Is a Knock-down Investment Property Worth It?

LChris17 on 11/08/2024 - 18:55
Last edited 11/08/2024 - 19:27 by 1 other user

Hi everyone, we own a mildly decrepit three-bed IP 20 km from Melbourne’s CBD.

The house is frankly ugly and, being 50+ years old, will possibly need major repairs within the next decade. It’s worth $550K and the outstanding mortgage, $300K, is fully offset. We’re thinking of knocking it down and building a replacement.

Has anyone here done something similar? Did the finances pan out? Is it worth going with a high-end builder or better to stick with a basic volume builder? Depreciation would be high in either case but I’m not sure expensive fittings would pay for themselves.

Opinions?

Financial

Comments

  • askbargain on 11/08/2024 - 18:56
    +3

    20 km from Melbourne’s CBD

    just say north

    • 2jzzzz on 11/08/2024 - 20:30

      West?

    • Wiadro on 11/08/2024 - 20:59

      south

      • LFO on 12/08/2024 - 10:30

        A bit humid but splendid 360 degrees coastal views.

        Easy open ocean access.

        • Wiadro on 12/08/2024 - 11:15
          +1

          house may float away

    • HeWhoKnows on 12/08/2024 - 09:20
      -1

      Knock down out the sticks is never worth it.
      OP should sell up and move closer to the CBD, St Kilda or down the Peninsula

    • altomic on 12/08/2024 - 09:35

      low orbit

  • mskeggs on 11/08/2024 - 19:02
    +7

    Can you replace with a duplex or two townhouses?
    Not sure why a 50yro home would need costly work, things were pretty well constructed in the 1970s.

    • Chris17 on 11/08/2024 - 21:19

      Frankly, it’s just an assumption on my part that the place will need major repairs. I know roofs and stumps have definite lifespans. Ours may well be still fine.

      • Mugsy on 12/08/2024 - 07:07
        +4

        Don't assume. Get expert advice on the state of the property.

        Otherwise, you're being a speculator and not an investor.

  • Benoffie on 11/08/2024 - 19:17
    +4

    Why does ugly = KDR? I mean, there's a lot of money in retro renos done right and people stupidly give stuff away for peanuts.

    But anyway. You cant answer this question without an engineer report. That tells you if there's fundamentally anything wrong with what you have (building inspections are a waste of money).

    Past that, you should be researching with local REAs, gathering data on what's going on in the area. Speak to several agents, get their 2c. Present all options not just a fait accompli.

    And, not knowing exactly what you have but offering proof that Nonna houses in Melbs are doing great, look at Shag Manor on IG. Shag as in rug…. 😏

  • jjjaar on 11/08/2024 - 19:40

    will possibly need major repairs within the next decade.

    Will these repairs cost ~$500k? Because that’s probably what you’re looking at for a knockdown rebuild. Possibly more.

    • 87percent on 11/08/2024 - 21:55
      +4

      That’s if your builder finishes the build and doesn’t go bankrupt

  • freefall101 on 11/08/2024 - 19:56
    +4

    will possibly need major repairs within the next decade

    Shouldn't you be doing minor repairs to ensure you don't need to do major repairs? If you know what is coming, it's usually best to preempt it.

    I can't imagine what would cost so much that you're better knocking it down if there's not currently a major issue. Restumping isn't that expensive ($10-20k), neither is ripping out the carpets and repainting. Unless you have quotes that it's over $200k to fix everything or you're looking to subdivide I'm not sure how it's worth it.

    There's also a reason that empty blocks sell for more than properties with decrepit houses, knockdown should be a last resort, not a first one.

  • boomramada on 11/08/2024 - 20:11
    +2

    Since its IP, check with your accountant on how it's going to effect on your capital gain later down the track when you selling them?

    • TEER3X on 11/08/2024 - 20:18
      +3

      Affect*

  • Chris17 on 11/08/2024 - 20:45

    Terrific comments, everyone. Thanks for taking the time to reply.

    The house is in Hoppers Crossing and it’s an eyesore by any definition. The architect may have been a drunk Cubist. But it’s structurally sound, even if the bathroom mould is tenacious.

    It sounds like we have a fair bit of homework to do before we can even consider a KDRB. We’re renting in a rural area right now, so our IP will likely become our PPOR at some stage. My vague idea was to rebuild, charge much higher rent and write off a decent chunk of deprecation.

    • larndis on 12/08/2024 - 07:48
      +1

      If you want to live there someday that changes the equation significantly. In that case, a tax accountant is the key person to talk to to understand the ideal timings. Before you talk to them it would be good to have a reasonable estimate of the build cost, expected rent and when you might want to move in.

  • JimmyF on 11/08/2024 - 23:52

    It’s worth $550K and the outstanding mortgage, $300K, is fully offset. We’re thinking of knocking it down and building a replacement.

    KDR will cost you $300-800k.

    So you got that cash? You'll need somewhere else to live while its being done etc.

  • Mugsy on 12/08/2024 - 07:09

    Also, how big is the block?

  • Trekky on 12/08/2024 - 07:41

    There was a recent sale in my area - $905k and then 6 months later a DA for a KDR came through, that's costing them another $800k. Median house prices are $919k

  • coffeeinmyveins on 12/08/2024 - 09:37

    I love the logic.

    50 year old house that doesn't have any major obvious issues but hey let's knock it down and built it with something that will fall apart in the first 5 years.

    Sound logic mate

    • Tiller76 on 12/08/2024 - 10:23

      I'll be laughing next year if the OP turns 50…..

  • hagendaaz on 12/08/2024 - 10:43
    +2

    I had a knock down and decided to sell. To build in my area and make good use of the view from the block I needed to budget around $1m build/landscape to get the ROI. My estimate on borrowing and holding costs meant that by move in time I’d be likely needing to sell straight away. While likely profitable I didn’t want to add the stress of building to my family at this time just to sell. The alternative would be living in baked beans and what is the point of building yourself a nice house if you resent it cause there is no cash flow for lifestyle?

  • Emcaljoe on 12/08/2024 - 11:43

    We looked briefly at KDRB… the regulations involved even before demolition were too much. Place needed restumping and was coming due for rewiring. Spent about $35k installing new kitchen, new carpets, window coverings, repainted ourselves. Added $80k onto selling price quoted by REA. Was it worth the effort? Yes and no.

  • Tigercjn on 12/08/2024 - 13:09

    It would only be worth it if the block were big enough to have 2 townhouses on it.

  • lookingfordeals89 on 12/08/2024 - 13:48
    +2

    I think you need to determine the land value of your property- out of the 500k you state, the house value should be very low. Take a look at comparables of land near the house of the same size recently sold- there should be a lot of plots sold around your way over the last year. That will give you a rough idea of what your land is currently worth.

    Take a look of what you want and the cost of what you want to build- volume builders have a set price on their website, add around 80k approx on top for site costs but this depends on your land, demolition costs around 20k, then upgrades- probably around 100k-200k worth depending on the house you want and builder, and then add landscaping on top which for a bigger plot would be around 100k, more if you need retaining walls.

    Add all this up, plus the rough land value- is that around the same price for sales of houses on plots of land the same size sold near you over the last year? Ideally it should come lower and that means it can be a good idea financially. Breaks even? That's good, the land will increase in value. If the cost of the new house comes much higher, maybe think about renovating.

    KDRs are time consuming and at times painful….but worth it if it means you get your dream home. Trust me, I am towards the end of the process!

    • Chris17 on 12/08/2024 - 13:58
      +1

      Thanks for that perspective. I’m on a couple of builders’ Facebook groups, and the stress and resentment among clients is excruciating. It seems that you have to be on top of everything - which is hard when you live four hours away from the prospective building site.

      Good luck with your journey. We love the idea of building ourselves the perfect multigenerational home, but it’s a pipe dream if the finances don’t work out.

      • Tily on 12/08/2024 - 18:40
        +1

        I’ve just finished a build for a new PPOR. Never again! I don’t know how people keep on building new homes every few years.
        If I was in your position, I wouldn’t KDRB an investment property. Do maintenance, etc and when you guys are ready for the dream home, then do the KDRB. The numbers also don’t stack up as an investment.

        • Mugsy on 12/08/2024 - 20:18
          +1

          Similarly, we've just taken possession of a new house that will be our PPOR… landscaping is still yet to be done and we're already sick of it. But then we did spend three years getting to this point (went through three builders, two loans).

      • lookingfordeals89 on 13/08/2024 - 09:26

        Thank you! Yes, it's been something we have wanted to do for years and we decided to just go ahead and do it. The lead up was frustrating with having to go over so many documents, fixing mistakes, dealing with council and amending the plans to meet guidelines etc etc. Once the build started it has just gone so quickly, we are really happy with it so far and there have been no delays. We receive the keys at the end of the month, and that's where the trouble of the landscaping, concreting, driveway etc etc comes into play but once we are in it will be worth it!
        Saying that though….I don't think we would do it again!

  • MITM on 13/08/2024 - 13:53

    Your bank might want to know why you want to knock down the building they have loaned you money on - presuming it's a home loan and the bank owns 55%.

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