Browse Forums Home Finance 1 Mar 13, 2010 5:44 pm Hi guys Wasn't sure if this was the right spot for this topic so please feel free to move to a more appropriate section if needed Ok so i am after some unbiased advice. DH, his manager (and financial guru/account) and a close friend are very keen to take on a bit of a buisness adventure.. Basically they want to buy an old house/vacant block of land - in our area or surrounding suburbs (Western suburbs Melbourne) for around $450k max. Then they want to subdivide it and build 2 (possibly more depending on the land size) modern townhouses on the land and sell them off to make a profit. Sounds fine in theory although I am always the cautious one and because all 3 of them are big risk takers and pretty biased about how successful the whole thing will be I'm coming here for some ubiased and hopefully useful advice So according to them 1) Buy Land/old home for $450k 2) Build 2 new townhouses on the land $200k per townhouse - totally $400k + $50k approx on a additional things; demolition, permits, architect (they have a friend who will do this cheap) 3) Sell for somewhere between $650k - $700k (very achievable in our area) 4) Make a profit - Spend $900k approx to make $1.4million (or at worst 1.2million) = $300 - 500k Profit! Basically the friend and DH will go 50/50 in all cost - so we will need an additional $450k loan approx, which is fine because we have had 2 properties on a mortgage before and have been fine (albeit a little tight) in making the monthly mortgage payments. What I want to know is a) Can you even build a townhouse for $200k - I should mention they have contacts in almost every field and DH's friend will be doing all the internal work himself - cupboards, flooring etc - it will basically be the slab pour/frame/plumbing/electricals they need to hire people out for. Also what is the deal with capital gains tax? If they sell the townhouses straight away I know they have to pay this, how much would it be?? Anything else to offer advice/stories on? They are all just so into the idea, and me well call me a sceptic but I worry....What if they don't sell I say? We will just rent them out say they! What if it ends up failing? You can't go wrong with real estate say they! Would you do it if you were me? The flip side is if this works we will be in a fantastic position - almost owning our current home outright due to the profit being able to go straight on the mortgage! DH thinks we do it twice and we are mortgage free... Is it really so simple?? My karma ran over your dogma Re: After some advice 2Mar 13, 2010 7:56 pm Hi Bel, It sounds good, doesn't it. I'm a bit like you and fairly cautious (although we did something similar with subdividing our land) It is possible, but they really need to do their research first...get everything properly costed out before jumping in. Anyway, with regards to capital gains tax...yes they will be liable. CGT is pretty complicated, well it's not too bad really...I'm just not very good at explaining it. Let's say for arguments sake that you are on an income of $50,000. You would be paying income tax at 30%. Then if you make a capital gain (after deducting costs and expenses) of say $100,000 the ATO divides this by 5 and adds this figure to your taxable income, to determine which tax level you have to pay CGT at. So in this example adding $20k onto your income still keeps you in the 30% tax bracket, so you pay 30% on the whole $100k. If you made a capital gain of $200k, this would take you into a new tax bracket and so you'd have to pay some CGT at the higher rate. Oh and you also get a 50% discount on the CGT if you hold onto the property for 1 year...not sure how this would work in this situation, but I presume it would be 1 year from when the townhouses are completed I was going to direct you to the ATO website, which I have found quite good, but the website is down . If you have a good tax accountant, they should be able to help you. I know that we went and saw ours just with some rough figures and he gave us an estimate of what our CGT liability would be. We showed him the estimated costs for the sub-division and the valuations on the blocks of land (which where yet to be sub-divided) and he did the rest. We are yet to go back to actually do our tax for last financial year...it's on my to do list. I'm sure there are sub-division experts who can give you more of an idea about the costs involved with sub-dividing...surveyors or engineers...our surveyor helped us a bit (but he wasn't very good really...very sloooooow). Sorry...I haven't helped much. Good luck with it. 'chelle We have a hand-over date...15/10...but I won't hold my breath! http://people-in-glass-houses.blogspot.com/ Re: After some advice 3Mar 13, 2010 9:06 pm Thanks Chelle - I really appreciate your advice DH's manager is an accountant and does all our tax so I should get him to break down the costs a little better for me in the coming weeks I think. DH is in a high tax bracket I know that - so we will probably be hit pretty hard....I have heard holding onto them for a bit longer can help but I don't know if that means we can rent them out or we have to hold onto them ourselves and not be collecting rent - might look into that My karma ran over your dogma Re: After some advice 4Mar 13, 2010 9:09 pm Pretty sure you can rent them out...that would be separate to the CGT...but best to get advice. 'chelle We have a hand-over date...15/10...but I won't hold my breath! http://people-in-glass-houses.blogspot.com/ Re: After some advice 5Mar 13, 2010 9:23 pm haywgl Is it really so simple?? Hi Haywgl Unfortunately, the short answer is no. Otherwise lots more of us would be doing it. However, your situation (good contacts, ability to do work yourselves, good knowledge of prices etc) gives you a far better chance than most. Assuming your figures are soundly based, I can see two main areas of concern that you need to consider carefully: Are the partners in the deal good enough friends to work through any difficulties successfully? I note that your husband's mate is doing a lot of the carpentry - is he to be reimbursed for his time? You really need to sort out the nitty-gritty that can be overlooked in the excitement of the project. The second area of concern is perhaps the more important. Many poorly-conceived developments have been saved by property appreciation, which has been generally the norm in Oz for more than a decade. But, there's always the possibility of a real-estate slump. I guess you could figure that a worst-case scenario would be break-even and, if that's the case, you have everything to gain and nothing to lose. Hey, I think I've just talked myself into this......if the personal relationships between the partners are sound enough to withstand a few bumps........then IMHO Go for it! Cheers zeke Re: After some advice 6Mar 13, 2010 9:41 pm zeke Are the partners in the deal good enough friends to work through any difficulties successfully? I note that your husband's mate is doing a lot of the carpentry - is he to be reimbursed for his time? You really need to sort out the nitty-gritty that can be overlooked in the excitement of the project. Yes, I was thinking about that too. I know of 2 brothers who went in on a similar deal and it turned sour...one did more work than the other...the other spent money without consulting the first. Brother 1 pulled out and it got very messy. They have only just started speaking again after quite some time. So yeah, they would have to have it all spelt out very clearly...or it could ruin a beautiful friendship 'chelle We have a hand-over date...15/10...but I won't hold my breath! http://people-in-glass-houses.blogspot.com/ Re: After some advice 7Mar 13, 2010 9:53 pm Re CGT - if you hold a property for less than 12 months you will be charged CGT on the whole profit - if you hold it for longer than 12 months (and presumabley rent it out in this time) you only pay CGT on half the profit. you pay the CGT at your highest tax rate, maximum aroud 47% in Australia's current tax rates., ie if you are in the highest income bracket and you have held the property for over a year you will pay almost a quarter of the profit in tax. If it is held in joint names, each party will pay for their part of the profit at their highest tax rate, so obviously this may bring the total to less again, especially if one party earns little or no income(eg a SAHM) We bought an established unit and held it for 6 years as a rental property - DH paid more CGT than me, being in a higher income bracket. Of course, any rent you recieve is also taxable income. Hope my answer makes sense Re: After some advice 8Mar 13, 2010 11:08 pm hi bel, I think the guys here have already covered most of it. I considered this idea in sunshine 3020 a couple of years ago, and I used to live there so I had a really good feel for what people wanted (and how much they would pay) etc in that area. I found it VERY helpful chatting to real estate agents in the area and they were all really helpful. Get on the phone to RE agents in the areas you are considering doing the work, or even better, go to an open of a finished unit similar to what you want to produce in the end and see what the agent tells you about the whole deal. They usually know a lot actually, including profits etc, you'd be surprised. in summary, I felt that unless I was a builder the capital growth was along the lines of just buying a property, taking care of it for a year and just selling (without all the blood, sweat and tears). The profit lines I came up with in similar scenarios to yours above, did not produce profits anywhere over $200K, it was more like $100K and I was well and truly prepared to only break even on the first job as a found my way round the whole "prop development" gig. I don't believe it is easy, or many more people would do it. I have only found builders (small time) who do it as their sole income (plus small private jobs). In the end I felt more inclined to go with a dual occ in St Albans or Deer Park, where I bought the "relatively good condition" home on a large block, subdivided, sold off the front "as is" for as much as possible, built new on rear making capital growth on the land at the rear only. I found this to be quicker (no demos), more likely to succeed, and more affordable (smaller loans is ALWAYS a good thing). But again, I turned away from it in the end fearing I may end up loosing due to the fact that I wasn't a builder myself. I decided on a completely different kind of prop development in the end, and I'm pretty happy with that for now. GOOD LUCK! A thankful person is a happy person. [/color]My hobby design blog: http://aviewondesign.blogspot.com/ Re: After some advice 9Mar 14, 2010 2:36 pm Hi bel First of all, we know many wealthy property developers who have done this and still doing it. Very worth while but due diligance is needed as you will be competing against experience property developers for the same property. They say you make a profit when you buy the property not when you sell it. The land must be bought under market value as it gives you a buffer zone if the market is flat and you are unable to sell the finished product for the price you want. Now this is my major concern about your deal Are you going in with 3 investors or 2? With the way I read it, DH and friend are the ones to take the financial risks but what about the 3rd investor...what is he bringing into the deal? I dont like joint business deals where one party takes all the financial risk. That is not good business at all. Sorry to be blunt but you need to ask the really hard questions now and get this all sorted out. If it was me, each partner puts in an equal share of the $$$$$'s. mrs B Re: After some advice 10Mar 14, 2010 4:43 pm I'm with Mrs B....be sure that the details of who provides what are all sorted with some sort of legal agreement, and make sure that you're not the only ones providing additional security. One other thing to be a bit cautious of: The planning application process can be complicated and drawn-out, especially if neighbours object to the development. So you may be up for extra costs there: legal fees, VCAT, council application fees... I don't know precisely, since I've never done this myself, but I know others who've spent a small fortune before they've even got to the building permit stage. Plus if it becomes a lengthy process to even get to the construction stage, thanks to narky neighbours, you're going to be paying interest on that mortgage for a lot longer than you might expect. Otherwise, I think it's a great idea. Oh, and Helyn summed up the CGT situation well (I might not know much about property development, but I know my tax law....). If you're acquiring an asset now, the only discount available is the 50% concession for having held the asset longer than 12 months. If you sell within 12 months, you can deduct your costs, then you pay tax on the profit at your marginal rate. Have a good read of the ATO info, and give them a call to discuss a hypothetical situation if you're at all unsure - even if you already have an expert involved, it doesn't hurt to confirm what he's telling you. http://www.ato.gov.au/individuals/content.asp?doc=/content/36581.htm Re: After some advice 11Mar 14, 2010 5:19 pm Wow! Thanks for your advice everyone - great to read It's funny most people's concern is for the contacts/relationship - as I guess this could cause alot of hassle for most but this is actually the least of our worries - our partner in this is someone I trust 100%. I think I made it sound like their was a 3rd party sorry - but there isn't - it is just DH's manager/accountant who is helping us get it all off the ground - he won't be contributing any money or expecting any - other than what DH already pays him annually for management fees which cover all this sort of advice/help At this stage it will most likely be 50/50, but we are going to look into us funding a bit more of it, due to the fact our other party will be doing ALOT of work on the properties - DH can help but isn't nearly as handy This again wouldn't bother us as even if we went 50/50 we would be out of pocket for paying someone for the labour so it evens out The CGT thing makes sense now - it will probably be more worthwhile to hold onto them for 1 year - save the tax but also use the rent on the mortgage - of course we will break down the figures properly to see what each comes out as... Funnily enough we really want to purchase the property next door to us - it is an old run down house that is unliveable at the moment, the owners live in WA and have let it go to crap basically, apparently they tried selling a while ago but no one was interested, we don't have any contact details for them, but we are hoping to get some so we can put in a private offerwithout real estate - thus saving them and us alot of money It would also mean no neighbour objections as we know we won't be objecting - and even better it means getting rid of the dump next door My karma ran over your dogma Re: After some advice 12Mar 14, 2010 8:05 pm haywgl Funnily enough we really want to purchase the property next door to us - it is an old run down house that is unliveable at the moment, the owners live in WA and have let it go to crap basically, apparently they tried selling a while ago but no one was interested, we don't have any contact details for them, but we are hoping to get some so we can put in a private offerwithout real estate - thus saving them and us alot of money It would also mean no neighbour objections as we know we won't be objecting - and even better it means getting rid of the dump next door Sounds like a win-win. Good luck! Re: After some advice 13Mar 15, 2010 5:17 am It sounds like a great idea Bel! Just make sure the numbers stack up and you have worked out the partnership precentages and who is going to do the work. Also, contact council now to make sure you are able to develop the land and there is no restrictions/easements on that particular block. Goodluck and looking forward to the pictures Mrs B Re: After some advice 14Mar 15, 2010 6:39 am Thanks guys I am nervous - but I must admit a tad excited too - if this works out and we can be mortgage free in a few years it would be amazing! I don't know when it is all going to happen or even if it will, but DH's manager wants it done while he is still contracted for a bit of security = so it would be sometime in the next 2 years! My karma ran over your dogma Re: After some advice 15Mar 15, 2010 8:40 am Don't forget to add in the selling fee Where you are coming from is where you are going to... Re: After some advice 16Mar 16, 2010 10:31 am I hate to rain on the parade but i've been thinking about this for a while too..exactly same situation. Here's the reality check for you. Costbase = $900K Sale= $1.4M Lets assume its $500K profit. and you keep it for 1 year. Interest costs for 900K and (assume 2 years, 1 year for building and 1 b/c u have to keep it) 6% of $900,000 for 2 years is = $54K per year ie. $108K (not considering the interest payments for the extra few months it may take u to settle ie. most people will need 60 days and assuming u list it for a month before it sells thats 3 more months of interest i haven't included) After the year you will need to pay approx $125K in capital gains tax And what ever is left...u have to halve that too. So i don't think you will be paying out your mortgage anytime soon The good thing is i haven't considered the rental income and the tax benefits of negative gearing the interest payments. Good luck. Smeags. < ---------bearer of bad news ---->Some say that a recession is when your neighbour loses his/her job while a depression is when you lose yours!<----- Re: After some advice 17Mar 16, 2010 8:23 pm First thing I would be doing is talking to your accountant friend and asking him if it would be better to set up a unit trust between the interested parties and use a paper company as the trustee. You might find some tax breaks and asset protection going this way but the accountant friend should be able to give you all the pro's and cons about this Re: After some advice 18Mar 17, 2010 7:23 am Hi Bel have a read of this thread... viewtopic.php?f=1&t=31102 This is just one of the many things you need to look at. I remember when we bought the block our house in on now, easements were the first questions I asked about Mrs B Thank you so much for the effort. We will use it to talk with builder. We also had idea of building duplex instead and seeking suggest ions. viewtopic.php?f=31&t=106744 11 13817 Versaloc is a mortarless besser block system that still needs a properly engineered footing. If you just do a 400x200 footing it will fail in time. At 17m long you need it… 1 15521 6 11528 |