Building an IP

[Gerrard]

The other day I came a cross a section for sale at a good price and started thinking about the opportunity to build a house to keep as an IP.

One advantage I see is that the whole property is usually worth more than the sum of the parts (e.g. developers build houses to onsell at a profit) which means the final property could value up to higher than the cost of building it.

However you would have to pay the cost of buying the land, building the house, etc well before you actually had an income from tenants.

Has anyone ever done this / got experiences to share?

Cheers
Gerrard

[AustinWong]

Hi Gerrand,

Your comments got me thinking... so I started an exercise to see what it would cost to build an IP on a bare section of land.

I am still going through that motion at the moment.

What I have found out so far is that a cheap 3 bedroom home will cost about $80k to build, then there is garaging say a single at $6k, and of course any landscaping and drives. All this on top of the purchase of the land.

I will keep you posted as I gather more info.

One thing that did cross my mind though is purchasing an IP with an existing house on it and a full section. With a full section, in most residential areas you could subdivide. If the house is positioned well, say at the rear or front of the section you could build another IP.

It would be better if you had an IP with the house to the rear of the property, that way you would need to do little in terms of the driveway which would now effectively be a ROW.

The bonus about doing it this way is

1) This way you already have income flowing from the first house, while building .

2) You do not necessarily need to subdivide the property to build, however you would want to ensure that you do the right things so that you have the option to do so at a later if you choose to. This alone would save about 15k in subdivisional costs.

3) Selling the new property if subdivided could return a reasonable profit.

4) Doing this method of building could bring your gearing from negative to positive.

eg. You buy a 3 bdrm house at $120,000.00 which can rent for $170.00 per week.

($170 x 52)/$120000 = 7.4%

You build a 3bdrm home for say $90,000. Now your returns on total cost are :

Weekly rent from 2 homes = $170 x 2 = $340
Capital value in property = $210,000
($340 x 52) /$210000 = 8.4%

This is a basic concept I came up with (pretty darn sure it is not an original concept though, as I mentioned it to a Realty Agent who had just sold a property to someone on the same basis).

What does the rest of the forum think? Can anyone else add to this? Any pitfalls to the concept?

Thanks

Lawrence

[Gerrard]

Hey Lawrence you've sure been doing some thinking!

My guess was that you should be able to build for under $100k including everything (curtains, carpet, apliances, etc) to get the house up and running as an IP.

I was going to check out spec houses such as Keith Hay homes etc, but just havn't got there yet as I've been chasing a few other things.

I've read about plonking a 2nd house on the front or back of an existing property and it definitely has merit. The question is where to do it. In Auckland or Wellington the land would probably be too expensive, but in smaller towns the rental return wouldn't be good enough to make it worthwhile.

Keep that thinking going. I'll let you know if I find out anything else useful.

Cheers
Gerrard

[drelly]

Hi Gerrard...

I've done exactly what you're talking about. I subdivided my section, built a new house and moved into it. Then I rented my old house out. In pure dollar terms, I would probably have done better just selling the section. However, if I'd wanted to keep the house as an IP, there is a lot to be said for a newly built home, even if it is cheap. Less maintenance, better return, better tenants... and so on. It IS a lot of work though.

Having said that, I have another property that I believe I can do the same with again. I will probably build and rent it out. I still don't like the concept of selling land and it's a great opportunity to end up with a good quality rental.

[AustinWong]

As some possibly cheaper options try :

Skyline Garages
Versatile Homes.

They tend to use steel exterior cladding (pretty tacky). But for a few thousand more you should be able to upgrade to board and batten. which when stained looks pretty good.

Also,

For garaging, if you are reasonably handy you can get a kitset single garage at about half the price of a built one.

Going one step further, one of the building inspectors at work tells me that you can buy a secondhand single garage for only a few hundred dollars as no one wants them. These should be able to be transported in one piece. You could then reclad for minimal costs if needed in a material to match the existing house

Will keep in touch on building options. I will prepare some costing schedules for comparisons and pass it around.

Thanks

L

[Marcus]

Hi Lawrence,

2) You do not necessarily need to subdivide the property to build, however you would want to ensure that you do the right things so that you have the option to do so at a later if you choose to. This alone would save about 15k in subdivisional costs.

I am considering this at the moment with a property that was purchased late last year.
The property could achieve great views over the front house (that also has water views) if I go for a 2 level dwelling. The trick will be doing it all for the right money so that it also achieves high yield. Skipping subdivision costs will be part of this.

I think Kieran must be doing a few of these and also promotes some of his property finding deals with the potential to add value and cashflow using the addition of minor dwellings.

Would be interesting to hear what he has to say on this issue.

Regards,
Marcus.

[Gatekeeper]

I've been looking at building options for a while. I've got a vacant section adjacent to another IP I bought in 2000, both 1/4 acres. Its a choice of plonking another IP on the back of the rental which only has a 1 bedroom cottage on it or putting it on the adjacent vacant section.
I don't want to under capitalise as its a good area, but I don't want to spend more than $90,000-$100,000 either .

[Marcus]

I don't want to under capitalise as its a good area, but I don't want to spend more than $90,000-$100,000 either

I hear you loud and clear on that one.
Its tough knowing where to draw the line especially as I am fairly green in this Dept. and am concerned about cost blowouts.

Regards

[AustinWong]

As a suggestion, make sure that you spend lots of time thinking about what you do want before you go jumping into building.

The number of times I have heard about cost blowouts.

I will make some comments, but bear in mind I have never built before, however I have know others who have and I have a project/contract mangement background.

None of the below are in any particular order.


1) Show your ideas to someone or two that you know, for a second opinion even if they know nothing about building. They may say... why do you have the laundry door there...why not over there instead etc..

2) Read up on it where possible on things people oversee when they look at building.

3) Find a reputable builder (word of mouth speaks volumes). The builder can in turn recommend other reputable trades people. Better still if you can make the Contractor the principal Contractor and he can arrange the whole lot. May cost a bit more (or not) but could save the extra hard work and stress).

4) If you want to keep costs down, then you will likely need to seek a mass production home, but not always necessary.

5) Do not outrightly copy a plan you like, if found out you could face some hefty legal fees and damages claims for copyright infringements.

6) It may cost only a bit more for a better and more attractive exterior cladding. I reckon it helps make the house. Stained batten and board looks pretty good. Also you may be surprised to see how much it costs to use brick. It may be worth the extra few thousands.

I think the real key ones are:

1) Be sure of exactly what you want. Check and double check. All the best contractors make their best profits from variations.

2) Sign a contract which should relate to an acceptable NZ industry standard. Usually NZS 3910, Conditions of Contract for Building and Civil Engineering Construction. The current revision is 2003. Have a look at the 1987 and 1988 versions which may be more suited to the client, if you seriously need to know I can find out. There is no reason why you cannot select an outdated version as a basis for your contract.

3) If you have not ask for something that is done or given approval, under 3910 you do not have to pay for it as all variations should be approved by the client. But the builder may want to remove it, however I believe that there are laws governing against the builder from being able to do this. Fair is fair pay the builder if the improvement is of benefit to you. Use your position as leverage to negotiate.

Stand strong and don't let the builder bully or make you feel guilty into paying for something you shouldn't.

5) Set deadlines for the work and liquidated damages for overruns in time. Be careful here with liquidated damages as teh courts will only uphold fair and reasonable loss or costs incurred due to the delays. A bonus clause may provide more incentive.

4) Withhold final payment (say 10%) until you are happy everything is just right. Nothing gets action froma contractor like money owed.

There is more on this topic of course but too many variables to cover right now.

Any more thoughts on this out there?

Thanks

Lawrence

[AustinWong]

One thing I came to the conclusion a conclusion about yesterday with the assistance of my real estate agent is when you have two houses set up on one property you need to be careful with tenant compatibility.

I guess almost like flats.

What are your experiences of this Drelly?


Thanks


Lawrence

[Gerrard]

Too right. One place I was looking at had a fully self contained sleepout that was rented separately and there was no drive up access to it, (and some issues with people in the main house).

The property manager said it was just too hard to rent separately, so although the potential returns looked good, it would have been better to rent the whole thing as one property, perhaps to someone with teenagers or bigger family.

Of course then the ruturn didn't stack up so I never progressed...

Oh well, if property investing was easy then everyone would be doing it. Hang on. Just about everyone is doing it!

Keep working at it Lawrence. I'm finding it hard to find properties at thye right price at the moment, but I know with the effort I'm puttin in it will only be a matter of time before I stumble across the next gem.

Gerrard

[kieran]

I think Kieran must be doing a few of these and also promotes some of his property finding deals with the potential to add value and cashflow using the addition of minor dwellings.

Marcus you are right! We are currently constructing 28 Minor Dwellings in South and West Auckland. This is a great strategy at present because it still enables a positive cashflow to be achieved (and they are not in the worst areas either). Each project (ie existing house plus completed Minor Dwelling) produces a yield of @10%p.a. upon completion.
The first one we completed just prior to Christmas achieved a Registered Valuation of $75,000 more than the cost and showed a surplus cashflow (after 100% financing) of $5,000 before tax on achieved rents and over $12,000 after tax!

Since December though the numbers aren't quite so good as the cost of acquisition of the original properties has increased but the numbers are still better than anything else I can find at present.

[Marcus]

Hi Kieran,

Good to see you back again.
Coud you possibly post a break-down of the costs you allow for when adding a minor dwelling? (Assuming the land is alreday owned).

Any other advice or suggestions would be hugely appreciated.

Thanks,
Marcus.

[kieran]

Thanks Marcus,

I have been away in the Wairarapa visiting relatives and then in Wellington on business.

The Minor Dwelling costs vary but we don't build el cheepo buildings. We have purpose made architectural designs specifically to maximise the use of limited space (60 - 70 sqm) we use palliside cladding (can also do brick but extra $) and iron roofs with a carport. We have various pitches on the roof as well so that the whole building looks like a "mini-house" instead of the traditional and often ugly "granny flat". We use master builders.

We are not the cheapest in town but there is no product that compares with ours and like everything we do we believe in quality. So we build quality properties that should last the distance in terms of value over time. You certainly get what you pay for and if you like cheap then don't get us to build for you but instead build yourself a garage / granny flat.

We have re-defined Minor Dwellings with our clever design of 3 brms and smart use of materials to enhance the rentable value and registered valuation of these "mini-houses".

Because pictures paint a thousand words I have emailed some pictures of one of our completed Minor Dwellings to Marc requesting he place it in an appropriate place somewhere in PT for you to view it.

We project manage the total process from start to end including all drainage, driveways, services etc and prices vary depending on size but are around $90-95k for us to build and usually @$15-25k for drainage, driveway, services etc (In some areas a reserve contribution must be made to the local council). Our usual all up cost to complete has been somewhere @ $110k.

Regards

[drelly]

Hi Lawrence,

I actually live in the newer house, so yes, I am quite careful with tenants. I guess it's a good rule of thumb to never let to anyone you wouldn't be willing to live next door to yourself!?