Ok, so where did we start with this one? Good question! We chose to start with the end in mind, meaning reflecting on what the objective is and what we wanted to achieve.
My first thoughts when looking for this project were, manufacturing money by utilising our skillsets! Don’t we all like the sound of that, right?
My following thoughts were….
- What is our Budget
- Location
- I want a big block to be able to subdivide and sell a block off
- House must have good bones
- Position of the house on the block
- Cost to Subdivide to be able to sell the block
- Cost to Renovate
So let’s take a look at some of these things in more detail😊
Budget
You can’t start any project until you work out your budget. The first step is to decide what your budget is to secure the property, then it’s time to determine what your budget is for renovations (if required) and what the cost to subdivide will be. Meaning how much cash do you have? If you can’t borrow extra cash from a lender do you have enough to cover the renovation and subdivision costs? Also how much will you need to borrow to cover the purchase price and purchase costs such as Stamp Duty, Transfer Fees, Conveyancing etc.
We decided to fully fund this project by using equity from another property (how to utilise equity for further blogs).
Our max purchase price was set at $480k with an ‘as is’ rental of $350 p/wk to secure the funding. Having done quite a lot of renovating before, I had allocated $30k for house renovations to increase the rental income (this meant looking for a house that needed a facelift and not anything structural). In this instance, I utilised my husband, a builder, to do the work for us rather than outsourcing trades (some trades were brought in). I then costed up the subdivision and knew this would be around the $25k. So $55k cash was needed to complete this project.
Location
I was looking for a 1200-1300 m2 block and knew this wouldn’t be possible in our budget in metro areas, so I decided to look within an hour of Adelaide. Northern Adelaide and the Barossa are very accessible now that there’s been some significant funding spent on our roadways (the Northern Connector), and it’s an easy drive, easy enough that you could commute to Adelaide for work. This location has all or most amenities that families/couples are looking for (public and private schools, hospitals, supermarkets, restaurants, coffee shops, tourist attractions, and industry to provide jobs in the area). The Barossa has several towns that are almost linked with some very affordable housing and it’s also a renowned wine region that attracts tourists from all around the world, as well as provides jobs in viticulture, agriculture and hospitality in the local area. The area is also surrounded by farming land (agriculture), and the landscape is breathtaking—many ticks for this area within an hour’s drive of Adelaide.
When I stumbled on this particular house, we took one look and knew it had good bones, and the two of us were on board to give it a crack and knew with a facelift, it would come up a treat together with a well-thought-out plan and budget, (and a handy partner to carry out the renovations).
The block size was 1300m2, on a corner, and the house was built right at the front of the block facing one street with two driveways, one from each side road. Perfect for subdivision!
Negotiations began, and we were the winning bidder. A bit to do, but nothing we couldn’t handle. We could have cut two blocks off, but after some research, we believed that people are looking for a minimum block size of 550m2 in a place like this—plenty of room for a single-storey home, double garage, oversized shed and large outdoor entertaining areas.
As soon as we had secured the contract we planned our timing schedule for renovations, when it would be ready to tenant, authorised the surveyor to start proceedings, and timing for when we could onsell the block.
My partner couldn’t start renovations for two weeks, and it took 2.5 weeks to complete the 1st stage.
Note to newbies… don’t forget your holding costs! 2 weeks before we could start, 2.5 weeks to renovate, 1-2 weeks to open the house to secure a tenant—six weeks of holding costs before rental income starts. Your 1st loan repayment will come out one month after settling.
1st stage – Order the new kitchen (make this one of your first jobs and search out quick suppliers and allow for this timing), rip up the carpets and lino, and take down old window treatments. Demolish the old kitchen, including pulling out an old Metters Stove, and work on a plan to modernise this space, install the new kitchen, paint throughout, lay new carpets to the bedrooms, upgrade the lighting to include some feature lights and downlights. Lighting makes a huge difference! We also had the floors sanded in the kitchen/dining room, pantry and hallway. The floors were gorgeous Baltic under the layers of the old flooring and came up mint with a natural lacquer. This gave the house a fresh modern look. There was some electrical work to add some power points etc. and make the laundry more functional.
2.5 weeks later, stage one completed… time to arrange the open house to find a suitable tenant.
I spoke to three agents, 2 of which told me they couldn’t achieve more than $440. One that told me they were confident at $450-475 (this agent was an agent chain that we have used in previous properties), so we decided we had nothing to lose by going with the chain we had previous experience with and to see if they could achieve this rental income for us. We had one open and had 3+ applications at the higher end of the asking price and ended up with $475 p/wk from a tenant looking for a long-term option. This was a great result from the before renovations’ rental income of $350 p/wk.
We decided the kitchen would be the hero of the house. 1st stage came in on budget by careful planning and deciding what would be the hero features, and then finding more affordable options for things that were not so obvious. Speaking of mint above, I decided on small Mint Subway Tiles in the kitchen, which look divine with some lighting effects.
Onto the subdivision/council application… our surveyors started working on the project for us as soon as we settled, and within 8-9 weeks, we had the 1st stage approved at council. As part of the subdivision, we have added a carport to the house. Although it does have a detached car shed, we believe the house will have better future value (what does future value mean for your property portfolio? To be discussed in future blogs) with a carport. We will install this ourselves.
Stage 2 – full subdivision approval. At this stage, we will need to demolish a small outhouse that is on the block at the back, which was a very small house that the original owners lived in before they built their house (the house we have just renovated). This is a great story because this was prior to 1950, and the couple lived in a 2-room house with four children, who we met when we bought the house (aged in their 60s & 70s now). They had great stories to tell us and took great pride in telling us how much fun and love the house had produced. Good vibes and good karma are great bonuses to any project. The carport will also need to be erected at this stage.
Stage 3 will be fencing off the block at the back and putting it back on the market to sell within 12 months. Why are we doing this? To manufacture money to pay down non-working debt. We will keep the house as an investment property, giving us some good tax breaks with it being negatively geared. We predict steady capital growth with the region going gangbusters. We will have to pay Capital Gains Tax on the sale of the block, which we have factored into profits, and we will sell when we can settle more than 12 months after buying the property so that the CGT is reduced.
Watch this space, and once the block is sold, I will blog about how we went with the sale, the house value once the block is subdivided, and what options will open up.
Happy project hunting and renovating to manufacture growth and, ultimately, money! Focus on ways to make money to pay down your non-working debt first.
#monwand
