Develop or Renovate – Investment Decisions
Warning : Local Councils are amending current approval laws on what will be open to review and what will not be entertained as far as new development goes. Do your homework with the council first !
We are often asked questions about purchasing existing property and either, sub-dividing & building more than one dwelling or renovating and then selling to capitalise on the investment. Here is a summary of answers to questions raised :
What are the ‘hidden’ costs when purchasing a property for the sole purpose of renovating & or to subdivide, develop and sell the property?
Time
- Time required to do your full due diligence within the market you wish to invest into
- Time taken to study what is involved to become a property developer, the pitfalls and traps, the ups and downs you need to avoid, the legal rules and obligations you need to follow etc.
- Time required to find a best fit property to match your strategy and requirements
- Attending open for inspections
- Attending Auctions
- Attending meetings with your financial planner and accountant
- On failing to purchase the investment property at the auction, starting the process over again to find the best fit property in line with your strategy
- Time taken to cosmetically fix the property to an acceptable level to rent out whilst undergoing applications for the renovation or development
- Time taken to plan and successfully apply for subdivision
- Time taken to have plans drawn up
- Time taken for these plans to be submitted for approval
- Time taken to apply for finance to finance this development or renovation
- Time taken to develop or renovate the property
- Time taken to have a contract of sale drafted by a solicitor
- Time taken to research which estate agent you will employ to market your property
- Time taken to successfully sell the property
Financial Costs
- Time : What is your hour worth to you today?
- Estimate the hours required to be put aside to reach your objective of purchasing a property, developing it and then having the property sold
- Multiply this by the value you are worth to yourself per hourTake this figure and add a level of profit (ie. 20% net return on your investment) determine a projected market value your finished product will be worth to a buyer
- Will you be achieving the desired say 20% profit margin?
- Property : What are the costs of
- The purchase price
- The Stamp Duties applicable
- Successful application for subdivision
- Having plans drafted and approved
- Building costsLandscaping costs
- See list of other costs below …
- Holding : How long will the project take you from research, to a successful purchase, through to successful sale?
- Finance Costs
- Vacancy lost opportunity costs
- Vacancy whilst renovating or knocking down and developing the site
- Through to successful sale and transfer of the title 30 / 60 / 90 days later
- Or if you don’t succeed selling within a certain period of time how long can you afford not to sell for?
- If you are then strapped for cash or losing profits, by how much will you depreciate the sale price by, to have the property sold?
- Are you sufficiently covered in the event of
- What if you apply for permits to subdivide and these permits are not successful?
- What if the application goes before VCAT and takes between 1 to 3 years of back and forth to have your permits approved? Can you afford to fund the property, will this process eats into your estimated profits?
- What if you apply for permits based on what you believe you can develop but the permit is only granted on a lesser development? What will this cost you? What will the purchase do to your bottom line?
Stress
- Immense amount of stress in rushing from open for inspection to the next open for inspection – learn to manage this
- The stress of attending many auctions to understand how they work before you begin bidding
- The stress of bidding and not winning
- The stress of bidding and winning
- The stress of fixing the property up to a level that is acceptable to a tenant whilst you are proceeding with subdivision, plans, permits, finance etc
- The stress of applying for subdivision
- The stress of having your legal contracts being presented by the architect, builder, sub-contractors reviewed
- The stress of successfully planning the renovation or development and having plans drawn up and approved
- Stress of dealing with builders and contractors
- Stress of worrying about your cash flow during this process
- Stress of having Contract’s of Sale drafted
- The stress of putting the property on the market and hoping you will get your return on your investment as planned for
- The stress of possibly not selling the property in the time frame you are working within
- The stress of dealing with builders once the property is sold and the new vendor discovers building issues that fall under the builder warranties
Costs you would need to budget for include :
- The initial purchase of the property
- Stamp Duties
- Paying GST on vacant land
- Hiring a Quantity Surveyor to survey the site, put up public notification, peg the site and the final survey
- Employ a Town Planner to prepare the council applications, manage the council requests and help you meet the required conditions of council
- Submitting to Council will attract application fees for the development application and for approval of the plan
- Fees of applying to the Titles Office for new property titles on successful subdivision
- What council head works are required such as the infrastructure management e.g. sewer, water, traffic, parklands etc
- Employ a Construction company under a contract
- Connection fees to connect to sewer and water system
- Putting up temporary fencing complying with OH&S
- Relaying or laying new driveway’s with access to all subdivided properties
- Ensuring storm water reticulation standards are met
- Applying for and installing telecommunication and electricity connectivity to each property
- If on a main road, your property has to have certified thickness of glass to minimise noise and also attract acoustic reports to ensure you are meeting with minimum standards
- What if the site is difficult and requires a more expensive foundation or slab
- What if you need to hire earth moving equipment to level the site and bring in extra soil or remove excess soil
- Employing the services of a qualified Solicitor to review Construction contracts and to draw up Contracts of Sale and other legal advice along the way where the builders are not complying to their contract, are using substandard materials, delaying construction, not meeting building deadlines etc
- The property will need to be presented well and will require landscaping attracting costs such as a landscaper, soil, grass, plants, trees, watering system etc
- Negotiating commissions with the Selling Agent
- Budgeting for marketing expenditure to ensure that the properties are sold
Investing in property for the sole purpose of renovating and or developing can be a very fruitful investment for you, the purpose of the above is not to scare you away from this type of investment opportunity but rather to enlighten you, so that you can make an informed decision as to which way you chose to go.
This type of property investment is not for the feint hearted or cash flow inhibited; but for the Investor who is going into it with their eyes wide open with access to a healthy line of credit to finance the project from go to purchaser’s settlement.
An estate agent selling you the property represents the vendor and is solely commission driven to tell you whatever you want to hear to help get you to purchase the property. A massive investment for you … once you are committed, you are in boots and all. It is your money (not the estate agent’s) make an informed decision.
An old adage in property is that if the property is a ‘steal’ there is very very good reason why it is so! Let the buyer beware!!
NB : Primary objective of Investing in property is to achieve and maximise your return on Investment. If this is your preferred strategy you would want to compare the numbers / financials which underpin your proposed investment before you commit to your say half a million dollars … would this statement be correct? If so read more … on comparing purchasing traditional real estate (existing property on the open market) with purchasing house and land or Off Plan developments
And working examples for demonstration purposes of financials on Off the Plan investment properties view here
