Choose between cashflow and equity when developing property

Do you want cashflow or equity from your development?

One of the first questions I ask anyone enquiring about property development project management services is: what is your goal?  What do you want to achieve from your development?

The reason I ask is because some people want to create positively geared property with the highest possible yield because they want to add to their cashflow.  Generally these people may have lower incomes but still want to build a property portfolio. The income from the properties will increase their taxable income. They don’t want property that is going to drain them financially.

Others are looking for negatively geared property where they can create lots of equity. Generally they are people on higher incomes, paying a lot of tax and need property that will help offset some of the tax they are paying. They need high depreciating property and want to use the equity created through development for their next deal.

There are very different development strategies for each outcome.  After this initial chat, we recommend a discussion with their accountant and lender take place to ensure that the development strategy that they want is actually correct for their situation.

Once we’ve established the development strategy, we look within this category for the right development site for them.

A high cashflow development will be one that produces a 9%-plus gross yield, and Property Bloom is achieving this with our granny flat developments. I’ve included figures on our latest granny flat completed below:

Purchase three-bedroom house on large, dual-access block:   $228,000

Stamp duty and purchase costs: $10,000

Renovations to house: $18,000

Total house cost: $256,000 – rent achieved $340 per week

Cost to build tw0-bedroom granny flat: $96,000 – rent achieved $280 per week

Total rental return: $620 per week, $32,240 per annum

Cost of house plus granny flat = $352,000

Gross yield (rent divided by cost) = 9.2%

This is a cashflow strategy, not an equity creation strategy, as a valuer is likely to value the property at cost plus upgrades unless there are direct sales comparables in the market. This is because the flat cannot be subdivided from the house and may be considered purely an upgrade to the existing house.

On the opposite end of the scale would be a three- to four-unit project that will create a large amount of equity, high depreciation benefits and not a bad yield, but a project of this size will still probably be negatively geared on completion.