Was there anything that could have been done to reduce the time?

Many more questions to come I'm sure.
 
so many hard lessons learnt

I do think it was worth it, and I will definatelly do it again. See, I'm a property addict, I enjoy house hunting, challenging myself with renovating, and feel as though I have achieved something worthwile through the whole process. Eventhough it was not a particuarly good ROI for such a large sum invested, as you said a valuable learning process, and I sure intend to get that 20%ROI next time, I think I now have the ability to correctly cost out the next project.

There were unforseen cost blow outs in lots of places, and a lot of it was due to my inexperience-
1.my first hard lesson was learning how to read infrastructure maps (which i should have done before buying- oops)
Essential infrastructure, sewer, power, water meter, (and later on for building; phone lines, gas) make up a huge chunk of the subdivision costs- I needed to have SA water do a sewer main extension in order to subdivide, this cost $10,000 more than expected.
2.my second hard lesson; just because there are houses nearby, don't assume that it's good land to build on, my block had a slight slope and it wasn't untill after I subdivided that i found out the whole back yard was unconrolled fill and i needed foundations 1m deep (an additional $12,000 construction cost, ouch)
3.avoid sloping land if you can, again due to inexperience I didn't factor in the substantial costs to retain (another $10,000 eeek)
In hindsite before I bought that particuarlar site I should have got someone with a building background to walk through it with me to point out potential pitfalls that i couldnt see.
Lesson 4. get a good team of professionals to advise you; builder, surveyor, finance broker, accountant etc.

The time line definatelly could have been faster, and with experience I'll now put forward better plans to council to reduce the back and forth process. Everytime plans need ammending the application goes to the bottom of the in tray, and a 3mth wait follows. There are some processes in the subdivision that you have no controll over and just have to wait it out, it took over 6mths for my new titles to be recieved by the bank even after they were finished, I think at one stage the bank said the Land Titles Office lost it, WTF!? and I couldn't start construction without the title for the land as the construction loan security.

Lesson number 5. do not get involved in subdivisions if you are prone to anxiety!
 
Cheers Brady, and I've been watching your subdivision thread with interest too.

I'm still hunting for the next purchase, the illusive corner block retain and subdivide, no luck as yet though...
 
You probably know this already, but for your next project you may want to focus on areas with good "land value" as building cost and subdivision cost is roughly the same no matter where you build ( give or take $20-$30k)- is the location that matters in your end profit for developments.

Your purchase: $290,000 ( for land and house)
Subdivision: $40,000 ( this soft cost was already 13% of your properties value from day 1)

Build cost: $170,000 ( Similar price no matter where you build in SA with the builder, a touch more for certain areas)


Overall you have done well for your 1st project - Good work!! ;)
With good depreciation and rental yield, you will reap the rewards sooner than you think- you deserve it!
 
I needed to have SA water do a sewer main extension in order to subdivide, this cost $10,000 [/U][/B]

This scenario can happen to anyone.Recently cost me $8100 to extent the main.interestingly,SA Water advised the actual cost to them was $16,200,but in their own words....... . You have also only been charged 1/2 cost of the main as there are potential beneficiaries to your extension. :)
 
Hi jim1964, yes, next time I will just sell off the land, I did not significantly improve my capital gain by building- the capital gain is created at the point of subdivision.

Perhaps someone with the contacts to do a owner build, would increase the profit margin, but since I work full time and wasn't game to do this myself I chose to pay a builders margin and full retail on the build.

I chose to build because the market dropped over the couple of years it took me to subdivide and I made a judgement call that the land wouldn't sell for the price I needed to make a worthwhile gain.

I guess the other option would have been to hold the vacant land until the market moved up enough to make it more profitable, but I'm not that patient! Luckily the valuation of the new vacant allotment once subdivision was completed was enough equity for security against a construction loan, and away we went.

I've had discussions with my accountant regarding selling vacant land, his advice: you do need to be careful the ATO doesn't class you as carrying on a business of development- and slug you with GST and full tax at marginal rates on all profit.
The aim is to only pay Capital Gains Tax (preferable with a 50% discount for holding>12mths) so only sell off a vacant lot every few years, and don't give up your day job!
 
so true

Hi MickC, you are absolutely right!

Lesson no 6. Subdivisions are more profitable when done on land with a higher value! I didn't understand that at the outset but definitely grasp that concept now. For the next subdivision I'll buy within 10km of the Adelaide CBD.

So for everyone following this thread, the ROI is much better with land closer to the city, see my maths below:
$450,000 purchase price house on big block
$20,000 stamp and closing costs
$5,000 cash flow negative over 12 mths (I'll be quicker at it second time around, I hope)
$25,000 subdivision (keeping in mind I now know how to pick the better site, so I recon)
$500,000 TOTAL INVESTED
but since the land value closer to the CBD is higher, end values look like this
$350000 house on small block
$250000 vacant small block
$600,000 TOTAL VALUE
=$100,000 CAPITAL GAIN (20% ROI)

The tricky bit is finding a house worth retaining on subdividable land and beating the other buyers to it, the most recent one I found was under contract in 3 days!
 
who cares?

Its cash flow positive, so who cares about capital gain or equity level at this early stage???
Its cf pos so just leave it there and as the market cycle comes back in the future, it will develop capital gain then. CF positive isn't easy to get these days, so just park on it and look for the next one. You could start again next week on the next........
 
Cheers Brady, and I've been watching your subdivision thread with interest too.

I'm still hunting for the next purchase, the illusive corner block retain and subdivide, no luck as yet though...

There was one at ridgehaven (27 hawke st) in the last few weeks, told a colleague about it, but by the time she rang up already had around 8 offers.
 
honestly, its not the best result you were expecting, but at least you didnt lose plus you gained so much in experience and knowledge, id say its an ok result,

even a better result if you kick more butt on your next project

well done on keeping yourself together!!
 
Hi MickC, you are absolutely right!

Lesson no 6. Subdivisions are more profitable when done on land with a higher value! I didn't understand that at the outset but definitely grasp that concept now. For the next subdivision I'll buy within 10km of the Adelaide CBD.

So for everyone following this thread, the ROI is much better with land closer to the city, see my maths below:
$450,000 purchase price house on big block
$20,000 stamp and closing costs
$5,000 cash flow negative over 12 mths (I'll be quicker at it second time around, I hope)
$25,000 subdivision (keeping in mind I now know how to pick the better site, so I recon)
$500,000 TOTAL INVESTED
but since the land value closer to the CBD is higher, end values look like this
$350000 house on small block
$250000 vacant small block
$600,000 TOTAL VALUE
=$100,000 CAPITAL GAIN (20% ROI)

The tricky bit is finding a house worth retaining on subdividable land and beating the other buyers to it, the most recent one I found was under contract in 3 days!

Auction.

54 Wallala Ave Park Holme

www.realestate.com.au/property-house-sa-park+holme-116488915

- 9km to CBD
 
Just wanted to chime in a congrats and well done, I hope your next one takes half the time and nets you twice the profit!
 
Hi MickC, you are absolutely right!

Lesson no 6. Subdivisions are more profitable when done on land with a higher value! I didn't understand that at the outset but definitely grasp that concept now. For the next subdivision I'll buy within 10km of the Adelaide CBD.

So for everyone following this thread, the ROI is much better with land closer to the city, see my maths below:
$450,000 purchase price house on big block
$20,000 stamp and closing costs
$5,000 cash flow negative over 12 mths (I'll be quicker at it second time around, I hope)
$25,000 subdivision (keeping in mind I now know how to pick the better site, so I recon)
$500,000 TOTAL INVESTED
but since the land value closer to the CBD is higher, end values look like this
$350000 house on small block
$250000 vacant small block
$600,000 TOTAL VALUE
=$100,000 CAPITAL GAIN (20% ROI)

The tricky bit is finding a house worth retaining on subdividable land and beating the other buyers to it, the most recent one I found was under contract in 3 days!

Looking forward to your next project, its all experience and learning curve, good on you for giving it a go.:)

I agree, if land component higher you will make more money, however your initial investment will cost more and so will holding costs.

I think its great to start off with smaller developments ie build at rear, or sell off land.
Once you have experience and equity perhaps look at 3/4 unit site developments the profits will generally be greater.

All the best:)

MTR
 
Well done Erica thats awesome and thanks for taking the time to share. I think the first development is all about learning the ropes but the fact that you have come out on top is fantastic.
 
You probably know this already, but for your next project you may want to focus on areas with good "land value" as building cost and subdivision cost is roughly the same no matter where you build ( give or take $20-$30k)- is the location that matters in your end profit for developments.

Your purchase: $290,000 ( for land and house)
Subdivision: $40,000 ( this soft cost was already 13% of your properties value from day 1)

Build cost: $170,000 ( Similar price no matter where you build in SA with the builder, a touch more for certain areas)

I hear what you are saying but I think in reality this is a different story. Blue chip areas are more expensive to build. DA, CC build cost is going to be more expensive.

The councils are generally anti development as are the people that live in these areas. So they will put you through the ringer trying to develop the block by way of unnecessary reports, changes, etc. Also the contributions fees in say warringah are going to be much more than say penrith.
 
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