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46 AUSTRALIAN PROPERTY INVESTOR NOVEMBER 2010 WWW.APIMAGAZINE.COM.AU

Already armed with a strong asset baseof properties, Kathy and Matt Shermandecided to find a project where they couldmake a large chunk of cash quickly.

We wanted to top up our buffer accountand help with the shortfall between rentand expenses, explains Kathy.

They also wanted to reduce the debtagainst their principal place of residence(their home) and use the remaining amounttowards significant time off work when theirfirst baby arrives.

To achieve this, a block subdivision andthe construction of a second dwelling onthe same block appeared a logical answer.

THE PROPERTY SEARCHWe targeted the northern suburbs of

Adelaide because we thought we could finda house on a large enough block within ourbudget of about $200,000, explains Kathy.

We wanted a simple subdivision wherewe didnt have to demolish an existingdwelling, and we also wanted to have rentcoming in throughout the subdivisionprocess to help with holding costs, so wewere looking for quite a specific property.

Ideally they wanted to find either a cornerblock where the existing house was forwardfar enough to chop off the backyard, or along block where the house was well overto one side.

They even used Google maps to viewaerials of the various properties for sale toassess the position of the existing house onthe block and to eliminate any propertieswhere the house was centrally positioned.

They also asked local agents what tenantsand owner-occupier buyers wanted fromproperties in that area.

The agents told Kathy that it wasnt verycommon to see a battleaxe block (orhammerhead block), and supposedly thosethat were starting to appear werent sellingas well as blocks with street frontage. ButKathy and Matt had already seen thisactivity warming up in the area.

We already had all the information fromthe council about required setbacks,minimum block size, dimensions andpercentage of private open space neededfor each block, Kathy says.

Wed spent about a month searching forproperties and attending viewings when wehappened to drive past a large corner blockin Elizabeth Downs with the existing houseright at the front of the block and a big ForSale sign outside.

After enquiring if the block was stillavailable, Kathy and Matt discovered thatthe property was already under contract.So they left their contact details with theagent just in case the contract crashed.

Two weeks later the agent phoned themto reveal that the contract had crashed andit was theirs if they wanted it. So they swiftlymade their move.

THE DUE DILIGENCEWe put the property under contract andused the time given under the building andpest and finance clauses to do some moredue diligence, explains Kathy.

They spoke to the planning officer at thecouncil again, who checked the allotmentsize and situation. He advised us that therewas a sewerage easement on the rear of theblock but that he did think it was possibleto do a subdivision without demolishingthe existing house, she notes.

They then contacted a subdivision-

MY DEVELOPMENT

Subdividing a cornerblock and constructinga second dwelling willallow Kathy and MattSherman to walk awaywith $90,000 in cashand give them a newhouse for theirportfolio. NICOLE NAVARRO

Fastprofits

specialist surveyor who arrived at theproperty for some preliminary surveying.This cost us $495 but would be taken offthe cost of the subdivision later on.

The surveyors report told Kathy andMatt that the subdivision was possiblewithin the council guidelines, as long as itwas a community title because of theeasement. While this doesnt adverselyaffect the land value, explains Kathy, it doesmean that whenever the property title istransferred buyers need to be aware thereare rules of access.

The easement ran three metres wideacross the blocks width, so while theywouldnt be able to pour a concrete slab ontop, they could pave or bark chip it. So thatsexactly what they decided to do.

Due to the restriction of not being ableto build directly above the easement, Kathyand Matt sat down with council and cameto an agreement that allowed the house tobe only two metres from the rear fence, forthe length of one bedroom, instead of therequired four metres. This also allowedroom for either a second living area at thefront of the property, or a double garage.On agents advice Kathy and Matt optedfor the second living area, knowing thatpeople in the area were likely to havefamilies, but not as likely to have two cars.

Prior to going unconditional we also ransome figures to check the financialfeasibility of the project, says Kathy. Inhindsight this was over-simplified and theend figures didnt turn out exactly as weestimated, but were still happy with them.

CRUNCH TIMEWhile waiting for their contract to becomeunconditional, the couple sought advicefrom their accountant on what to do withthe completed subdivision. He suggestedthat we sell the existing house, build on thevacant block and keep it as a rentalproperty, says Kathy.

Then, when the original house sells, andwe pay off that mortgage, well walk awaywith cash rather than equity.

They calculated that once fees and capitalgains tax are taken into account they willgain a cash amount of almost $90,000 aftertax.

Our accountant suggests we pay thisamount off our PPOR (principal place ofresidence) debt, reveals Kathy. Becauseits cash and not an equity loan there are notax implications in its use and then if wewanted to we could have our PPORrevalued and the equity withdrawn as aninvestment loan to use for investmentpurposes.

While they did discuss holding the front

dwelling as a cash flow positive property inaddition to the negatively geared new houseon the back block, Kathy reveals that tomeet their personal goals unrelated toproperty they decided on the first option.

The idea is well still build an asset basefor the long term, but along the way sellthe odd property to release cash to enableus to reach our personal goals, like buyinga boat or going on holiday, she reveals.

GETTING THE PROPERTY TENANTED Once the property was settled, a quick$11,000 cosmetic touch up was requiredjust to make it liveable.

This included a termite treatment,rubbish removal to clear the back blockready for subdivision, a new front door, alick of paint on the house front, a newletterbox, and landscaping, including a new-look garden and garden path.

However we didnt get the three dollarsto every dollar back in value like youresupposed to when renovating, says Kathy.

Instead their property value was boosted

by $15,000 to $210,000, just enough tocover the expenses, however the asking rentremained the same at $225 per week.

We probably did get a little carriedaway, she says. I also think the area andthe timing werent right to see the valueincrease.

To service overhead costs it wasimportant for Kathy and Matt to movetenants in pronto. So their propertymanager presented them with an interestedtenant a single, 18-year-old mum of twokids with no rental history.

But within six months, while Kathy andMatt were overseas on their honeymoon,the tenant fell behind on the rent. After aletter from the agent the rent was paid anda second chance was granted. On the nextinspection, however, the agent found thehouse in a mess, there were dirty nappiesscattered everywhere, childrens drawingsall over the walls, a smashed wardrobe, andsour milk throughout the house.

The tenant was given one more chanceto lift her game, but again she stopped

THE NUMBERS

PROJECT DESCRIPTION

Originally a three-bed house on 800-sqm corner block, subdivided and added a three-bed house, ElizabethDowns, SA

Date purchased November 2008

Purchase price $195,000

Purchase costs: stamp duty and mortgage insurance $4,700

Total purchase costs $199,700

Renovation costs $11,795

SUBDIVISION COSTS

Legal fees $3,974

Surveyor $2,775

Subdivision application $700

Water connection/levies $1,978

Council open space levy $4,493

Lands Titles Office search fees and plan prints $260

GST $326

Development assessment commission lodgement fee $1,052

Lands Titles Office outer boundary plan lodgement fee $895

Total subdivision costs $16,454

Projected building costs $144,215

Total development costs $160,669

Estimated value of new property on completion $250,000

Anticipated equity gain $89,331

Total gain as a percentage of cost 55%

Loan-to-value ratio (on entire property prior to expected sale of front house,including renovation and turn key extras from existing equity bin) 72%

Equity gain = current value total cost. LVR = current loan / current value

WWW.APIMAGAZINE.COM.AU NOVEMBER 2010 AUSTRALIAN PROPERTY INVESTOR 47

Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

paying rent so her tenancy agreement wasfinally terminated.

The property manager then took thetenant to the tribunal because she wouldntvacate the premises. The tribunal found infavour of Kathy and Matt, but while theykept the bond, it didnt cover the damageor cost of cleaning up the house to make itliveable for the next tenant.

Kathy and Matt cleaned up the rubbish,fixed the broken wardrobe, replaced thedamaged carpets, repainted the walls, andsigned up a new tenant.

STARTING THE SUBDIVISIONThe surveyors took care of everything,according to Kathy.

Because the surveyors didnt have to re-measure the block, their initial payment of$495 was deducted off the end bill. Themeasurements and technical drawings werethen submitted through council.

After a very lengthy one-year subdivisionprocess, council approved it with specificrequirements regarding two rainwatertanks both of which must hold a mini -mum capacity of 1000 litres. It alsostipulated that the first tank must beplumbed into one utility within the houseto comply with Australian standards.

Matt explains that the second rainwatertank needed to be attached to the first to

collect any overflow from the firsttank once it was full.

The purpose of the second tank is to actas an overflow container with a muchsmaller outlet (eg. a hose turned on half-flow at all times) to allow the water to emptyfrom the second tank into the stormwatersystem at a slower rate than it would if itran through the normal 75-millimetrestormwater pipe.

The clause was listed as being a safetymechanism for the one in 100-year storm.

The purpose of this is to hold back someof the water flow on heavy rain days so thatthe drains in the street arent overflowedwith excessive amounts of water.

It took Kathy and Matt one year to startthe subdivision process, then another fullyear of waiting for the subdivision title.

We ended up entering into a familyagreement joint venture with my parentsat this stage of the project, as we didnt havethe cash for the surveying fees at the timeand they did. It worked out great and wevesince bought another investment propertytogether, Kathy explains.

The water meters caused us a fewheadaches, remembers Kathy.

Because the subdivision had to be acommunity title there needed to becommon area, like with a strata title. In ourcase, because of the easement servicing bothblocks, the rules state that the front househas to be able to access the sewerage pipesat the back of the rear block, meaning theowners representative can enter that areaif necessary on application.

She adds that as with a strata title, therules on a community title state there mustbe common ground. So Kathy and Mattdecided to allocate this common area to asmall area at the front of the block and

placed a new water meter for the back blockbeside the existing water meter.

At the time this seemed to be the mostlogical option, but in hindsight the couplereveal they wouldnt do it again because itmeant the pipes needed to run 20 metresunderground from the water meter downthrough the front block to the back block,costing an additional $800 in plumbing anddigging.

Their subdivision title certificate onlyarrived in August this year. This month,

the slab will be laid and construction willfinally begin.

SHIFTING FINANCE When Kathy and Matt originally boughtthe property in November 2008 througha mortgage broker, they were set up on astandard 90 per cent interest-only loanusing equity from other properties astheir deposit.

Before they sell the existing house, theywill borrow against the value of the newlysubdivided block of land. Using 90 per centof this value Kathy and Matt will pay downthe original debt of $175,500 (which willbe fully assigned to the old existing fronthouse), so that when they sell the existinghouse they can walk away with cash.

Theyll borrow 90 per cent of thecombined value of the block of land($95,000) and the house construction($122,215 not including the turn key extrassuch as air conditioning and floor coveringswhich will be drawn out of Kathy and Mattsequity bin on completion), meaning a totalloan of $195,493.

Of this loan, the bank will retain the fullcost of the construction (thereby requiringno deposit from Kathy and Matt) to paythe builder, and will release $73,210 to pay

MY DEVELOPMENT

Front afterBackyard subdividedFront before

The block subdivided

When we achieve our sale price on theexisting house of $205,000, well be able to pay off the mortgage and walk away withabout $90,000 after fees and taxes.

48 AUSTRALIAN PROPERTY INVESTOR NOVEMBER 2010 WWW.APIMAGAZINE.COM.AU

WWW.APIMAGAZINE.COM.AU NOVEMBER 2010 AUSTRALIAN PROPERTY INVESTOR 49

down the original debt of $175,500. But to do so Kathyand Matt need to pay mortgage insurance ($3000), solicitorsfees ($500), release mortgage fees ($300), and a dischargefee ($300), leaving $69,110 available for use.

Because they currently owe $175,500 on the entireproperty, theyll use this $69,110 to reduce the loan to$106,500. When we achieve our sale price on the existinghouse of $205,000, well be able to pay off the mortgage andwalk away with $90,000 after fees and taxes, Kathy says.

SELLING THE EXISTING HOUSEA fence installed along the back border of the existing housenow divides the two blocks, with the existing housecurrently up for sale.

Kathy and Matt expect $205,000 on the sale of thisproperty, slightly lower than their original asking price of$220,000 due to it being in direct competition with otherhouses in the area with larger yards (after the subdivisiontheir block size was reduced to 450 square metres).

But considering theyve only spent $195,000 for thehouse on the original block size (800 square metres),$11,000 on cosmetic touch ups, and $4700 on purchasecosts, theyre essentially looking at selling the block at halfthe size for a greater price just two years later, which wouldmean almost a 100 per cent profit.

They understand that there are still many large blocksin the area and the feedback from buyers was that thebackyard is too small, particularly in an area where peoplelike to own a dog or two, she says.

However, while these factors might work against themachieving $220,000, it will still be an attractive option forelderly couples or investors not wanting a property witha big lawn to mow or significant garden maintenance.

THE NEXT STAGEKathy and Matt have contracted a builder to construct athree-bedroom, two-bathroom, two-living area home onthe new block for $122,215, which should be worth about$250,000 and rent for about $260 per week when complete.

There will be a further small equity gain once the buildis complete but we expect this to be swallowed up by thelandscaping, air conditioning and other extras, Kathy notes.

Our plan at this stage is to hold on to the new build forabout five years and then sell to realise the capital gains,which will be shared with my parents for their part in theproject, reveals Kathy.

The slab will be down this month and they anticipate asix-month build time.

While expecting to walk away with fast profits, the entireprocess has taken the couple two years just to get thesubdivision completed, perhaps a little longer than initiallyanticipated.

The hardest part has been sitting around doing nothingand waiting for things to happen, says Kathy.

But the great part, she adds, is the substantial cash theyllwalk away with initially and the potential future profitstheyll make on the back block when the entire project iscompleted. api

API ConnectDo you have a question for Kathy and Matt? Email it toforum@apimagazine.com.au and well do our best to publish theanswer in a future issue of API.

Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.