Case Study: Interstate investors exceed profit margins with develop-to-hold strategy
When two experienced interstate investors approached us in 2017 looking to purchase and complete their first residential development in Perth, it took a team effort to deliver their build-to-hold strategy. Below, we look at how our divisions brought the project together to exceed initial profit expectations.
- Development delivered under budget, with profit margin exceeded.
- High bank valuations realised an additional $200k in equity
- Construction completed within six months
- All properties rented on 12-month lease term and above initial appraisals, with development coming to completion in a recovering rental market
- Land use maximised to enhance long-term capital value and improve re-sale potential
- No joint liability and over $40k in stamp duty savings through complex finance strategy
- Depreciation benefits on brand new developed product
In December 2017, two Melbourne investors approached Momentum Wealth with a brief to jointly purchase a site for immediate development. Working with an acquisition budget below $900,000, the clients saw an opportunity to take advantage of subdued market conditions and low construction costs in WA to purchase a well-located site in close proximity to Perth’s CBD, with a strategy to develop and hold on completion to generate an attractive rental income (in addition to manufactured equity).
Property Search & Acquisition:
With the brief in mind, our buyer’s agent conducted a thorough market analysis, narrowing their search to a number of key areas that met the clients’ criteria. This search focused on strong lifestyle and location attributes to align with the investors’ holding strategy, including proximity to prominent transport routes, schools and nearby amenity to support the development’s long-term growth potential (rental and capital).
After an intensive six-month search period, which included closely monitoring housing stock and off-market listings for suitable opportunities, our buyer’s agent identified a site located 5-6kms south of Perth’s CBD with R40 zoning allowing for group dwellings. The existing dwelling on the site was run down with minimal improvements, making it ideal for a develop-now strategy with low demolition costs. The nature of the site as a decreased estate also provided potential for a quick purchase and settlement process, allowing for a fast construction turnaround as per the clients’ requirements.
The site and existing dwelling were shown to our development team to carry out a comprehensive pre-feasibility analysis on projected returns and end-costs. This resulted in a bid being placed by our buyer’s agent at auction, with the site being secured at the lower end of our appraisal at $850,000 (below land value, with the site revalued post-demolition at $875,000).
Design & Build:
Once due diligence was completed, Momentum Wealth’s research, development and buyer’s agency teams worked together with an architect to evaluate different design options, with a development application submitted to the local government for approval shortly after settlement to minimise the investors’ holding costs. During this process, we were able to make use of the rear laneway to strategically design four villas on survey-strata titles (two street-facing and two laneway-facing). This negated the need for a common driveway, which allowed us to maximise build size (250m2 land area), in turn protecting the development’s end value and removing the need for shared strata levies. Whilst making this ideal for a long-term hold, this design also suited the investors’ joint investment strategy by allowing for two identical developed products that could be evenly split on completion.
Following a competitive tendering process and a thorough review of the specification, we were able to work together with the preferred builder to establish high-quality design choices that strategically influenced the time on site required by the different trades involved. By preparing a fixed lump sum construction contract over the entire site, we also enabled the builder to programme the build strategically to further reduce construction timeframes and associated costs whilst maintaining the high quality of design. This allowed for a shorter build timeframe, with the development coming to completion in June 2019 following a six-month construction period.
Upon completion, the bank valuation for the new units came in $50k above initial projections, resulting in the investors realising an additional $200k in equity across the development. Due to the short construction timeframe, low construction costs achieved and high-quality design of the final development, the project exceeded initial projections, achieving a final profit margin of over $350k.
With the existing construction loan covering all four units, our finance broker was then faced with the complex task of separating the loans and splitting the titles of the units, which we were able to achieve through a disposition. This mitigated the stamp duty costs associated with transferring the titles, saving the investors an estimated $45k in expenses and removing any joint liability on the final products.
Following the implementation of an in-depth marketing strategy by our property management team, which included targeted online advertising, after-hours viewings and rigorous follow-up procedures, we received eight applications across the four properties from prospective tenants. Within eight weeks, all four units were rented out on a 12-month lease and above our initial rental appraisals, with the properties achieving a final rental rate of between $450 and $475 per week (initially estimated at $405-$435 for street front, and $445-$475 for rear laneway properties). This saw us achieve an additional $100 per week in rental income for the clients, totalling an additional $5200 per annum.