Jo Chivers is director of Property Bloom, which manages property development.

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Jo Chivers

29 November 2012

You don't need to sell to reap the benefits of property investment

You don't need to sell to reap the benefits of property investment

I had a call from Dave today.  He said, "Hi Jo, can you help me with a dual-occupancy project?’  To that I replied: "Sure, Dave, we’d love to.  Tell me a bit about your strategy and what you are hoping to achieve from a property development."

He said, ‘"well, my wife and I want to turn over a few developments, you know, complete one, sell and then use the profits to go again. Our aim is to use the proceeds to pay down the mortgage on our principal place of residence and keep investing." 

Dave certainly has a very good plan. As property development project managers, we are not qualified to give accounting or financial advice, but I do like to check with anyone making this kind of enquiry that they understand what selling costs are involved.

Dave said he understood there’ll be agent’s selling commission and marketing costs to sell the new villas and said "We might have to pay some capital gains tax, and that’s it, I think."

My reply: "Are you sure, Dave?"

If you take a look at the selling costs, then you may think twice about selling on completion, especially if it’s a small development like a dual occupancy.

In the Hunter region of NSW where we manage our developments, we can typically create around $100,000 in equity on a dual-occupancy project. This sounds like a lot of equity to create, and it is – if you are holding the properties you’ve built.

By holding on completion you not only get the benefits of depreciation and higher than average rental returns (everyone loves to rent a brand-new property), but some clients choose to refinance sometimes up to 95% LVR (loan to value ratio), and by doing this they can access a lot of the equity that’s been created through the development process.

But if you are looking to sell on completion, then there are a whole list of costs you need to consider.

The big one is GST, and as I explained to Dave, I highly recommend he checks this out closely with his accountant.  GST is payable when you buy new property, so Dave would need to ensure he pays 10% of his selling cost in GST.  However, if he holds the properties for five years, the property is no longer deemed new and no GST is applicable.  If Dave is not registered for GST then he can’t claim the input tax credits throughout the life of a development, so already he’s lost a big chunk of his profit.

Mortgage costs can be another cost to consider. Dave needs to check with his lender what fees and charges may be applicable when he subdivides the two dwellings – the lender needs to approve this before the subdivision can be registered - and then on the discharge of the mortgage.

In some instances, land tax may also be payable on a property that is being sold.

Dave said he would have a meeting with his accountant and then come back to me on his plans for his dual-occupancy project, and that’s exactly what he did.  A few weeks later, we had found him a great site and now he’s planning to hold the villas for the short term due to the potential yield of 7.5%. This also helped him realise that if you are going to all the trouble to develop property in the right location, you may as well hold to reap the immediate and future rewards.

Jo Chivers is director of Property Bloom, which manages property development.

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