Is The Block the world’s worst development?

Washington Brown has crunched the numbers on The Block’s latest development in Melbourne’s inner-city bayside suburb of Port Melbourne, and something just doesn’t add up.

 From a financial point of view the development, which consisted of transforming a 1920s art deco building into a luxury apartment block, was one of the worst he has ever seen.

While I understand the magic of television, Channel 9 has outdone David Copperfield in creating the illusion of a profit to the public!  Depreciation Quote Schedule

Let’s look at the numbers:

According to reports Channel 9 bought the site for around $5 million, which allowed for 6 apartments. Only 5 were sold on TV and for calculation purposes let’s say the acquisition costs is $4.2 million.

The construction cost and depreciation allowances totalled over $11 million, for the 5 apartments alone.

That’s $15.2 million alone in construction and acquisition costs.

It’s worth noting that under the Income Tax Assessment Act 1997 the initial vendor (ie. the developer) has an obligation to pass on the actual costs of construction to the purchaser, where the costs are known.

Let’s not forget there’s then a variety of other costs involved in buying and selling, and undertaking a property development, including:

Whilst some of these costs may have been avoided due to contra deals, the bulk would have to be outlaid by Channel 9. Depreciation Calculator

I estimate these additional costs to conservatively be $2 million, which brings the total cost to $17.2 million.

The Block’s total sales realised just a little over $12 million, leaving the development in the red by around $5 million, yet it has been indicated that profits of up to $715,000 were made by the contestants.

That something David Copperfield would be in awe of.

You know it’s the peak of the market when reality TV shows are pulling rabbits out of a hat to show a profit.

Whilst the contestants may have walked away with some ‘profit’, if the numbers are to be believed as shown on the show that development was a stinker.

The worry is these shows give an unrealistic expectation to would be budding renovators.

Is Housing in Australia Affordable?

Ahhhhhhhh, housing affordability. That old chestnut. It’s a topic that’s been hotly debated a million times over! And will no doubt continue to be for many years to come.

The general consensus is that property in Australia is unaffordable. The results of a recent survey seemed to confirm this, with the proportion of adults who own their own home falling from 57% in 2002 to 51.7% in 2014.

Housing in Australia Affordable

The annual Household, Income and Labour Dynamics in Australia survey, authored by Professor Roger Wilkins from the University of Melbourne, also found that the rate of home ownership is expected to keep falling, and may drop below 50 per cent as early as next year.

So, is home ownership falling because Australians simply can’t afford to buy properties due to hugely elevated prices, or is it due to other factors?

Property prices have significantly grown

It’s certainly true that property prices have significantly risen in Australia over recent decades.

The median dwelling price for the combined capital cities is currently sitting over $500,000, according to CoreLogic. But prices of course range widely between the capitals. Hobart is the cheapest at around $300,000 and Sydney being the most expensive at nearly $800,000. Depreciation Calculator

This decade so far prices have risen across the board by 35%, and over the previous decade they rose by around 140% according to CoreLogic figures.

But since the beginning of 2010, it’s been the two major capitals of Sydney and Melbourne that have seen the majority of growth. Prices are increasing by around 60 and 40 per cent respectively (as at May this year). The other capital city markets have seen either little growth or have fallen in value, so theoretically, in some places affordability is actually improving.

This is especially the case when you consider interest rates; in this regard 2016 actually presents quite a good time to buy with the cash rate now sitting at a record low of 1.5%; very different from the double-digit interest rates investors experienced decades ago.

We, of course, also need to consider incomes in relation to price growth. Depending on who you ask, there can be a case to say housing has or hasn’t become more unaffordable. It’s clear, however, that house prices have risen faster than incomes, making it harder to save for a deposit.

 

Priorities are changing

While property prices have clearly risen, it’s also the case that priorities for more recent generations have changed.

Once upon a time – not that long ago really – youngsters left school and got a job, with their primary objective being to save for a deposit to buy a home.

Nowadays, however, younger generations seem to have different priorities. They often leave school with the intention of travelling abroad for a gap year (or two or three). Or if they go straight into a job they’re not necessarily saving, but buying the latest gadgets; in our modern society it’s about instant gratification.

So does that have an impact on affordability?

It makes sense that it likely impacts on the ability to save for a deposit.

We need to consider which is the cause and which is the effect, however. Some – including a Sydney real estate identity recently – argue that this generation is simply too selfish to make the necessary sacrifices, such as cutting back on commodities such as widescreen televisions and designer clothes, to save and get a foothold in the market. Depreciation Quote Schedule

But on the flipside others argue that priorities have changed simply because it’s impossible to save the huge deposit required for property these days. So younger generations are instead deciding to spend their money on something else because property is out of their reach.

But are the expectations of younger generations now just too high? When they complain about property being unaffordable, is that because they want to buy a flash pad in inner Sydney as their first home, rather than buying something further from the city in a price bracket they can actually afford? Essentially, many want to buy what would traditionally be their last property – often what their parents have worked their way up to – first.

Add to all this the fact that renting has also become more socially acceptable. The Great Australian Dream perhaps fading a little, and we have a little more insight into the affordability debate.

Consider your options

It’s clear that the debate around housing affordability isn’t clear-cut; there are many aspects to consider. As the debate continues to rage, demands for reform or government measures to curb price growth will persist.

While Australian property prices have risen and are unlikely to fall (despite claims from doomsayers), leading many to feel as though it’s impossible to break into markets such as Sydney, there are always more affordable opportunities within each capital city if you care to look. Consider buying further from the city, or a unit instead of a house. Scale down your expectations and buy where and what you can actually afford.

And if you don’t want to scale down your expectations, become a ‘rentvestor’. This means you choose to rent where you want to live and invest where you can afford to buy.

For investors, it’s of course better to buy where there’s more potential for growth. Chances are that’s in an area that hasn’t already seen huge growth. Yet where there are lower prices with more room to move.

My Best Property Deal

Tyron Hyde was recently asked by Your Investment Property – “What was your best property deal?”

How long have you been investing in property?

Well about as long as I can remember! For me, the term “investing in property” means more than just buying an actual property.

I’ve been “invested in property” ever since I was about 17 and walked on my first building site.

I was that kid that would always stop and stare through the hoarding of a building under construction and look at amazement at the excavation and try to work it out.

It drove my girlfriend (now wife) stir crazy as we would often miss the start of the movie!

What was the best investment property deal you have made?

best property deal

My First Investment Property

My first property investment was probably the best deal I ever did.

It was over 20 years ago, and I had just started working at Washington Brown. We were acting as the bank Auditor on the redevelopment of the Balmain RSL.

I liked the area and knew the potential this site offered. Together with a friend we put down a $2,000 holding deposit on $259,000 unit.

The builder went into administration on the job, and the project took a lot longer to complete. Luckily, the values of the property rose strongly.

And by the time settlement took place, the prices went up so much we didn’t have to put our hands in our pockets because the price rise was all the equity we needed to settle.

We ended up selling the unit 2005 for $490,000. So we turned our $2000 into $231,000 in less than ten years.

So excluding taxes, stamp duty, etc.. that works out at around a 70% compounding return over a nine-year period!!

What did this investment allow you to do?

This investment allowed me to buy more property of course! Every property I have ever sold has always re-invested back into another property. Depreciation Calculator

In hindsight, with some of the recent price rises in Sydney, I wish I had found a way to hold onto them.

But it’s not always that easy.

What is your ultimate goal as a property investor?

My ultimate goal as a property investor is to live comfortably off the income I receive from my investments.

I have a mix of investments including commercial and residential and not all are based in NSW.

As I get older, I am more debt risk averse and don’t like borrowing that much if at all to fund these investments.

With Negative Gearing still around, I know this probably isn’t the wisest economic move, but it sure makes me sleep better at night.

When is a Good Time to Buy an Investment Property?

Building Insurance Valuation Report

A lot of people buy property when interest rates go right down. Like now, there are a lot of people buying because interest rates are low. Everyone goes out and buys and that creates more demand as well. And who would not want to buy if you can lock in interest rates and borrow at 5% for five years?

Depreciation Quote ScheduleBut for me, I don’t want to rush. Sometimes I tend to sit back and wait when the market is hot. I’ve learned that sometimes being patient with your money is good. You don’t have to buy something every year. It might be better to save up for 10 years and then come and pounce when other people are not in the market.

Sometimes when the rate goes up to 9% and no one can afford to buy, I’d rather buy then and have enough money and not have to worry about having a big debt or fighting with other investors. You don’t want to be in so much debt when rates go up again.

I don’t want to buy when there are 100 people going to auction against me. I’d rather buy when there are not a lot of buyers.

Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

Building Insurance Valuations Sydney

building insurance valuations sydney

Building insurance valuations Sydney wide is not something to leave to speculation. As experts in the construction and building industry, we know there is a big difference between a market valuation and the actual costs of reconstruction. A comprehensive building insurance valuation report will ensure that in the event of an insurance claim you are not left out of pocket.

At Washington Brown, we base our building insurance valuations on the full cost of rebuilding, in the event of total destruction. We don’t do this so you’ll pay a higher insurance premium. We do it to protect your investment. Our building insurance valuation report will outline costs for demolition, site-clearing, professional fees, compliance and reconstruction.

CASE STUDY

Property: Office and storage building
Description: 8 levels above ground comprising inner city storage facilities and office suites with 1 level of basement parking
Age: Built in the 1970s
Location: Melbourne Central Business District, Vic.

In 2009, we were approached by a large property management company to assess the replacement cost of a building that had been newly acquired by one of their major clients. The assessment had already been completed in pre-acquisition stage by a well-known property valuation company, together with their valuation report. Depreciation Quote Schedule

Note that the valuation documents, or any particulars they contained, were not disclosed to us prior to our report preparation. We did not know the purchase price of the property either as the buyer did not want to disclose it at the initial stage.

After reviewing all the documentation provided, and consulting with the property manager, we carried out a detailed inspection. It was in the heart of the city so we scrutinised the accessibility and adjoining buildings which have a major bearing on city construction.

We released our assessment with a recommended amount for the replacement of the building of $30 million. We received a phone call within one minute. The conversation went along the lines of, “There must be a mistake? The client only bought the property for $13 million. The valuation report recommends a replacement value of the building to be $7.5 million. Surely there cannot be such a difference?”

Depreciation Calculator We dissected the report with the property manager and went through all the components that may have caused such a difference. Some of the issues were:

The lessons learned were:

Needless to say this client is still with us today.

To get a quote for a building insurance valuation visit here – building insurance valuations Sydney

Why I Started in Property…

Why I Started in Property

Today, I thought I would go into why I entered the property market to begin with

You see, when I was 17 and while working at McDonald’s and doing my HSC, my future brother-in-law – a developer – said two things that changed my life: “You can only ever make real money working for yourself” and “McDonald’s really is a property development company … they just sell hamburgers on the side”.

As I was flipping those burgers I was thinking “there’s got to be more to life”… and as I tried to work out what he meant by McDonald’s being a property developer I enrolled in a Bachelor of Construction Economics. The course led me to becoming a quantity surveyor.

Before this I never really had an interest in property so his advice certainly steered my career path, because it was during my degree back in 1993 that I applied for a cadet role at Washington Brown. Now I own the company.

A few years into my work at Washington Brown, aged 25, I wrote a thesis on property depreciation, and thought that this could be a good business opportunity.

This is where part of the advice kicked in. You never make real money working for someone else. So I left Washington Brown, and my mentor who then owned the company, and I started my own quantity surveying firm, Property Depreciation. I did that for about a year and half, and once my old boss at Washington Brown saw that it was successful, he invited me back as a partner. I haven’t looked back since.

The worst advice I ever got

The worst advice I ever received was from a financial planner who led me down the path of investing in shares. I have never lost money in property, but I certainly have with shares. Depreciation Quote Schedule

In hindsight, I should’ve stuck to what I know – property. But the allure of buying shares in a company that you don’t own, then sitting back and letting that money grow, was appealing.

Fast forward to the Global Financial Crisis and hey presto it wasn’t so alluring after all! I have always found that letting someone else make money for you ends in tears.

To me, investing in the stock market is the easy option, unless you know what you’re doing.

And while letting someone else make you money can work, I would rather back myself. Whether that’s investing in my business or trusting my property skills to know if an opportunity is likely to pay off.

So my own advice is invest and nurture what you know best – you.

If you need a depreciation schedule for your investment property – get a quote here or work out how much you can save using our free calculator.

When Do I Sell My Investment Property?

sell my investment property
One thing to remember with property investment is that your entry and exit costs are pretty high. You have to consider stamp duty, your advertising and marketing costs when you sell and the capital gains tax. Depreciation Calculator

Overall, you make your money in property when you’re buying. That is, if you buy right. If you think about the developers, they make money buying land. When they buy the development site, that’s when they make money, when they buy at the right price.

It’s the same with property investors. When you buy at the right time, you should be able to afford to hold the property for an extended period and hopefully over time it will generate income. If you buy something when you’re 30 years old, by the time you’re 50, hopefully your yield as a percentage of your purchase price will be 15 to 20% per annum, which is pretty good. It is like dividend growth from shares.

I know a lot of things could come up that could force you to sell – you will have children, you could get married or get divorced. There are many things that could change your investment strategy over time too. But most people, I think, go into property with the idea of holding it for a long time. They want to own it for an extended period.

As with any other investment, you’ve got to look at making money from it. People need to understand the entry and exit costs of property, including capital gains implications. I don’t think enough people who sell properties try to work out whether they have made money or not. In order to cover all those costs, sometimes you really need to hold for a while.

A lot of investors don’t factor in the entry and exit costs when they work out their true profit. For instance, if you’ve bought a $500,000 property, you’ve got around $50,000 in entry and exit costs. So you need around 10% profit before you make money. But once you’ve done that, it is all blue sky.

Work out how much you save using our free property depreciation calculator or make it happen and get an obligation free quote for a depreciation schedule now.

This blog is an extract from CLAIM IT! – grab your copy now!

What Drives You To Succeed?

what drives you to succeed “What drives you to succeed?”, was a question I was recently asked at a seminar.

It’s an interesting concept to ponder.

Thinking back, I think I was motivated to succeed from an early age. I saw my father work hard all his life to support 5 kids and then lose all his superannuation in the late 1980’s when he invested it all in a company called Estate MortgageDepreciation Calculator

They proclaimed to be “safe as a bank”, but in reality were just lending to developers and offering a slightly higher interest rate on deposits.

So that extra 1% or 2% my dad was supposed to get cost him his life savings. It shattered him.

I guess part of me wanted to make him proud and prove that I could “make it”.

By the time I was 30, when he passed away, I had my own business and he saw that I was doing OK and I know he was proud.

Nowadays, I get inspired by meeting incredible people.

Whilst there are shonks in the building industry, there are also some creative and passionate people out there too.

Most successful developers don’t do it for the money, so what drives them?

It’s generally the challenge that they love, the creativity and the ability it gives them to leave their mark on society.