There are bargains to be found, competition is low and with interest rates dropping and rents going up, now is a unique time to be in the market, as is evident in a recent deal found by Investigate Property.
This property is either a delight or a disaster to most people. A delight to Reno Kings graduates and a disaster for untrained people who can’t recognise a deal.
On offer was a two bedroom workers cottage (which we could easily make into three bedrooms). For those that don’t know the difference between a workers cottage and a Queenslander, a workers cottage in most cases is an older, smaller styled version of its larger cousin, the Queenslander.
What a dump!
This dwelling needed work: it had previously been attacked by termites, it had a front enclosed verandah, the roof when viewed from within its cavity is like a night sky with stars of light seen through its entire surface (a polite way of saying it was riddled with rust and on its last legs), the gutters were non-existent in parts, the external paint on the outside can be rubbed off with your hand (no joke!) and the inside had the decor, carpets and curtains that you would expect of a house that had not been updated in over 40 years. It looked like a dump.
Limited street appeal with no front fence, poor landscaping and an enclosed verandah.
Enclosed front verandah.
Paint can be rubbed off with your hand and the gutters are in a bad way.
The entire house needs to be repainted, but still, you can see some character there.
In other words, we simply loved it! The Reno Kings are all about adding value through quick and easy renovations and providing the structure is ok, the rest can be easily improved. Taking a leaf out of Newton’s book, where he states that “for every action, there is an opposite and equal reaction”, we knew that this property had potential because the worse it looked, the greater the change we can make to it in a positive way.
Despite appearances the house was structurally sound - check out the new stumps.
Here we had a great renovator, so now it was just a matter of making sure we bought well and the numbers worked. Here’s how our Back of Envelope (BOE, aka feasibility) looked for our client who is flying up from Canberra to manage and carry out the renovations himself:
|
Purchase price |
$431,000 |
|
Purchase Costs |
$22,000 |
|
Estimate of renovations TOTAL |
$37,000 |
|
TOTAL |
$490,000 |
|
Estimated End Value |
$560,000 |
|
Added Value |
$70,000 |
Respectable numbers, but we have only told you half the story.
The above is good, especially given how many people are sitting on their hands saying you can’t make any money right now, but hardly a fortune.
Here is where the fortune lies. The site is located in a prestigious suburb that has historically had very high growth. The median price of the suburb is $870,000 (year ending June 2008. Source YIP Magazine), so this property was purchased at less than half of the median for the area and yet it is in a quiet street.
Buried Gold!
And here’s the gold.
It is also a development site!
The client is going to renovate the house to create instant equity in a slow market. The equity gain is the equivalent of 18 months growth in a typical market and yet people think there is no growth at the moment? The equity will be used to fund the consultants for the development application, which means that when you consider they are using a line of credit from another investment property to fund the purchase costs and renovations of this dwelling, at no stage prior to the approval being issued will they have to put in their own funds!
MSP - Multiple Strategy Property
The site can be developed with a separate freehold dwelling behind the existing house, which is how they are going to make their fortune from this property. It is what we call an MSP – a Multiple Strategy Property. It is also a good way of reducing risk. Let’s imagine they don’t develop for some reason. It doesn’t matter what the reason, they are still in front. Try doing that with a large development site, which typically have limited returns and any renovations you undertake won’t allow you to exceed the price paid due to the size of the land. The result is no easy short term add value potential and a site that is heavy on cash flow while you hold.
Side access allows us to develop behind without shifting the front house over. That's how you save money!
One of the interesting things about this site is if you were to ask council what you can do with it there is a fair chance that you would be told that this site could not be developed. This is because there are question marks with the site, and you have asked the wrong question of the wrong people.
The agent didn't know!
The most profitable development sites are almost always sites where you achieve above and beyond what anyone else believes you can do. The other buyers and the agent just did not know that this site could be developed. Think how much you can save (and make!) by knowing what others don’t.
Let’s look at the numbers now:
|
Purchase and renovation costs |
$490,000 |
|
Development approval costs |
$30,000 |
|
Service Costs |
$17,000 |
|
Site clearance |
$3000 |
|
Infrastructure Charges |
$25,000 |
|
BA Costs |
$12,000 |
|
Construction Costs |
$340,000 |
|
Holding Costs |
$50,000 |
|
TOTAL |
$967,000 |
|
TOTAL END VALUE |
$1.24 mill |
|
Profit |
$273k or 28% |
So how do you develop above and beyond what anyone else believes is possible? You get educated.
If you cannot recognise these opportunities before others, then you have very little chance of buying them.
If you do not know what the Development Approval Stoppers are and the research you need to do, then you may get caught with a site that cost too much, because you paid a price that reflected an end use that was never actually possible.
Get you army together
If you do not have an ‘army’ – a group of specialists you can ask important questions of and get answers from in quick time, then you will miss out on these opportunities, even in a quiet market.
The everyday investor is currently waiting to see what happens with the financial markets because they believe you need growth in the market to make money. The reality is if you get capital growth resulting from a general market rise this does not put you ahead of the rest of the pack, only in line with them.
Serious, informed investors generate their own growth regardless of what the market and everybody else is doing.
Developing for Profit is the ultimate two day development workshop and is being held at the right time... interest rates dropping, rents rising, under supply of rental property and most of all an abundance of builders and tradies. The time is right but are you ready? The information from this workshop cannot be found anywhere else and is guaranteed to save you from mistakes and give you the information to make you money in this market.
Warning! To give you personal attention... We have limited the numbers to an exclusive group of 25 bookings nationwide so it is imperative you book now to guarantee a seat.
Developing for Profit is to be held on November 22nd and 23rd in Brisbane and as stated is strictly limited to 25 bookings, so be quick to reserve your seat now to avoid disappointment. Book by 13th November to also receive an audio pack of the last Developing for Profit workshop.
Remember also that this workshop and any airfares or accommodation may be tax deductible – check with your accountant.
Click here for more information.
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