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Discussion in 'Investing Strategies' started by Tizzy, 15th Jul, 2006.

  1. Tizzy

    Tizzy Well-Known Member

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    Perth WA
    Well I thought I might share the experience of one of my current ventures. If I report on the progress as it happens then you can watch it either succeed, or not in this current climate of investing in Perth property.

    At this stage I can't say where the development is because it hasn't settled yet and I am not the only person involved and there are privacy issues. But the general principles may be useful to others.

    8 separate investors have jointly offered to buy a block of land in an established suburb in Perth. Average price in the area for a home is 365K. The block, 4000sqm, has an old recently rented asbestos house and several out buildings on it. These need to be demolished, and the block will take 8 three bed 2 bath double garage properties. The block is rectangular flat and deep.Perfect for an access road down one side with each house positioned off the left of the new drive to be built. Each strata will be just under the 500 sqm size. Quite generous sizes really.
    So to the process. As there are 8 buyers, we formed a company, each of us becoming shareholders and we pay a project manager. That company disbands at the end of the process. The company owns the block, settling in September. As there are no titles created yet, there is no security as such to borrow against. So on settlement we need to put in $100K each. With us, that will be an LOC on PPOR. Then we individually will provide further funds to pay for sewerage connection, stamp duty, head works, council development fees, demolition, suveyors etc. Right up front, we have each put up $9K for deposit and to pay the project manager. If the block doesn't get approved for subdivision, then we get most of that money back. If it does go ahead, we settle, we clear and we build and share the costs as we go along. The projected cost for the land and creating new titles is somewhere between 140-145K. The build is about $130K.
    Re working with others. Basically, this hasn't been much of an issue, one project manager helps sort that out. Financial processes are transparent because money will go through the newly formed company. Anyone needing to back out at any stage early in the process will be able to do that. The syndicate has the option to buy that person out themselves or introduce another person to take over the share. We have all signed a contract stating that once titles are issued, the share can be sold at any time to any buyer willing to proceed with the build. At a minimum, if one of the 8 wish to sell then they will receive a guaranteed 30 K more less any costs. Will let you know how it all proceeds, as we all have every intention of seeing this right through.
     
  2. Rick

    Rick Well-Known Member

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    Good luck Tizzy!

    What are the rough costs of setting such an arrangement up?
     
  3. Tizzy

    Tizzy Well-Known Member

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    Thats it Rick. Just the $9K, $5K of which is land deposit. The balance employs our project manager. Then all other outgoings to get the deal to the point where the blocks are titled shouldn't be more than $140 total each.
     
  4. Nigel Ward

    Nigel Ward Team InvestEd

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    Great story Tiz! Please keep us updated.

    Just curious though, why a company and not a trust or unincorporated JV? Won't there be a serious tax inefficiency through loss of the 50% discount? Also, to get the separate titles into the shareholder's hands if they wanted to buy and hold would involve CGT and stamp duty.

    Good on you for getting involved in an exciting project like this...just want to understand for all our benefit why you structured that way.

    Cheers
    N
     
  5. Tizzy

    Tizzy Well-Known Member

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    Basically, we did briefly discuss trusts, but went with the company idea Nigel because it was the least intrusive method for this particular group of people. I probably should have said that we all had the same goal. None of us actually intended buy and hold. The option is still there, but initially anyway none of us intended to. Also, several of the others have businesses, trusts and other complex arrangements and the company with share holder model fitted best with that complexity. Yes part of the $140K includes stamp duty cost and we knew CGT was part of the deal. The others have a lot of experience in this type of developing and to a large extent I am along for the ride and learning as I go, so if the majority want things done a certain way then I go with it. So far there haven't been any "major" disagreements.


    At the same time I am on a massive learning curve by devouring the free information contained in property forums and now reading some of the new books I've bought. So my ideas about buy and hold are formulating at the same time as I'm involved in projects that are for selling. So I am also in two minds and we possibly could keep the house if another gets built and sold first. Its all in the timing!! ;-))

    The same syndicate idea could so easily be done with a group of like minded individuals who wanted to subdivide a large block together and build and hold. It would be good for the experts to comment on the best/cheapest option in that situation. It may be more complex to structure for a mix of sellers and holders but good acounting and tax advice should minimise the mistakes.

    Personally, we have used a Family Trust to buy a duplex, green title and build with our sons. I think that works well because we can share any profits to minimise the tax costs between the five of us. We can also take advantage of the 50% discount if we wish by holding until after 12 months.

    Now just a point on my habit of saying "I". To complicate things further, "I" is actually the 5 members of the family trust. The two trustees of that trust are myself and husband and both our names are now registered as share holders in the company subdividing the land. "I" just happen to be the one doing all the work by studying! lol

    Helen
     
  6. Nigel Ward

    Nigel Ward Team InvestEd

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    Thanks for the explanation Tizz. What you've described is a really common reaction by many groups teaming up for developments.

    As long as you've costed in the additional expenditure/tax then it's all good.

    Please keep us posted as your project progresses.

    Cheers
    N.
     
  7. Tizzy

    Tizzy Well-Known Member

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    So much about property is waiting waiting waiting. Just a quick post to say that finally, settlement is in 12 days time. We've now set up our company and signed us all on as directors. Company gets dissolved after the titles are established (Won't be holding our breath on those strata titles either, WAPC appears to be operating in crisis mode and taking for-ev-er!!!)

    So at settlement, 8 syndicate members hand over 100K each. Also, $4,474
    for stamp duty share. Then aprox another 30K each to be paid as required over about 6 months for demolition/council fees/sewerage connection/headworks and surveyor.

    Good news for the syndicate is that another four unit block has just settled in the same street for 650K.


    Thats all there is I'm afraid. :)
     
  8. Tizzy

    Tizzy Well-Known Member

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    Finally a little bit of news

    Like I said back in October, the wheels of progress are grinding slowly in Perth!!

    Update...

    Our group of 8 building plots actually adjoins (creating an "L" shape) a group of 5 strata sites. So we've joined forces to cut down the costs of bringing in the sewerage connections etc and so we can share a dual entry access road. That means we have a very stylish development of 13 strata sites (500sqm each) with a road access at either end of the "L". The development has a remote security fence at either end and each build is a really nice rendered finish 4 bed 2 bath home, with double remote door garages. Full finish internally (carpets/tiles/ air con)

    The builds and associated costs will be no more than $150K all up. The land development has been no more than $140K. Total Outlay aprox $310 by completion of build, November 2007.

    We are still in the midst of the titles application process. Titles now due in April or May, not March. Hold up with the titles was because we originally applied to green title the two adjoining blocks prior to strata titling the lot. That process didn't work easily for us because the group of 5 blocks also includes an operating child care centre at one end and we couldn't easily separate that off. Now the title application process has began over again and the 13 blocks and one child care centre are all going to be strata titled.

    My intention was to build and rent out. Shouldn't be any problem at all to tenant at say $300-$320 pw. Might have to add a few things to the build cost to make it really attractive for tenants, but here's my real dillema.

    We can pre sell these builds at $449K and it is tempting me to go that way. Its only tempting me because of the slow down in Perth, but really I'm in two minds about this because I still think there'll be steady CG. I could also draw down on the equity anyway and still continue to invest.
    On the other hand, it's a good profit.... What do you think? :confused:
     
  9. Jacque

    Jacque Team InvestEd

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    Hi Tizzy

    What an exciting project! When planned and executed well, these joint ventures are exactly the type that can pan out to be very successful for all parties involved. I believe that your employment of an outside project manager here serves to demonstrate how to remain subjective from the earliest point and give the project the best chance.

    I'm a little lost with the dvpt progress however- hoping you can reiterate what you're actually building again? In the first post, it was 8 buildings (are they strata freestanding or townhomes?) but now it appears you've joined forces with a neighbouring property and now have 13 sites? Or did you merely share the cost of services and still maintain 8 blocks?

    When it comes to pre-selling (to take what appears to be a healthy profit) it really depends on your long term goals here, as well as your ability to retain the property cashflow-wise.
    It has cost you approx $310K to build each property, with a rental expectation of around $300-320. You will still be out of pocket obviously with cashflow, even after depreciation costs, yet you state that you believe there is further CG to be expected. If this is the case, and you can wait 12 mths to reduce your capital gain tax payable, then perhaps this is an option worth considering as an alternative.
    If you believe that Perth's growth will continue further and you wish to revalue and reuse the equity to leverage into other projects or investments then I can understand why you'd want to maintain such an asset for the longer term.
    Should, however, you wish to take your profit (minus selling and tax costs) because you believe that Perth has peaked or you wish to take a definite cash amount now rather than relying on what the future might bring, then that decision will be up to you.

    Whatever you decide, do keep us informed of the progress as all of us could benefit from an account of such a big project like this. Well done for going that step deeper and taking the bigger risk! I hope it works out as a fantastic outcome for you all, and think of the learning experience you would have chalked up. Great stuff :)
     
  10. Tizzy

    Tizzy Well-Known Member

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    Location:
    Perth WA
    Thanks so much for the feedback and encouragement Jacque, much appreciated.

    I think I need to make things much clearer when I write because obviously I'm leaving great big holes in my explanation. :)

    The actual builds are 13 free standing homes on 440 sqm strata titled blocks. We effectively lost the other 60sqm to common driveways. The adjoining block of land is being developed by another group of investors and all 13 of us contract the same project manager.

    The 5 investors who own the other block, set up a company to develop their block just as we did (we are all connected through the pm which is why we all know each other). Then as the process progressed, the recommendation we received from the surveying company was that major savings could be made by developing as one L shaped development, and we all agreed to it.

    It was saving about 70K to bring sewerage connections and power from one particular direction. Other benefits included dual access from two separate road frontages. It just made good sense to work together and create an impressive, larger development. We are also putting some additional funds into the boundary fencing to give a slightly exclusive feeling to the place.

    The initial company structure we set up can't be used now, because the two blocks are now simply being treated as one development. Rather than establish yet another company that included all 13 investors as directors, we decided an easier solution was to channel funds through the company that our property manager purchased the blocks in on our behalf.

    That means of course there are some financial risks involved. We have invested money and really have nothing to show for it yet. Our safety net however is provided by the 13 caveats that our lawyers have placed on the titles. This arrangement will remain in place until the strata titles come through. :cool: It's just a sensible (and very easy) precauation really. Not sure its the best solution, but it has worked so far.

    As far as the CGT exemption period, that apparently starts from the time we wrote the offer and acceptance which was five months ago. So if the build takes until November to complete, we'd be over the 12 months anyway before settlement.

    We are leaning more towards holding for the longer term than selling. Once the title comes through we will take out an IO loan for 310K and get back the original 140K we invested to develop the block(that initially came from an LOC).

    As there will be sufficient equity in the place, it will be uncross collatoralised at refinancing (yeah!).

    Site gets cleared this week with all the gum trees with ribbons wrapped round hopefully left standing !!!

    Tiz
     
  11. Jacque

    Jacque Team InvestEd

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    So how is it all going now Tizzy?
    I noticed (reading SS post) that cost blowouts are starting to occur? Sounds like you're not taking them lying down, however, and are putting some time into ensuring everything is still going well. Good for you :)

    Hope a satisfactory outcome is reached and the dvpt can march on!
     
  12. Tizzy

    Tizzy Well-Known Member

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    Location:
    Perth WA
    Hi Jacque, yes there are cost blow outs with our two unit development site. As the same builder is doing the larger 13 house development we will all meet to discuss the implications, particularly for those who wanted to presell.

    I suspect that the delays with the titles process for our duplexes are what gave the builder the incentive to increase their costs by so much.
    It seems that until the actual build contract is signed, those costs just keep climbing from the time you sign the preparation of plans agreement!!

    It appears that you get three months at the initial quote, then costs increase by 1.5% per month . I haven't seen that in writing yet, but I believe thats whats occurring.