All I want for Christmas... is some more houses

Just in time for Christmas we’ve received the results of the National Housing Supply Council’s State of Supply Report 2011.

The Council’s report provides independent and consistent data on housing supply, underlying demand and the supply-demand gap, as well as affordability. The report has become a trusted resource for both government and industry. Reference:  http://www.nhsc.org.au/supply.html

With so much debate going on with whether there actually is an under supply of housing or not, this report gives some real weight to the argument. In fact, it’s pretty clear.

The Council projects that underlying demand and supply over the next 20 years will see a shortfall of over 600,000 dwellings nationally.

Wow...that’s a lot of housing that will be required despite ‘weaker market conditions’ that are being touted right now.  But I’m not really seeing ‘weaker’ conditions. In the areas Property Bloom develops things have started to move. Just this week we found a fabulous development site.  It is a solid three bedroom house on 1012sqm with two street frontages (there’s the twist).  This potential development site had plenty of interest, so much so that we had to race to exchange in order to secure it and take it off the market before Christmas.  The agent received over 30 enquiries in under a week.  On this site we’ll build a three bedroom duplex – two attached 3 bed villas – for our clients.  So we’ll create three properties from one. 

This is where I make the familiar reference to the two speed economy.  You will find that in any large region where there is lots of employment opportunities – as we see in the Hunter Region of NSW – there will be strong demand for housing.

But it’s not just any housing that’s required. We need to tailor to the needs of the community.  The State of Supply Report uncovers that the numbers of households comprising couples without children and lone-person households are projected to grow much more rapidly in all regions than are the number of households that are families with children.  With an aging population this all points to a need for smaller dwellings. The projections suggest that most regions can expect a greater relative increase in demand for flats than for separate houses.

Here’s an important point:  “...demand for private rental dwellings may well increase more sharply than is projected, due to social housing stock not increasing in proportion to increased underlying demand...”  What is that telling you investors?  Rents will continue to increase, combine this with interest rates dropping, buy in the right area and you should end up with a very strong yield.

With affordable housing in great demand, Property Bloom addresses this by developing properties; renovating houses and then building a granny flat. This strategy can be turned over very quickly and we basically double the housing capacity for that property and create a 9% gross yield for our clients.

By building villa developments in large regional towns like Muswellbrook, Cessnock and Maitland we are also providing good quality, affordable dwellings. These are quickly snapped up in the rental market.

So if you are looking for to give yourself a Christmas present, consider developing property, or at least purchasing one, in areas where there is an under supply and strong demand. You’ll not only be doing yourself a favour, but also the communities you are investing in and assisting with the shortfall of housing.  Merry Christmas!

Property Development…The Answer to the Housing Shortage

If you are a property investor looking to take the next step into developing property, then there’s never been a better time.  Just take a quick look at the current market conditions and you’ll see what I mean.

Australia’s housing shortage is likely to get much worse before it gets any better because construction of new housing continues to fall well behind the number of properties required. We are seeing Australia’s population growing although the ABS reports that at March 2011 growth had slowed slightly over the prior year.  But we still grew by 312,400 people. In contrast, we saw a 7% decline in new dwelling commencements (nationally) over 2010/11 to 154,877.

Then there is the continually rising demand for rental properties. The national vacancy rates are now 1.8% and a lot lower in most of the areas of the NSW Hunter Region where Property Bloom is developing. There is massive demand for new rental stock and tenants will pay a premium for brand new.

And here’s a tip for what to build:  The changing demographics of Australia - particularly a smaller proportion of couples with children and ageing of the population- is likely to increase underlying demand for smaller dwellings proportionally more than demand for separate houses. 

The Government’s National Housing Supply Council’s 2010 State of Supply report concludes:

• Underlying demand has continued to grow since the last report (by more than 200,000 households) and is projected to increase further by 2029 (by 3.2 million households to 11.8 million);
• Supply is not responding to this increase in demand (and that the impact of the global financial crisis on residential development in 2008-09 is likely to reduce dwelling completions in the next few years);
• State and territory data on future infill and greenfield supply may be higher than actual delivery of lots (contributing to a larger gap);
• The gap between demand and supply has continued to increase and will continue to increase without any changes to demand and/or supply;

So the writing is on the wall. We need more housing and depending on where you are developing, villas or units will be in demand.  It’s a perfect time to step up and become a developer.  But if it’s your first time, you should use a project manager to guide you through the development process.

At Property Bloom we start by finding suitable and affordable development sites for clients in the right locations where there is good demand for new dwellings.  Then through a detailed process, we’ll guide the project to a result of building anywhere from two – six new villas, more if clients can finance larger developments.  In some areas we are building larger houses as this is what is in demand right now.  The total cost of a typical development is $650,000, around the price of a two bedroom unit in Sydney.

Whilst all the hard work is taken care of, clients can be as involved as they like in the process.  We have some clients that are first time investors and need their hand held through the process. Others want to learn the development process so they can do it themselves next time. At the other end of the scale there are experienced investors who work in demanding jobs who don’t have time to source development sites for themselves, let alone manage the entire process.  Property Bloom has managed over 45 developments, so we have a tried and tested system in place.

Using a project manager to handle your development means you are handing over all the detail to someone with the experience needed to successfully manage your investment.  Some of the responsibilities of a project manager include:

• locate suitable sites
• run feasibilities on potential development opportunities
• brief designers and work with them ensure the site is optimised through good designs
• consult with architects, engineers and other technical workers to make sure that design intentions are met.
• interpret plans, estimate costs and recommend reliable suppliers
• manage the planning phase to ensure the fastest possible approvals
• study building contract documents and negotiate with building owners and subcontractors
• manage construction methods and procedures
• coordinate the supply of labour and materials
• direct site managers and subcontractors to make sure standards of building performance, quality, cost schedules and safety are maintained
• control payment to subcontractors by valuation of completed works
• communicate effectively and report accordingly
• keep project budgets

Is there a good time for your builder to go broke?

The Definition of a Developer’s Nightmare is: hearing that your builder is going into liquidation.  So what happens when a builder you’re using does go into liquidation?

With the announcement of Cosmopolitan Homes in NSW going into liquidation last week, I thought I’d share what I know about this topic.

When your builder raises a contract, they also need to raise insurance. The policy that is most important is the Home Warranty insurance. 

Home Warranty insurance is issued to the developer/homeowner to protect them against loss due to non-completion, defects and breach of statutory warranties by the builder. It is legally required and is only triggered if a builder dies, disappears or becomes insolvent before completing the home or fixing the defects.
I’ll repeat...you can only claim on this policy if your builder dies, disappears or becomes insolvent.  These are pretty drastic outcomes really for the builder but can also have dire consequences for you.
I think we all understand what ‘dies’ means.  ‘Disappearing’, well I’m not sure how this is legally defined, I couldn’t find an explanation. How long does he have to be gone for?  Does a three month trip to Vegas count?  What I do know more about is the process of ‘becoming insolvent’ and it can be quite drawn out.

If you find yourself in the situation where your builder has gone into voluntary or court appointed liquidation, the good news is…you are most likely covered by Home Warranty insurance. The bad news is…your cover may not be enough to complete your building works.

I’m going to let you into a little known fact:  Your Home Warranty insurance policy only covers 20% of the builder’s contract and up to a maximum of $300,000 for incomplete work.  So the stage your builder goes broke is very important, but totally out of your control. I’ll come back to this.

Going into liquidation is not easy for anyone. For voluntary liquidation the builder needs to acknowledge that they just can’t keep trading. There can be a period of denial as he comes to terms with this. Hopefully, he won’t be trading whilst insolvent because that’s against the law.  Signs of distress may include; delays in completing the stage of build and disgruntled tradies who have not been paid or are continually having to chase payment and the builder being over anxious for their next drawdown. So when the builder finally faces reality and goes into liquidation, he needs to appoint an accounting firm to manage this process.  They will be known as the liquidators. Their job is to notify all ‘creditors’ of the situation.  A creditor will be you if you are under construction with the builder and anyone else he owes money too like staff, contractors and suppliers.
The builder may be put into Court Appointed or Official Liquidation. This is when someone applies to the court that a company should be wound up in insolvency. If this happens the court will appoint a liquidator. 
Either way, before you can make a claim under the Home Warranty insurance policy, the status of the company must change from “registered” to “Under External Administration and/or Controller Appointed” on the ASIC website. Once the company’s status has been changed, you can lodge your claim.
When you make your claim, you’ll be asked to complete a schedule of payments you’ve made to the builder up to this stage. You’ll know how much you have left in your construction loan account. So then it’s a roll of the dice to see if you can complete the works with the insurance payout.
The insurance company will appoint an assessor who will inspect the site and put a building schedule together for the works that are outstanding. This is sent out for tender to builders on the insurance company’s panel and you can also get your own quotes.  This is when you may discover that the works required to complete the project may not be covered by the claim and what’s left in your construction loan.  With just 20% of the original builder’s contract to play with, there really isn’t a good time for your builder to shut down.

How can you avoid the situation of a builder going broke? Well you can certainly do your research on them before signing up. Get a list of their tradies and talk to them about how they are treated by the builder. Does he pay on time? Is he good to work for?  How long have they been working with him? Talk to past clients and ask how their experience was?  Check the Department of Fair Trading website for any past complaints and the ASIC website to see how long the builder’s been trading and his status.

At the end of the day, you will need to trust yourself and go with how you ‘feel’ about a builder. After all, we cannot know everything that is going on with a company. When you find a good builder, stick with them!

Interesting links:

https://homewarranty.nsw.gov.au/portal/server.pt/community/a%3Bhome/255

http://www.fairtrading.nsw.gov.au

http://www.search.asic.gov.au/gns001.html

www.propertybloom.com.au

A tweak in the schedule is worth two in the bank

So you’ve just received your DA & CC consent and it’s almost time to start building.  Just how long will the construction phase of your development take? Or more importantly, the question is how long before you start making a return on your investment?  I guess this is like asking, how long’s a piece of string?  Because the answer will depend on many factors;

-   The number of dwellings you are building – single house or multi unit development?

-   The type of construction process; slab and brick, timber floor and walls, partially prefabricated materials etc  

-   The size and degree of difficulty of the structures.

-   The weather; how many rainy days will delay progress? 

-   Material and contractor availability.

-   The builder’s ability to manage his contractors – his relationship with his trades and communication skills.

-   The knowledge and experience of those managing the project.

-   Any issues that may arise during the development process i.e. hitting rock when excavating.

Generally speaking, the build phases on Property Bloom projects range from a dual occupancy being completed within four months to a four villa project being completed in six months.  Our granny flat developments are only two months from receipt of approval to completion of building works.

Now you have an idea on how to estimate your build time...is there a way you can save on holding costs too?  The answer is yes and it’s all about analysing your building drawdown schedule.  A simple revision to a builder’s drawdown schedule can end up saving a considerable amount of money in interest holding costs.

Typically, my builder’s drawdown schedule would go something like this for a dual occupancy development....

Deposit – $5,000 due when signing the tender (before DA is lodged)

Slab Less deposit paid – 20%

Frame & Trusses – 20%

 Lock up – 25%

Mould out – 25%

Completion – 10%

By requesting a change of just a few percentages over each phase we can save thousands of dollars for our clients.  This was our proposed change to the schedule:

Deposit – $5,000 due when signing the tender (before DA is lodged)

Slab Less deposit paid – 15%

Frame & Trusses – 20%

 Lock up – 20%

Mould out – 25%

Completion – 20%

This is a much better schedule for our clients as there is more to be paid towards the end of the build.  Not only does this save on interest costs, but it keeps the builder ‘in the game’ as there is more for him due at the back end of the build.

 If I was really good at maths, I could calculate the exact amount saved be tweaking the percentages....but alas, I’m not that clever.  So here is a challenge for all you clever readers... 

Assumptions:

Build cost and construction loan is $500,000,

Total build time frame is five months from slab down.

An equal amount of time between each phase, although not likely, just to make it easier to calculate.

Interest rate 7%.

Can you tell me what would be the difference in interest payable for each scenario?  I look forward to hearing from you. Please email your answers to: jo@propertybloom.com.au

Systemise the Success of your Development

This week I created a system.  My aim was simple; to achieve more in less time.

I had decided to set up a meeting with one of my builders.  The builder and I only started working together fairly recently when I introduced this particular type of development earlier this year, and  over a short period of time we were now up to our sixth project.  I knew we could fine tune our process.  He’d had some recent staff changes so it was the perfect time to gently tell him exactly how I wanted my developments to run. 

Before the meeting yesterday I’d prepared a draft Procedures document which was based on the way we had been doing things up until then.  

But it wasn’t until I started documenting pretty much everything we did that I realised how much was involved in this somewhat basic development strategy.  What started in my mind as a one pager has turned into four. It’s funny how we simplify in our minds a process because we’ve done it time and time again.  But when you really break it down in writing, you can see all the fine details.

Using a System or Procedure keeps me on track with our projects...I now literally have a written system for everything I do.  It gives me something tangible to show to my clients and helps explain exactly what Property Bloom really does when managing their development.   It’s also an important tool to use when training new staff as they have a documented procedure to follow.  

By the end of the meeting with my builder, we had agreed on a three very important changes that will impact the bottom line of my developments;

1.       We changed our standard floor plan slightly to make it more cost effective to build, without reducing the size. Now I could offer my clients a cheaper build price that will not impact on the end value or rental return.

2.       We changed the payment schedule so my clients would pay less in the first half of the build phase, saving them valuable holding costs.

3.       We minimised choice to save time. By setting up standard inclusions plus a list of ‘optional extras’ it meant that clients would not feel overwhelmed by choice on fittings, fixtures and colour selections and we could manage this process faster moving to the next step and saving time.

I was happy with my new system and excited to put it into action immediately and already we are getting more done, in less time.  Because as they say...time is money.

Fast Track your Development by using a Project Manager

I often get asked what I do for a living.  My ‘elevator pitch’ or quick answer is…” I help people develop property by managing all the details from finding the right site through to finding the right tenants on completion.  The result is creation of a large amount of equity through the development process.”

Their next question is always…why don’t you just develop property for yourself? 

The answer to this is a bit longer, but to keep it short and sweet… I love sharing knowledge and find it very satisfying project managing developments.  I do have a stake in all our developments anyway, as I share in the equity we create.  This means I take personal ownership of the developments. Over the past 8 years the number of developments Property Bloom has managed stands at 53. This is on average of 6.6 developments per year.  Also, the bottom line is that there is no way I could finance 53 developments on my own.  By doing them for others, I get to do what I love and make a living from it. No brainer really.

So what are the benefits of using a professional project manager for your development? 

Save money; a good project manager will have established discount structures in place with builders, architects, surveyors and other contractors.  On a 3 villa project, the builder’s discount alone saves our clients over $12,000. On a 6 villa project we’re saving them well over $30,000. These savings help offset the project management fee.

Save time;  To set up your own development team, find the right site, run feasibilities, design the project, manage the planning phase and then the build phase for even a small dual occupancy can be very time consuming. If you are trying to hold down a full time job at the same time, you will find it challenging. Using our refined system, we fast track all stages of the project for clients. 

Minimize risk; if it’s your first development then just one error may mean the difference between a profitable development and a non-profitable one. Using an experienced PM takes some of the risks away. Developing will always have an element of risk, every development is different and we’ve learnt something new from each one we’ve finished.

Learn how to develop; simply by going through the process whilst working with a PM you will learn so much. If you engage a PM that is happy to teach you along the way, then you may be ready to manage your next project on your own.

Access to sites not on open market;  our sources know what we’re looking for and will contact us about sites they may have available or have coming up.  About 50% of our sites have not hit the open market.

Professionally managed & recorded; the paperwork alone can be mountainous and you want to ensure all documents are kept to maximize your tax return and so you can use them as a reference when doing your own project.

Local knowledge and experience; Property Bloom specializes in the Lower Hunter Region of NSW. So we know the markets very well and can quickly analyze a potential site location. Our contact base of agents, contractors, builders, professionals is broad and we have been able to weed out any suppliers we have not been happy with in the past. We continue to fine tune and improve our systems and processes.

Keep your day job;  cashflow is important when developing so all of our clients have day jobs to fund their developments. It enables them to keep moving forward with building their property portfolios.  We often have clients running two projects simultaneously to fast track their wealth creation.

If you’re thinking of developing but are a little worried, work with a project manager who has local knowledge and good experience in the area you want to develop in. You’ll essentially be buying yourself the time and experience it would have taken you to get up to the same level.

To Sell or Not To Sell...that is the question

Even before you start looking for your development site, you’ll need to clarify one thing.  Are you developing to sell or to hold?

To answer this question, you may need to answer another...

 Is your strategy short or long term?  If it is short term, then selling may meet your needs to make a quick return on your investment. If you have a long term strategy to build up a property portfolio, then holding will be the way to go.

There are several factors that will influence your decision:

Location

Your development is in an awesome location but in a poor rental market.  An example of this may be a coastal area where there may be higher demand from owner occupiers wanting to purchase low maintenance property to retire to. In this case you may sell to realise your profits as holding would not be viable due to low rental returns.

Timing

If you complete your development and the market is in an upswing with high demand, then you may get a higher than anticipated sales price. So this may influence you to sell. But if the market is down and there is an oversupply of property, but a tight rental market, then holding may make sense.

Interest Rates

An important factor in calculating holding costs is interest. If interest rates are around 6.5% as they are now yet the rental yield is around 8% in the area you’re developing in, then holding the properties makes good sense. You may look at fixing rates for a few years, to take the risk of rates rising out of the scenario.

Taxation

You need to discuss your personal and/or company tax situation with your accountant before starting to develop property. There is capital gains tax to consider when selling as well as GST implications when selling brand new dwellings. These alone may sway you to hold. You also need to check on land tax to see if this will affect you if you decide to hold.

Most of Property Bloom clients develop to hold.  This is because they choose to access the equity – which is created through the development process - through refinancing on completion.  This means they don’t have selling costs like agents selling commission, capital gains tax and GST.   Once refinanced, they can pull some equity out of the development if they choose.

Another deciding factor in holding is in the areas of the Hunter Region we develop in, we are getting very strong rental returns. We find that we can maximise the rent because the villas are new. Tenants do pay a premium to live in a new dwelling. Also the vacancy rates are less than 1%.  The gross yield on completion can be as high as 9%. The yield does also depend on the size of the development.  A three villa project will have a higher yield than a dual occupancy. 

Another reason our clients hold is take advantage of the high depreciation benefits they receive on the new dwellings.  On a typical dual occupancy, our clients are receiving around $17,000 in year one (based on Diminishing Value method). If you are paying lots of tax, then this is definitely one of the rewards of holding.

The final reason Property Bloom clients hold is because they want to build up a retirement fund and take advantage of future capital gains. In the suburbs we develop in, there is high potential for capital growth because of many factors including increased population, projected housing demand in the council’s Regional Strategy, spend on infrastructure and the benefits that the coal mining industry bring to these towns.  The long term growth figures are over 12%.  So if a client can create around say $80,000-$120,000 in equity through the development process AND then holds for ten years, they stand to receive 12% growth on average, each year.  The future value of their development will be considerable.

Whatever your strategy, make sure you put down a solid plan that you feel comfortable with and set up a professional team to help you achieve your goals. 

It’s not over till the fat lady sings!

Last week we ran a massive race.  It could be said it was the grand prix of property purchases.    You see, I found a really, really fabulous development site for my client and there was no time to waste as I realised that the property was way under priced!

It all started with a call from the agent.  “I’m listing a property you might be interested in Jo” she said.  The grin on my face broadened as I asked a few crucial questions...what were these questions? 

There were five:

What is the land size? I was told 1,000sqm (it was actually 1,039sqm)

How many rooms does the house have?  FOUR (most houses in this suburb are 2-3 beds)

What’s it renting for? $265 per week (ears prick up...WOW this is way under rented!)

Where is it? Did I hear you say “on the corner”?...  YES, it was a corner block!

What is the listing price?  $270,000...hmmm I knew a four bed house on 500sqm (more than half the land) had recently sold for $272,000 a few doors up and it was not a corner block.

As I asked these questions and even though I actually received some incorrect answers, my heart was pounding.  I knew this was an extraordinary property.   As luck would have it, I was going to be in the Hunter the very next day so I could check it out immediately. 

I sweetly asked the agent... “Can I inspect the property tomorrow?”  After a few hours wait, the answer came by email....No, not yet as the contract had not been received, although they had a signed agency agreement.   I picked up the phone and after a few minutes chat, I had gleaned the address of this property. 

The next day I could think of nothing else as I hit the freeway.  My curiosity was soon satisfied as I stood at the fence, peering through the bushes to grab photos of the property we were soon to secure for our client.

Had I not had a good relationship with this agent, I may not have been able to get the address. But she knew that my clients were always strong purchasers.  As part of our process, before a client even signs up with Property Bloom, we ensure they have done THREE things:

-          Sought independent financial advice to ensure property development is the right strategy for them.

-          Had a preapproval from their lender on figures relating to the type of development we’d be project managing for them.

-          Discussed the correct structure to purchase under and tax implications with their accountant.

So we were able to move quickly, before this property had officially hit the open market. We had a two day head start.  We knew the property would hit the internet sites and be advertised in the local newspaper very soon, so time was of the essence.

I took lots of photos and rang my surveyor. Had he done a survey on this property in the past?  Sometimes I find this to be the case and we can obtain a copy of an old survey. But, today he said “no, he had not”.

I rang my client and told him my feelings about this property.  The house had a lovely Federation style with wrap around veranda. The large corner block was a no brainer.  BUT...even without seeing the contract, I knew that the zoning for this suburb was changing to low density under a proposed Draft LEP.  In the past we could have lodged a DA to build a duplex behind the house and complete a two lot Torrens Title subdivision. But I knew this was no longer an option. I had developed in this very street before, so I knew where the sewer main ran.  I knew rental demand was strong.  Most importantly, I also knew that being a corner block with kerb & guttering on just one boundary meant that council would condition kerb & guttering to be completed on the other boundary as part of the DA consent if we were to lodge a DA for a subdivision.  Whilst the block was large enough to subdivide, this cost of approximately $30k - $50k for 50m of kerb & guttering including the bitumen sealing of the very wide road shoulder, could kill the project.  This was the deciding fact for me.  An inexperienced punter, not knowing the local council requirements, may have easily found themselves in hot water.

The answer for this site was a strong yield creating development strategy and we would build a two bedroom granny flat to supplement the four bedroom house.  This would not over develop the block and leave adequate outdoor living space around each dwelling.  We would not be asked to upgrade the road as part of this Complying Development.  The property was opposite a school, the four bedroom house would rent to a family with kids needing some yard space and the two bedroom flat may well be rented by a retired couple of a single parent.

So with a little freshen up renovation, paint and new carpet, the house will rent for $350 per week. Remember we paid just $270,000 for it (full asking price was our very quick second offer, before the property was ‘officially on the market’). It will cost us $90,000 to build our granny flat and this will rent for $270 per week.  The result is a 9% gross yield for my client.

By this time, we were well and truly sprinting to exchange.  I knew as soon as this property hit the open market there would be mega interest in it. Little did I know,  it would also be the catalyst for some very unscrupulous agent activity.  We later found out that one local agent who DID NOT have a sales agreement with the vendor, tried to gazump us by talking directly to the vendor telling them he could bring them a buyer above asking price.  You can only imagine how the listing agent reacted to this! 

That’s why we were sprinting.  Within 5 days we had received three crucial pre-purchase documents:

-          pest & building report

-          Ident survey

-          Bank valuation and unconditional loan approval

My client’s conveyancer had to hound the vendor’s solicitor to make them act fast and move to exchange as quickly as possible.  They didn’t know what had hit them. Usually it’s the other way around with the vendor pushing to exchange.  My job was to keep all parties fully informed so everyone knew that my client was moving as quickly as physically possible to exchange. This communication process was crucial in the success of the deal.   The vendor had told the agent to keep the property on the market until it was exchanged.  So if for one minute, the agent thought we were moving too slowly, they could well have taken another offer to their vendor.  

My message from this experience to you is....run loudly and fast...don’t ever let things go quiet!  Manage the process till the end if you want to ensure you buy that property.   As they say...it’s not over till the fat lady sings or in other words...until you sign the contract and exchange takes place!

Renovations with a twist

This week I was really excited to find a fabulous property that we could add value to.  Add value?…in what way I hear you say.  Perhaps you are thinking through renovation…new kitchen, new bathroom, paint throughout, perhaps a deck out the back or even maybe add another bedroom?  Yes, this kind of work would usually add value to a property.  But actually, I was thinking along other lines and two words had sprung to mind….GRANNY FLAT.

By adding a granny flat to this property, we could literally double the rental return.

This four bedroom house, in a Hunter Region of NSW town, was renting at $260 per week.  But as soon as I saw it, I knew it could achieve much more. It is a large block, over 1000sqm with dual access.  By building a 60sqm, two bedroom granny flat on the property it could be rented for around $270 per week on its own, just for the flat.  But it does get better….the house is way under rented.  You see, I’m finding right now that as rental markets have continued to tighten over the past few years, there are some owners and managing agents who haven’t bothered to increase rents. This house was being rented by a long term tenant and quite frankly, she is on a very good wicket!  The market rent in this town for a four bedroom house is actually up to $350 per week.  So the house is under rented by a whopping $90 per week.

So if we spruce up the house a little, and this one only needs a paint and new carpet, we can increase the rent to $350 per week.  The purchase price is $250,000 and we may spend $8,000 of a cosmetic reno, so already that’s gives us a 7% gross yield. Not a bad return when the average yield for houses in Sydney, for instance is 4.18%.

The granny flat will cost us $92,000 to build, this includes the design and complying development application fees. It also includes separate service connections for the flat so that we can rent it to a different tenant to the house if we need to. Remember, the flat will rent for $260 per week.  If we add the cost of the flat to the purchase price of the house plus the small renovation costs, and include purchasing costs of stamp duty, legal fees, reports etc then we end up with a gross yield of around 9%.

Did I already mention that the average rental yield on houses in Sydney is around 4.18%?

Ok here is the twist. If you have a Self Managed Super Fund or are thinking of setting one up, you may be able to do all this from within your fund.

On 14 September 2011 the ATO released draft Ruling SMSFR 2011/D1 clarifying its views on key issues surrounding borrowing arrangements (Limited Recourse) as they apply to Self Managed Super Funds (‘SMSF’), allowing fund monies to be used to renovate property.

Importantly the ATO has given clarity to concerns of fund trustee’s in regards to repairs, renovations and improvements to properties held in SMSF’s under Limited Recourse borrowing arrangements. It is clear these can now be done within such arrangements. Borrowed monies cannot be used in all cases for such work; however other monies within the SMSF can be utilized.

This information comes from Nic Ellis, Director of The 2020 Group, who tells me he’s had more enquiry than ever on this topic.  People want to utilize their Super to not just invest in property but to renovate and add value.  With such a volatile global situation and stock market, Australians want more security around their retirement funds.  Nick says he’s happy to see the draft Ruling as it falls in line with his company’s interpretation. The SMSF Limited Recourse borrowing for purchase of property has seen significant growth in recent years and this draft ruling will help turbo charge this sector of the market.

However, the area remains complex and care needs to be taken to ensure expert advice, appropriate structures and experienced administration of this process. So if you want clarity on this go to: http://go2020.com.au.tmp.anchor.net.au/index.php?pageID=10#sectionStart

In the meantime, if you think you may be interested in a granny flat development then let me know and I can provide more details on the property we uncovered this week. 

Dual Occupancy - Strata vs. Torrens Title Subdivision; and the winner is...

Last week I presented the pros and cons of Strata vs. Torrens Title subdivision for a dual occupancy project. 

For this project, we are building two free standing homes. The land is not a corner block, so one home is positioned behind the other and they will share a common driveway.

Our first response was to try and achieve a two lot Torrens Title subdivision because it’s what most people understand when purchasing houses.  Strata subdivision tends to be associated with multi unit developments, rather than house and land projects. 

But, when you think about it, if you have two houses sharing a common driveway, then there should be some formal arrangement on who is going to pay for the upkeep of the driveway.  A strata subdivision covers this off whilst a Torrens subdivision leaves driveway maintenance up in the air or for owners to fight over.

We asked our surveyor to set up the Strata Plan giving each house its own land on title, minimising common areas to the driveway and the dividing fence between the two houses.  Being a small, two lot strata subdivision; it means that we’d be exempt from the more formal strata management of larger schemes.  As the houses are freestanding and have their own yards, it is quite a simple process. 

If our client, on completion of the development decides to hold both houses, they may also decide not to even register their subdivision immediately. We would have the approval in place and this has no shelf life, so they could register the subdivision years down the track when and if they decide to sell.

If they decide to sell one house and keep one, after registering the subdivision, all costs for managing, maintaining, repairing and insuring the common property are shared by the owners in direct proportion to their lot's respective unit entitlements. In this case it is an equal share; each lot has one unit entitlement, so it is very straight forward to manage. Each owner is responsible for 50% of any costs to repair or maintain the driveway/common area.

Small Strata Schemes (2 Lots)

The special provisions for 2-lot schemes are:

·         the 2 owners automatically form the Executive Committee removing the requirement for an election

·         a quorum for all meetings is when the 2 owners are present

·         Building insurance is not compulsory where the two buildings are detached and there are no additional buildings on common property. However, both owners must decide to forgo insurance cover by unanimous resolution at a meeting. Each owner may then insure the structure on their own lot.

·         If the buildings are detached, the owners can decide not to have a sinking fund provided there are no additional buildings on common property. Both owners must decide this by unanimous resolution at a meeting.

With the advent of the compulsory 10-year sinking fund plan legislation, 2-lot schemes managed to get special consideration. Essentially, a 2-lot scheme doesn't need to have a sinking fund.

Finally, there are no requirements for two-lot schemes to have any audit of accounts and financial statements.  Reference: www.strataman.com.au

Property Bloom found by setting up the strata title subdivision in the right way that it was the better way to subdivide. Not only does a small strata subdivision (two lots) cost a lot less in development costs than a two lot Torrens subdivision, it is also a much quicker process.  

The winner is, in our books is a Strata Subdivision for a dual occupancy where there is a shared driveway.