Buying Old House and Rebuilding with 2 Smaller Houses - Smart Investment?

jez22333 on 08/01/2018 - 12:46

Hello everyone,

With the current ridiculous house prices in Melbourne, I'd like to know what people think of this idea to help reduce costs.

My partner (fiance) and I would like to own a 3-4 bedroom home and so would my partner's brother. The brother is married and has a 2 year old child.

I currently own and live in a tiny 2 bedroom apartment and my future brother in law owns a slightly larger 2 bedroom apartment but has moved into his parents house and rent out the apartment to save up money for a new house.

The idea is that the 4 of us (me, partner, partner's brother and sister in law) all buy 1 very old large house together and rent it out. Then when we are ready to upgrade, knock it down and build 2 houses/townhouses on the property.

Surely this would be a much cheaper option given that it is the land that is expensive rather then the house?

Any advice would be much appreciated!

Thank you

Home & Garden

Comments

  • inherentchoice on 08/01/2018 - 12:57
    +1

    Have any other houses in the same street already been subdivided? Council planning schemes can prohibit duplexes or cutting blocks into two.

    If you buy it now and rent it, then it would probably be negatively geared and you'd be making a loss on the assumption the market will go up, no? That's a bit risky I think.

    • jez22333 on 08/01/2018 - 14:02

      Where could I find out if the Council prohibits cutting a block into 2?

      Yep definitely need to consider negative gearing but I wouldn't expect to put down the minimum deposit.

      • Archi on 08/01/2018 - 14:11
        +10

        Where could I find out if the Council prohibits cutting a block into 2?

        if you have to ask this question.. you have much research to do.

        • jez22333 on 08/01/2018 - 14:47

          Yep I agree, I have much research to do. This is more to push me the right direction or if anyone has done something like this before then any advice would be much appreciated.

  • El Grande on 08/01/2018 - 12:58

    We are doing the same thing. Once you buy you will realise house is very expensive too. I am looking to do an owner builder or might as well get a building licence. But what I hear from tradies that I contacted its a lot of hassle as you are at the bottom of the tradies list when they are working for other real builders.

    • Baghern on 08/01/2018 - 13:25
      +3

      Can't you get away with the other one as labeled as a "granny flat/extension"?

      Subdivision would eventually be required if one wants to sell though.

      But considering the op is even considering this, I assume the two families get a long real well. For the majority of families I would say hell no

      • jez22333 on 08/01/2018 - 13:57

        yep, very lucky to get a long

        • subywagon on 08/01/2018 - 14:14
          +2

          Until the building process starts, and people start arguing over designs, space, money etc…

        • jez22333 on 08/01/2018 - 14:47

          @subywagon: haha very true!

        • munecito on 09/01/2018 - 10:43

          I would get a wide instead. That way both dwellings would have street frontage.

        • jez22333 on 09/01/2018 - 10:58

          @munecito: what's a wide?

        • Tiller76 on 09/01/2018 - 11:55
          +1

          @jez22333: Wide block to be subdivided and you both have street frontage. Instead of having one house behind the other.

        • munecito on 10/01/2018 - 13:18

          @jez22333: I was being just pedantic as you said that you were "very lucky to get a long" instead of get along.

          Tiller76 got the reference.

          Sorry for being a profanity

      • El Grande on 08/01/2018 - 18:31

        We want to do 2 townhouses side by side. Subdivision won't work as its a wide block and the current house sits right in the centre.

    • jez22333 on 08/01/2018 - 14:03

      How much do standard 3-4 bedroom houses cost these days?

      • smashed on 13/01/2018 - 10:03
        +2

        They are cheap in poor areas and very expensive in affluent areas…

        Seriously, you need to some research before asking naive generic questions mate.

      • D6C1 on 17/01/2018 - 00:44
        +2

        They usually go on 40% discount from time to time.. Keep your eye on the deals here and you can score a standard 3-4 bedroom house around $79k.

        Dont forget pricepal or cashrewards!

    • jhmtaylor on 09/01/2018 - 10:14
      +3

      El Grande, you are far better off getting a reputable major project home builder to do the job. They pay a lot less for materials and labour but add a margin for project management and profit. If they know what they are doing, they will be in and out in less than 13 weeks, whereas an owner build will take twice as long, cost 15% plus for materials, you wont attract top tier tradies.
      Tradies do not like owner builders because they are usually dis-organised, have to educate the owner on how they think it should be done there is no continuity of work, so you tend to attract those who can't find work elsewhere. Last and certainly not least, there are 100's of little tips experienced builders use to produce a better product, which the owner builder will find out about, the expensive way. A good site manager will be instructing the tradies how he wants the work done and to get on with it. If you want to save money stick to what you do best and if necessary do extra hours.

      • Nousernamehere on 09/01/2018 - 23:22

        El Grande, you are far better off getting a reputable major project home private builder to do the job.

        There, fixed that for you. Stay away from project home builders if you want it done properly and without being charged thousands for simply moving a wall 300mm.

  • TheBilly on 08/01/2018 - 13:08

    might as well get a building licence

    When you figure this one out, please let me know lol

    • El Grande on 08/01/2018 - 18:32
      -3

      Go to TAFE. Can't be that hard. My uncle has one.

      • TheBilly on 08/01/2018 - 18:37
        +2

        Industry work experience is also required and not jist anything, ypu have to work with a residential builder specifically, now you can't just get your builder mate to write a letter for you and your sweet, you have to show you were employed via PAYG and Super Contributions for 2 years. They have made it very difficult to dodgy up.

        • El Grande on 08/01/2018 - 21:58

          I didn't know. One of my mates is an architect but he's super expensive. Even at mates rates, he wants 10% on all cost.

          My uncle got his like 20 years ago. He doesn't work as a builder though.

        • TheBilly on 09/01/2018 - 00:40

          @El Grande:

          Use his licence, 20 yrs ago were the good days, now its shit. I know people that will let me use theirs at $10k-$20k per house. Sounds like alot but if you want to build a custom house you can save ALOT of money.

  • djkelly69 on 08/01/2018 - 14:24
    +4

    Where could I find out if the Council prohibits cutting a block into 2?

    How much do standard 3-4 bedroom houses cost these days?

    So basically you haven't done any research and are just hoping to get someone to run the numbers for you?

    • jez22333 on 08/01/2018 - 14:46

      I will definitely be doing the research, this is more to push me the right direction or if anyone has done something like this before then any advice would be much appreciated.

  • enzioFirenze on 08/01/2018 - 15:14
    +2

    economically, it definitely makes sense, a word of warning, make sure the two families get along very well and are very tight, otherwise this merry band could end up being a disaster nobody saw coming and you'll be left without a brother-in-law!

  • Euphemistic on 08/01/2018 - 15:33

    Buying with family is a high risk situation, especially if spouses are involved. It puts a lot of strain on a relationship, especially if you want to develop later.

    Best investing separately.

  • MITM on 08/01/2018 - 15:33
    +3

    I can see tears already.
    So when you buy a house together, the bank will lend you (say) 80% of the value.
    Then you intend to demolish and dispose of the house - the bank will not like that at all, as they hold the mortgage over 80% of the house you are deleting.
    Then presumably you'll ask the bank to give you a construction loan on top.

    My suggestion would be to talk to a bank or broker first with your plan.

    On another note: I know someone who bought 2 houses side by side, and split the 2 into 3 and built 3 separately titled houses. Sold one, leased one, and lived in the third. They used an architect to fit the 3 houses with privacy the main goal.

    • jez22333 on 08/01/2018 - 15:42

      This is excellent advice, thanks so much!

  • bob smith on 08/01/2018 - 15:43
    +3

    You will need to consider the loss of rental income when it comes to knocking down the old house.

    i think you were meant to say run down house instead of old? I'd prefer to live in an old period house than live in a new house.

    • jez22333 on 08/01/2018 - 15:54

      Yes very true Bob, definitely run down rather than old. And I agree, new houses are so cheaply built!

      • MITM on 08/01/2018 - 16:06

        Do you mean are built cheaply (eg cut corners) or are cheap to build (eg good value) ?
        The fact that building is so expensive, is what keeps the value of older properties high.

        • jez22333 on 08/01/2018 - 17:14
          +1

          Cut corners and do the bare minimum

        • Euphemistic on 08/01/2018 - 17:46

          @jez22333: depends on the build, projects homes built down to a price. Custom build depends on your budget, and usually built to spec, not price.

      • Qkumber on 18/01/2018 - 14:51

        You’ve just said new houses are cheaply built. This is exactly what you are wanting to do! First off you need to work out if you even want to live in a newly constructed house compared to a period house

  • MITM on 08/01/2018 - 16:03
    -1

    From a taxation point of view, because you rent out the house, the property is subject to capital gains tax upon sale (if ever).
    So your 2 new houses, although you live in them each, will have to be calculated as to how much is GCT liable and which % is GCT free (upon sale).
    eg Old house costs 1,000,000 on 1/1/18 and is rented till 1/1/23 (5 years)
    then you kick out the tenant and build 2 glorious houses for 1,000,000 (500,000 each)
    And then on 1/1/28 (after 10 years ownership) your partners brother, wife (& kids by then ?) decide to sell up and go bush.
    …… someone else may want to take over from here……

  • toniyellow on 08/01/2018 - 16:45
    +3

    There are other people looking for ‘very old large houses’ with the potential to be knocked down and rebuilt. If you start reading real estate ads for such properties you will notice this, as often if the real estate agent knows something can be done, they will market it.

    There will be ones where it is not hard because someone has done the legwork e.g. the ad will say things like 'Current DA Approval for Subdivision' Someone has already got council permission, you just need to do the knocking down and rebuilding.

    There are ones where it is possible but involves work e.g. the ad will say 'Large block! Similar properties in the area have been approved for subdivision! STCA' This is used a lot, means ‘subject to council approval’. You would have to file the paperwork with the council which in itself costs money, and can take months if not longer, but at least you know there is precedent. You run the risk that if the next door neighbour really hates the idea, they can protest and delay your application, or cause the Council to reject it if they have valid arguments.

    There are ones where it is not possible, but you think it will be in 2-5 years or so. (e.g. perhaps the neighbouring Council recently reduced the block size they allow for subdivision and you think this Council will follow). You rent it out, and wait for the Council to change their regulations. You likely get a better price, because it is not currently possible to split, but run the risk that that Council doesn’t change their regulations by the time you are ready to build, or ever.

    So it is possible you will save money, but you are competing against other people with the same idea, so the money you save is going to be related to the amount of hassle and risk you are willing to deal with. The personal costs will be higher than buying on your own – going to see houses as a group, agreeing on a property, agreeing on a builder, agreeing on floorplan, organising all the legal aspects, council approvals etc. The final outcome may be worth it. It may involve so much time, hassle and compromises by the end of it you would have ended up happier if each couple just saved up and bought an existing townhouse that that someone else has developed. You are probably the best suited to know your own tolerance for bureaucracy, and how different the opinions are likely to be amongst the 4 of you.

    • TheBilly on 08/01/2018 - 18:44
      +1

      If you start reading real estate ads for such properties you will notice this, as often if the real estate agent knows something can be done, they will market it

      Most with easy potential and profitability get sold before going to the market. I have a friend with a developer dad, he never buys in competition with general consumers like us, anything that is duplex worthy and has potential to make money now at the right price gets offered to him before it even gets listed on RE.com or Domain, there are 2-3 agents in an area that he focuses on that give him first dibs. Any that he passes up either aren't that profitable, or have associated headaches he doesnt think are worth the time.

  • Stewardo on 08/01/2018 - 21:33
    +1

    I think it’s a good plan,
    It’s easy to be negative on a blog, or give unqualified advice.
    I’d get specialist professional legal, financial and construction advice before committing to anything.
    Much of the advice given on here is general hearsay and is often wrong.

    • jez22333 on 09/01/2018 - 10:59

      Thanks!

  • DarkOz on 09/01/2018 - 07:29

    Get a corner block if possible. It has better options but probably will cost more to secure it.

    These are the examples of what people I know had done to their corner blocks:
    - Built 2 small terraces on the backyard to live in and sold the front house which was old. The terraces are accessible by the side street.
    - Built a large granny flat on the backyard with a driveway. Renovated the front house to live it.

    • jez22333 on 09/01/2018 - 11:00

      Very good advice, thank you. As a traffic engineer, choosing access points is certainly up my alley!

  • jm48 on 13/01/2018 - 09:59

    Josh on ABC's Gardening Australia did exactly this, I think.
    With his wife's brother, in Freemantle.
    Details about the project here -
    http://joshshouse.com.au/about-the-project/the-property/

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