- Existing house and land cost $1185k
- Cost to build second house $345k
- Registered valuation on completion $1545k
- Equity gain $15k
- Pre build rent $580p/w
- Yield (on cost) 2.5%
- Post build rent $1180 p/w
- Yield (on cost) 4%
- Build completion date – October 2017
Build Cost Breakdown
- Project management/architecture/conception planning $35119
- Council Fees and development contribution $14749
- Water connection and infrastructure levy $9272
- Power Connection $10141
- Engineer design and inspection fees $3011
- Surveyor $2041
- Fixed price build contract $193800
- Building PC sums $53914
- Drainage $3400
- Kitchen and flooring $10137
- Landscaper $9000
TOTAL BUILD COST $344,584
I bought this property in May 2016. It appealed to me because the Auckland City Council were about to release new zoning citywide and this property was to become ‘Mixed Housing Urban’ allowing for much more intensive development up to 3 levels high. There was potential here to later develop 3 level townhouses, with no density restriction. I was keen to land-bank a property with this zoning for the future.
In the meantime, I had renovated and tenanted the main house onsite. you can read about that here East Coast Rd (part one) . The return though was poor at 2.5% gross yield and I was topping up the mortgage payments each month. While I was not in a position to complete a townhouse development, I did need to improve the yield on the property so it would at least break even for me. Upon purchase, I made the decision to build a minor dwelling on the rear of the site to improve income.
A minor dwelling is an ancillary unit, sometimes called a granny flat which was allowed under the old Auckland district plan. The rules include strict size limitations and a minimum site size. The rules as they were at the start of the project do not exist now the new district plan and zoning has been implemented. At the time there was a lot of uncertainty in the building industry around how these types of projects might be restricted in future.
I initially decided to use a turn key company to plan, consent and build the minor dwelling. I was also worried about the time-frame and racing to meet the deadline of the new district plan which would no longer allow the minor dwelling concept. I was keen to get the council consent applications underway asap so I did not miss out. The turn key company managed the initial surveys, architecture drawings and council consent process, but when the time came to put together a contract for the build their price was pretty high, around $280k. I ended up using builder sourced on builders crack as every other builder who had come recommended to me was tied up with work for a year or more. The contract, like for like, came in at $193k
The builder, having recently set up his own business, I suspect, had never managed a new build and seemed inexperienced in dealing with council, which definitely had its frustrations for me. I took a risk when I hired him, and I was prepared for some challenges. We got through it though, despite several below ground cost over runs. These related to sewerage lines in odd places requiring the re-engineering of retaining walls, storm water which had been destroyed by tree roots needing rebuilt, and very poor soil quality that affected our support posts for decking and retaining. While the above ground aspects of the build came in on budget under the terms of the fixed price contract, those unexpected aspects of the below ground works, could not be known or costed beforehand. These were a lesson for me, being new to development projects, and I hope will help me plan contingency budgets for these things in future developments.
As I write I am awaiting the final council code of compliance certificate, which I hope will be issued in the coming week or two. The new minor dwelling is now tenanted with my property manager at $580 per week. In the planning stages we estimated the rental would be $520 per week so I am very pleased with the result. Rents have risen around 2% in the last 12 months, but the prospect of a brand new, fully insulated and double glazed home was appealing to tenants. We had the property rented within 5 days after 25 viewings. It was a popular offering.
I had been slightly worried the compact 3 bedroom option as opposed to a larger 2 bedroom offering might not be well received by the rental market, but this was not the case. To assist in making the place feel more spacious I fitted shelving as well as rods in all the wardrobes so chest of drawers would not be needed, and added a garden shed to go with the ample covered under house storage. I also chose block out roller blinds as opposed to curtains as they were less intrusive in the rooms. The architect had ensured plenty of large floor to ceiling windows and an L shaped kitchen, which were clever ways to make the rooms feel more spacious.
Needless to say the final build price was considerably more than I had planned for, with the below ground budget over runs and all the little incidentals along the way. I had initially hoped to complete for $250-$280k, the final figure being $345k – almost that of a larger full size house. I have discovered that the smaller the dwelling the higher the square meter price becomes, there are some economies of scale with size in new builds. This was one of my learning’s. It was also painful to have to part with such large sums for development and infrastructure contributions and to have the process scrutinized and assessed with such rigor at council. Less than a decade ago the process to construct a simple ancillary unit such as this was a much easier, less bureaucratic, and less expensive exercise.
Disappointingly the equity gains on this project have been minimal at 15k. From an equity perspective the better gains were in the renovation of the existing property. However my goal here was to improve the yield and cash-flow of this property and this has certainly improved. The return on my $345k investment is 8.7%, bringing my yield on this property to 4%. Improving on the 2.5% it previously returned. The property is now breaking even. I no longer need to top up the mortgage payment. In the new year rent increases are planned for the main house and my plan now is to keep the rents consistent with market rates and let the tenants pay down the remaining mortgage for me.
I would be reluctant to engage in another minor dwelling development, given the costs involved for a dwelling so small. I think there are now better opportunities for equity gains through building regular full size second dwellings, which would now be permissible under the new unitary plan – effectively 2 houses on one title, or a subdivision scenario. For cash-flow and yield gains I’d consider flat conversions within the existing footprint of a house to give an additional income stream for a significantly lesser development cost.
In the back of my mind I’m also considering what future potential there may be for this property. There is a neighboring house on moderate land parcel, currently a rather run down rental property. I’ll keep watching this, as if it ever does come to market the combined lots would be 1400 square meters of Mixed Housing Urban zoned land. A significant parcel and allowing several 3 level townhouses to be constructed. This would be a valuable holding to own. The minor dwelling and main house (as well as the neighboring house) are all built on timber piles rather than concrete pads so could easily be lifted and relocated off to another site to allow more intense development. I’ll keep watching and when it is offered, I’ll be ready.