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Alastair Moore: Bigger isn't always better

Friday, May 29, 2020

IMG SOURCE: KEITH HAY HOMES

Sometimes, bigger is not always better. There has been a noticeable trend of late, with customers looking to build as many homes on their available space as possible, without being aware of the potential tax implications, extended timeframes and lending restrictions which significantly increase the level of risk especially when the post-COVID market is already rife with warinesses. 

Customer Situation

This particular customer approached us with a goal in mind of expanding his rental portfolio by building an additional dwelling to rent out. This would generate some extra income as he is nearing retirement. He owned a fantastic, relatively large, empty section that he had already sub-divided from the original Lot which contained an existing rental property of his. The site had available on-site public services, within the Mixed Housing Urban zone.

He had been working with a housing company who had proposed developing the site with 3 x double storey 80-100m², four-bedroom homes with double garage. The total approximate cost was $1.5 million and the projected total timeframe was 1.5 – 2 years to complete. The value of the completed development would have been around $2.45 million generating an equity value of $950,000.

These figures look fantastic, so why didn’t he sign the contract?

When breaking down the risks in developing a project this size, specifically around his personal development goal, there were a few external factors that influenced his decision. These are often overlooked by investors once a large equity gain is on the table.

The first factor is that when building multiple homes, banks change their lending terms and offer an interest rate which is a lot higher than the standard mortgage loan to cover the increased risk associated with multiple home developments.

The second factor is the tax which would be payable if he decided or needed to sell the houses for any specific reason. Due to the amount of lending required for the project, he would have been forced to sell at least one of the houses on completion. The tax payable and agent fees would have significantly reduced the equity gain.

Keith Hay Homes Solution 

We listened to this Customers specific goals and requirements and it turned out that the level of risk played a major role in the decisions he was making. We put together a proposal for one, single level, three bedroom, two bathroom dwelling with a generous sized deck, large garden area and double parking – an attractive and practical lay out for families, couples, professionals or single room renters alike. This provides a much larger pool of both potential renters and buyers if he decided to ever sell.

The total cost of the project came in at $330,000 and will take 6-7 months to complete from first introduction with a completed development value of around $850,000. With that figure, there will be an equity gain of $520,000 and significantly less interest to service. The project will take less than half the time to complete and most importantly, there is still a healthy equity gain with a fraction of the risk involved compared to the original proposal he was looking at.

By still building one house and getting a large equity gain, opens up future options to re-use some of the equity gain to purchase alternative properties. Also, building a transportable home, provides the option of still being able to build three townhouses or sell the land by moving the house to place on another site.

Summary

When choosing to build, the reason WHY you want to build should be your driving factor. With this particular example, playing it safe with minimal risk is what was driving the project. We never know what lies ahead and by following his strategy, he was completely comfortable with his decision as four weeks after he signed the contract, Covid-19 closed down everything. There was minimal disruption to our process as the project was in building consent approval phase so the level of risk only minimally increased and he could sleep easy at night knowing the right decision was made.

Project details

 

  • First Choice 85e, built on site, with personal extras - $195,000
  • Site services incl. 110sqm driveway with double parking, large deck with balustrade - $81,000
  • Engineering fees - $9,000
  • Council fees - $45,000
  • Total: $330,000

 

Project pictures

IMG SOURCE: KEITH HAY HOMES

IMG SOURCE: KEITH HAY HOMES

IMG SOURCE: KEITH HAY HOMES

Every Development has its challenges. If you find yourself questioning if you have made the right decision, it's never too late to change your mind. We have many different solutions that we're happy to discuss so please don’t hesitate to contact us at Keith Hay Homes. You can email me at alastair.moore@khh.co.nz or call 022 077 3523.

 

 


ABOUT THE AUTHOR

Alastair Moore

Alastair is a property investor and works for Keith Hay Homes as a Home Consultant. 

 


 

 

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