The common investor always faces the reality of not being able to buy more. The reason? Taking on more investments reduces your cash flow diminishing your ability to increase your borrow more.
So how do you get around this barrier?
If your looking at buying more property and reducing your debit we explore a dual occupancy strategy that can help free you from the limitations of a ordinary property investor. We share a testimony of a successful property developer, how he did it and the pros and cons of dual occupancy.
How To Buy More Property | Transcript
00:31: Did you know the majority of Australians don’t purchase more than two investment properties simply because they don’t have the correct investment strategy? And the reason behind why people struggle to do this is because balancing your finances, your personal lifestyle with maintaining investment properties, especially when things go wrong, when you have unforeseen maintenance, tenants moving out and having a vacant property, it becomes quite difficult and quite taxing on the mum and dad investors out there. So the strategy we’re talking about today will hopefully alleviate pressures on your finances and give the investor more time and more balance in their life because the cost of owning property will be a lot less.
01:19 So the strategy we’re talking about today is dual occupancy or, basically, a subdivision strategy. So what that means is… It can look like a few different things; typically, it’s buying a block of land and you can build two or three properties on there, you can buy an existing house and then knock it down and do the same thing, or you can basically buy a house that has the ability to put a second dwelling at the rear. And that’s the strategy that I wanna talk about today, the last one there, because that seems to work for the mum and dad investors, and it’s quite a relatively easy one for people that are looking at, basically, expanding their portfolios.
02:01: Okay, so the story I’m using today is a live case study, it’s one that I’ve actually done myself, and I’m just gonna go into an overview over the whole project, the costs, that’s the general costs that I had and the profit that was made and, basically, how you as a listener there can move forward and try and do this strategy yourself. So if you go to Google and check out the address 166 Grieve Parade in Altona. Now, I purchased this property, I believe it was in 2015, and it was a great little house, three-bedroom on a block of land that was around about the 600 square meter mark. Now, the house itself needed some light renovations, but more importantly, I’d used a lot of skill and a lot of research and time that I… That Know-how that I know on how to find something that you can actually subdivide. So it has enough room in the backyard to put a two-bedroom property in the rear, enough room for a driveway to go down the side, and most importantly, has no restrictions in place where neighbors or council could stop me from doing this kind of project.
03:11: So once I came into ownership of Grieve Parade, what I did then was basically put tenants in the property and let the property as is. It was good enough to be leased. And in the background, I’d hired a architect to move forward and put together the whole project, so proposed plans of a two-bedroom, one bathroom, one car spot unit in the rear of 166 Grieve Parade. Now, the planning process was quite difficult and it took a long time. We had a lot of trouble with council just to get everything through the way they wanted and a lot of revisions. But the whole process generally took almost two years to get through and get a building permit, so I could basically just hand the plans and permits to a builder and the builder would do the rest. The best part of the whole planning process was I did have a skilled architect and he was able to manage the whole process for me. So once I received the building permit from council I was very quick to hire a builder, and we had a… Pretty much had a finished property after about nine months, nine months later.
04:18: So I was at a point where, it’s quite an exciting part of the project, where I had to subdivide. So it’s probably wise to talk about subdivision here and what exactly it is. So when you have two dwellings in a property, you’re able to basically divide the property itself, the driveways to separate titled properties. So the one block of land becomes two in the eyes of a bank, in the eyes of council. So you can literally sell one of the properties and keep one of them. You can keep both, but they will be treated as two different dwellings.
04:52: Okay, so once the properties were subdivided, I had my tenants luckily move out of unit one and I was able to renovate the front property, a very basic renovation, I think I spent about $20,000, and I leased out unit two. So still receiving the rental income the whole time from the day I bought the property, till I leased out unit two, I was still able to generate an income and balance, I guess, the repayments of the property. Unit one was vacant, it was renovated, and I was proceeding to sell the property, which I did. And unit two is one that I currently lease to this day, a number of years later.
05:35: So here are the figures; that is probably the interesting part of how this all worked. So the property was purchased for 615,000 plus stamp duty fees. The cost to renovate the front property, build the new unit, subdivide the block of land into two lots, I paid 270,000. So the final cost was $870,000 to do the project.
06:01: Now, what I’m not taking into account is cost of financing and the rental income, I’m just putting that aside for now. And also the tax implications, there is also a lot of tax that can be paid when there is a lot of profit in these kinds of projects. I’m just giving you a very simple overview, so you can understand the power of this process when it comes to investing. But at the time of completing the project, this was late 2018, I had basically made a market value of $1.35 million. So that’s a profit of $400… Approximately $80,000 thereabouts.
So given in that time, the market had gone up quite a bit, the real estate market had experienced a small boom in those years so that helped… Assisted a lot, but the power of the market going up is I was leveraging two properties from the day that I purchased one. And I had the options at the end to do whatever I wanted, so I could sell the property, I could could keep them both and generate a great income, but the strategy lies in selling one of the properties, usually the older one, and maintaining a very low level of debt.
So in essence, you’re probably managing… In this example, you’re probably managing a debt level of around $200,000 or $250,000. And that’s an instantly positively geared property. And just so you can work your own figures there, the rental yield on that property is about $380 a month. So a great strategy for your mom and dad investors.
07:37: So the next part of this podcast, I wanted to talk about some of the questions our listeners ask about the subdivision process, just to help enlighten you, I guess, on what can and can’t be done. So question one: Can you do this as your first investment? And that means… I’ll expand that to can you do this as your first property? And the answer is yes. A lot of my clients that I help buy property for, I buy property that has that ability to simply slot another unit in the back of the property. So things like you can live in a house for a number of years, enjoy the property and when it outgrows your needs, you can pretty much do whatever you like. You can subdivide it, put a unit in the rear, you can knock down both properties and build two units. They sky’s the limit. So 100%, you can.
08:28: So the next question is: Can you sell a property without doing the building part of it? So you get the plans and permits and you decided not to move forward with the build and sell the property and make more than you normally would on a normal sale.
Look, the answer is yes, this appeals to quite a broad range of people, investors and builders alike that are looking for a project they can just step right into and not have to go through that two-year planning period. You save them a lot of time, a lot of overheads in the sense of keeping up a property to be able to turnover and make a profit quicker. So it’s quite attractive for many people.
09:06 Okay, the next question is: How long does this normally take from start till finish? Look, I’ve myself done this process about four times over a space of about 12 to 13 years. I would account about two-and-a-half years for the whole process from start till finish, if you’re treating it like a business. It’s important to have enough funds, so basically have a budget that will last you through thick and thin over this period of time. And it’s quite a safe amount of time to allocate to make sure that you can pull this off successfully and complete it.
09:42: Okay, another question we have, which is a common one is: I have no knowledge in this topic, but I would like to move forward and try and do something like this myself, is it hard? Well, [chuckle] that’s a good question. I did this myself with very little knowledge, I purchased a three…
A block of land as my first investment, and I basically sub-divided it into three lots. So, I built three three bedroom town houses, two bathrooms in each, and one car spot. This was in the western suburbs of Melbourne in Hoppers Crossing. You can check it out, it’s 33 Dowling Avenue in Hoppers Crossing. It’s obviously unit one, 33 Dowling Avenue, unit two, unit three. So you can find them online and view the property. So that project, with very little knowledge, a lot of eagerness, and desire to learn was incredibly difficult, and the profit margins were very small. Not to mention the stress involved in just trying to work everything out.
10:43: So in my opinion, it’s always better to get someone to help and manage a process, especially if they know how to… The know-how, they know how to do everything from start till finish. This will save you a lot of stress and most importantly, maximize the money that you can make. In hindsight, I probably would have never purchased this property knowing what I know today.
There definitely would have been better strategies in place for me to make money, like the one I’m talking about today, but telling a young man that is very difficult and trying to get them to… I guess, steer their ship in the right direction is very hard. So my advice in this instance is it’s not that expensive to hire people, and guide you, and hold your hand through this whole process to make sure that you’re heading in the right direction financially and also the right direction when it comes to completing this from start till finish and not having to do something like sell halfway through.
11:41: Okay, so I’ve hoped you enjoyed the topic today. The next episode, we’ll be talking about buying a property during a recession. Is it a good idea? And don’t forget to subscribe. Every new subscriber, we want to thank you for coming on board to the Wise Family. And we wanna give you a free property report, so leave your details on any of our websites and the suburb of your choice and we’ll email you a property report on all the stats that you need to know about buying in that suburb. Thanks for listening.