We’d been working on a new development strategy that we could offer clients. Currently Property Bloom project manages three main types of developments;
Granny flat development – this suits investors on a budget who want cash flow. Whilst a granny flat development won’t create much equity as we can’t subdivide the land, we do upgrade the existing house and then build second accommodation. It’s essentially an ‘add value’ type development that delivers high yields and some depreciation benefits.
Dual Occupancy – this involves building two freestanding homes usually on a nice corner block of land and subdividing. We will usually look for the land in a newer estate. This strategy creates equity, delivers a decent yield and good depreciation benefits.
Medium density developments – the land size needs to be large and we’ll build three or more villas and subdivide. This creates good equity, decent yields and delivers high depreciation benefits and suits high income investors.
Sometimes a client would like a dual occupancy development but may not be able to finance it. Often, they’ll then consider a granny flat development.
The big difference between these two strategies is that one results in a high yield but low equity creation (granny flat) and the other creates good equity and still delivers a decent yield (dual occ).
I saw there was a fair gap between the cost of a granny flat project (high yield) and the costs of a dual occupancy (two freestanding villas) project. There was demand for as a ‘stepping stone’ type strategy.
So, we recently introduced what I call our ‘cheapie’ duplex development project (I’m still working on a better title!).
For the ‘cheapie’ duplex strategy we need to locate cheap land in established older suburbs. This does not mean we look in undesirable areas or sacrifice location for cost, it just means we look for a bargain.
Sometimes it may mean demolition of an old house or we’ll find a piece of land that’s become available as a result of a subdivision. Regardless, this strategy is all about low cost.
Once we secure the right site, we then build a basic duplex and subdivide. A duplex is two attached villas. By basic I mean still built to the highest of quality, but there is no ensuite off the master bedroom, it has a single garage and no bells and whistles. It’s still good accommodation, but just your basic three bedrooms, one bathroom. Our duplex does have airconditioning, dishwashers, and an internal laundry with second toilet and patio with pergola.
We know exactly what this type of accommodation will rent for – it’s targeting the low to middle rental market where there is currently good demand. We also have a good understanding of the expected end value as there are some similar sales references, albeit older dwellings, in this market.
The most important challenge for this strategy is to bring in the build costs as low as possible.
For our first project, we’d found a cost effective site in an older suburb with a mix of cottages and new homes. The location is good, close to the local school. But there was an old house to demolish. The house was full of asbestos and the demolition costs are coming in higher than first anticipated.
The duplex concept plan was designed and our first building tender had come in about $5,000 higher than estimated. This combined with the higher demo cost, meant we needed to work hard and find some serious cost savings. We explained this to our builder and had a good meeting, pouring over the plans. Perhaps we’d need to do away with our second toilet or internal laundry to save build costs?
Now back to my phone call from Kaye...
”I’ve got some great news, we’ve been able to reduce the build cost AND keep the laundry and second loo” she said. Their draftsman had worked out a more economical way of designing the footprint of the duplex so that there was a few less ‘angles’. This impacted on the roof design. So with a minimal change to the front façade, we could save over $8,000.
This saving not only bought us below estimate on the duplex build cost but the extra savings will help offset the higher old house demo costs. We are still awaiting more demo quotes and hope to get the cost down further.
We think our ‘cheapie’ dual occupancy strategy will work well in meeting the needs of the rental market but more importantly, meeting the needs of clients looking for a keen deal.