You gots to spend money to make money

[theducks]

So I've been looking at Realestate.com.au again (co-incidently, Liz is almost level 60 in WoW..) and found this block of land : 3000 square metres of "soon to be" R160 zoned land in Scarborough for $5,775,000! The R160 zoning will (apparently) allow 48 units in an 8 storey building.

Now before we go too much further into this hypothesis, let me just show that I'm not entirely naive and say: Yes, I'm aware it isn't yet zoned R160, and if it isn't rezoned, you couldn't build those 48 units, and yes I'm aware that residents of Scarborough don't like 8 story buildings, and so there's a lot of risk in this proposition.

So anyway.. $5,775,000 + stamp duty puts purchase cost at $6,051,105. Assuming 48 units, you're looking at it costing you at least $126,064.68 per unit, before you even start building. Now let's assume that your units are 3 bedroom and really nice, and have a build cost of say $250,000 (including all approvals, design costs, building common areas, etc), which makes the cost per unit about $376,064.68. Assuming you can sell them each for about $450,000 (at least, I mean, these places have ocean views!), you're making $73,935.32 per unit, or a gross profit of $3,548,895.36. Let's assume you're looking at 50% capital gains tax on this, so you'd make a smidge over $1.75 million. However, if you could sell the properties for $500,000 instead of $450,000, you could make an extra $2.4million, or about $3million net profit.

However, in order to make that money, you need to spend $18,051,104.64. $18 million is a not insignificant risk. Now, you can reduce this risk using the condominium model, in that you don't start building till you sell enough of the units off the plan to cover your build costs for all of the units (in this case, you'd need to sell 41 off the plan), but you still need to front the $6 million to start things off, along with another large sum of money for architects, project managers, etc.

So my next question is, does anyone reading this have a spare $19 million they can lend me at 0% interest?

... anybody?

... Bueller?

Comments

[livelurker.livejournal.com]

I think I worked out that if we didn't spend any money or pay tax I could just about service the interest on a $1million property loan. Then just hope it goes up in value real fast :)

Remember, if you owe the bank a couple of hundred thousand, it's your problem. If you owe them $19 million it's their problem!

The lot is in Hastings street, so it'd probably be near the approx. 8 storey high White Sands hotel, which might help in the argument about the height.

[theducks.livejournal.com]

If you owe them $19 million it's their problem!

Haha.. that's a good point :)

[ataxi.livejournal.com]

If you can get someone to loan you $19m at 0% you're basically set anyway ... doesn't take genius to realise you could definitely make at least around $1.5m in a year on that. Which in the three years it would take you to finish your development and make your net profit of $3m (by the way, I'd suggest that's a very cautious estimate) would get you something similar just in flat interest.

And if you'd invested the $19m in Google circa late 2004 you would have done waaaay better :-)

[theducks.livejournal.com]

It all comes back to the title of the post - you need to have money to make money. Once you've made the first few million, the rest is easy! :D

[llary.livejournal.com]

As someone living in a house that was purchased from a bankrupt building project, I wouldn't touch new builds with a 10-foot bargepole.

$19m invested into a 7.25% 4-year bond with compound interest leaves you with over $6m before tax. This is why the smart developers build to let, then sell after 20 years :) The cheapest way to build smaller developments is often to buy up a condemned or very old building including land rights then demolish what's up top for the land. Plus that way you get to play with explosives and/or big cranes.

[llary.livejournal.com]

PPS: the reason why a lot of stuff gets built is to avoid company tax. Cash-rich developers see property as a safe way to offload cash into something that will grow their net worth, not as a fantastic investment in its own right.