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Property Investment Updates

Do you want Cash Flow or Equity from your Development?

One of the first questions I ask anyone enquiring about Property Bloom’s property development project management services is what is your goal?  What do you want to achieve from your development?

The reason I ask is because some people want to create positively geared property with the highest possible yield because they want to add to their cash flow.  Generally these people may have lower incomes but still want to build a property portfolio. The income from the properties will increase their taxable income. They don’t want property that is going to drain them financially.

Others are looking for negatively geared property where they can create lots of equity. Generally they are people on higher incomes, paying a lot of tax and need property that will help offset some of the tax they are paying. They need high depreciating property and want to use the equity created through development for their next deal.

There are very different development strategies for each outcome.  After this initial chat, we recommend a discussion with their accountant and lender take place to ensure that the development strategy that they want is actually correct for their situation.

Once, we’ve established the development strategy, we look within this category for the right development site for them.

A high cash flow development will be one that produces a 9% + gross yield and Property Bloom is achieving this with our granny flat developments. I’ve included figures on our latest granny flat completed below:

  • Purchase 3 bedroom house on large, dual access block:   $228,000
  • Stamp duty and purchase costs: $10,000
  • Renovations to house: $18,000
  • Total house cost: $256,000 – rent achieved $340 per week
  • Cost to build 2 bedroom granny flat – $96,000 – rent achieved $280 per week
  • Total rental return: $620 per week, $32,240 per annum
  • Cost of house plus granny flat = $352,000
  • Gross yield (rent divided by cost) = 9.2%

This is a cash flow strategy, not an equity creation strategy as a valuer is likely to value the property at cost plus upgrades unless there are direct sales comparables in the market. This is because the flat cannot be subdivided from the house and may be considered purely an upgrade to the existing house.

On the opposite end of the scale would be a 3-4 unit project which will create a large amount of equity, high depreciation benefits and not a bad yield but this sized project will still probably be negatively geared on completion.

Here’s an example of a three unit project Property Bloom has just completed in the Hunter Region of NSW:

  • Land 1090sqm:   $195,000
  • Purchase costs:   $7,000
  • Building costs:  $667,000 includes all design, fees, DA &CC costs
  • Total Costs:  $869,000
  • Rent on three units @ $390 per week each = $ 60,840 per annum
  • Estimated values of freestanding 3 bedroom, 2 bathroom units: $1,088,000
  • U1 $369,000 (DLUG), U2 $350,000 (SLUG), U3 $369,000 (DLUG)
  • Gross equity created (value less costs) = $219,000
  • Gross Yield: 7%

Be clear with your goals.  Yield or Equity and sometimes you may achieve a balance between the two.

With cash rates now down to 3.25% and banks fixed rates around 5.4% (for 3 years), yields are increasing.

To create a good amount of equity in your development be sure to buy the land at the best possible price, look for relatively flat land which will help keep site costs low and build just what the market needs, not above it – don’t over capitalise.  If you can keep your building costs low but still deliver a good product, then you have met a few developer golden rules.

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