A fairly simple development strategy for a first time developer wanting to boost their property portfolio is a dual occupancy project; buying land where you can build two dwellings and subdividing. The dwelling/villas may be attached or freestanding, either way you are basically halving the land cost for each and that is where the value lies.
Where Property Bloom develops, there is usually opportunity to create well over $150,000 in equity through a dual occ development, this is created within about twelve months and doesn't take into consideration the capital growth that also may occur during the development period.
The equity position of a project is determined when you take costs of the project away from the end value. However, be aware that you can't access the entire amount of equity created if you are refinancing on completion as the banks will most likely lend you around 80% of the value, leaving some equity in the project.
Timing your development can also boost the equity creation. If you are developing in an area experiencing good capital growth whilst your project is underway then you have timed your development well. Even if the market is flat, you can still manufacture some equity. Equity created is through the development and subdivision process because you are adding value to the land not with one dwelling but with two. By subdividing, you are halving the land cost for each dwelling.
Here’s an example of a dual occupancy project we recently completed:
Land cost: $270,000
Stamp duty: $2,940
($5,000 NSW New Home Grant applied so the government contributes $5,000 this off sets the stamp duty cost)
Legal fees: $1,500
Build cost, including plans, council fees & charges, subdivision costs, for duplex; three bedroom, two bathroom villas: $450,000
Total cost: $724,440
Actual end valuations: $920,000 or $460,000 per villa
Equity created: $195,560
Gross Yield 6.7% based on renting each villa at $480 per week.
If you are borrowing at around 4% then the project may be cash flow positive for you. This is when the rent and depreciation benefits combined cover the costs of interest, insurance, council, water rates and management fees.
There are strong depreciation benefits too, expected depreciation $20,000 Year 1 (using the diminishing method)
Want to know how to do it?
Of course I'd recommend using an experienced project manager to guide you through but you can have a go yourself - it will depend on the resources or skills you have available; time, experience, knowledge, contacts with a bit of patience thrown in.
The steps involved in a dual occupancy development strategy are:
- Finance preapproval. It’s important before you start looking at development sites or any property, that you have a preapproval from a lender in place.
- Understand the council requirements for dual occupancies in this area. Study the council’s Local Environment Plan (LEP) and Development Control Plan (DCP). This will let you know the size of land you’ll need for your dual occ and what is permissible.
- Conduct due diligence on the area you want to develop in; understand the zoning for dual occupancies. Having correct zoning doesn't always mean you can carry out a dual occ. There may be covenants on the land preventing building more than one dwelling.
- Search for land that meets a number of criteria; size – look at the frontage and know what the minimum width is for your dual occ. Look at the depth and size to ensure the land is large enough to meet the DCP including the minimum outdoor private space requirements. Check the aspect, north facing living areas are desirable and will make meeting the BASIX requirements much easier. Make sure there are services to the site; electricity, sewer, gas. Then ensure the land is relatively flat with a slight slope to the street unless there is a drainage easement at the back.
- Check the Planning Certificate to see if the land is in a bushfire or flood zone. You can still develop in these areas but it will add to your build costs.
- Have your builder look at the site. This is very important as the builder will look at the land from a different perspective.
- Run a feasibility to ensure the project will be viable. Find recent comparable sales references to base your end value estimates on. Talk to agents about the current rental market and what rent could be expected and calculate the projected yield on completion. Most importantly, you need to have a good understanding of the build costs. The build costs will evolve over the design and planning process. Your builder can give you an estimate once a concept plan is available, but as the full Development Application (DA) plans and documentation is available, the builder will then need to run a full tender. Cross check this against your original estimate. If it’s in line, lodge the DA if it’s not, go back to the design and look at areas where you can reduce costs. Once the plans are approved, the builder may update their tender if council asked for any changes. If not, then a final tender will be generated once the engineer’s plans for the Construction Certificate (CC) are available.
- When securing the land, request a long settlement period with permission to lodge a DA from the vendor. You can get all the design work and perhaps even have the DA and CC approved before you settle on the land, this will reduce your holding costs.
- Once you have the DA & CC approvals, you can then go back to your lender to obtain your unconditional construction loan. As soon as this is in place, construction can commence.
- The build phase for a dual occ should be around three to four month, depending on weather. You need to be on site each week to check the builder’s progress and put out any ‘fires’ that may arise as you are under construction. I've heard some stories of build times taking up to twelve months, so make sure you conduct due diligence on your builder before appointing them.
- Once the building works are completed, an Occupation Certificate will be issued. You can now have your villas tenanted. Don’t forget to order a depreciation schedule to maximise your tax rebates.
- You can now apply for the subdivision certificate and once council issues this, you can register the subdivision (after your lender has signed off on it). There is no need to register immediately if you are planning to hold and not planning to refinance as you may find costs such as rates may be a little less if the villas are kept on one title.
I’ve summarised the process briefly, but it’s actually not that straight forward. You really do need the time to work on this development strategy closely as mistakes can be costly. If you're a first time developer, use an experienced property development project manager. Our clients enjoy the peace of mind that we've found the right location and development site for them and that their project is being managed efficiently, they also benefit from our long term relationship with our builder. All the fine details are reported to them in a written weekly report, so they are learning from the process but still have time for their own career and family. It's an easy option.