Property Investment: Progress

Showing posts with label Progress. Show all posts

39 – Gazumped

I’ve mentioned a few times on this blog how smoothly everything went with the first investment property. From land and build contracts, to finance, to construction, and tenanting it was one tick in the box after another. When we set about repeating the process with Open Corp, I expected an identical outcome, this time with the benefit of personal experience.

Through no fault of Open Corp’s, we’ve had a rocky start this time. Our finance pre-approval, with me only recently back to work and the wife on maternity leave, was heavily scrutinised by the bank and was finally approved in mid-December—valid for three months, including the Christmas holidays. Dear wife then took her time finally agreeing to the commitment before we gave Open Corp the green light.

More recently, with our pre-approval due to expire within a week, I received a call from Open Corp telling us a larger buyer had come in and offered to purchase all remaining blocks in the development we were to buy in to—including all blocks with non-executed contracts. We’d signed the contract but it hadn’t yet been fully executed (signed) by the vendor. I’m not sure if it applies in the fullest sense to this specific situation, but I think we were gazumped.

Open Corp were helpfully able to secure another, larger block for us in a neighbouring estate (at a higher cost due to the increased land size—with the difference to be rebated back to us). They also had our initial deposit refunded from the original land developer and applied to this new property. The stamp duty will be about a thousand dollars more because of the increased sale price but I’m comfortable with that seeing as how we’ll be getting an extra 48sqm at minimal cost.

Given the timelines for the finance pre-approval, we were able to nominate Open Corp to sign the land and build contracts on our behalf (the property is in Victoria) and the mortgage broker was able to submit our finance application on the last day of our pre-approval… still without an executed land contract.

Land contracts just aren’t working out for us this time around. It’s now been two weeks since the final finance application was submitted and we’re still waiting on the executed land contract. I have no idea what the hold up is this time and apparently neither do Open Corp but it’s all slightly concerning—especially coming from where we’ve been with the first block. Will the same thing happen with the unexecuted contract being sold to a bulk purchaser? Is whoever does the signing at the vendor’s end out of town? In other words, what’s going on?!?

[Update (6 April): the signed land contracts finally came back late last week, which of course starts the clock ticking for the finance approval…]

Meanwhile, the bank seems to be moving the application forward without this seemingly important document and have ordered a valuation on the property and requested a few extra pieces of documentation from us. I have no experience how flexible the major banks are with the deadlines for their pre-approvals and I’d be very curious to know what happens next if this purchase falls over on the land contract.

All of this is unnerving and frustrating but we’ve never had any major issues buying or securing finance for our PPOR or the first IP and I’m hoping this will come good. I know finance is often the biggest hurdle for many buyers and it was certainly a relief to move forward from the point of unconditional finance approval with the first IP.

Compounding matters, the bank (a different lender to the one we used for the first IP—to avoid cross-collateralising) has flagged a possible issue approving a 10% LMI discount for us. Certain professionals are eligible to pay a 10% deposit instead on the typical 20% deposit before LMI kicks in and the wife, being a doctor, falls into that category of professional. The only problem from the bank’s perspective is the fact she’s not working… or more precisely, as I’d describe it: she’s on leave (maternity leave)—and she is therefore still employed. Unfortunately she has no current pay stubs to prove that to the bank and we’re waiting on a letter from her employer in the hope the bank will accept that.

I hope we’ll have a better view of both the land contract and the finance situation this next (short) week but I won’t bet on it.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

26 – Progress Update: Final Stage

It’s hard to believe how quickly it’s all happened but construction of our first investment property is complete (well, “practically complete” anyway). As with all of these milestones and progress update posts, we received another—the final—invoice and we’ve been scrambling ever since to ensure everything is in order.

The builder’s Invoices are due within seven days of receipt (communicated to us through Open Wealth) so the first order of business was to authorise payment by the bank. This payment also required proof of insurance, which had to be purchased. Our client liaison manager at Open Wealth forewarned us about this one to avoid any delays so I’d been comparing insurance products when the call the came in to let me know the last invoice had been issued. Even still, it caught me off guard a little bit as I wasn’t expecting everything to be finished until the end of August. The bank is also doing a final inspection/valuation so this payment will likely take a little longer than most.

As it’s now time to move into the next phase of this project, tenants, it was also time to select a property manager and get my head around all of the services covered, our options, and the necessary paperwork. I’ll write about that in an upcoming post but the house is on the market and seeking a good tenant.

Finally, there’s now the critical decision as to whether we fly over to Brisbane to have a look, ideally in the next few weeks before the house in tenanted. We’re only entitled to inspect the property, legally, four times a year (including official property inspections by the property manager). Open Wealth contributes $400 towards travel so it seems silly not to take advantage of that offer (the $400 ultimately comes out of the development management fee we pay to Open Wealth at the beginning of the process—we could have gone over earlier, i.e. at land settlement).

We’re ultimately very keen to stay emotionally detached from this property. That said, while I’m confident the build was executed well and has been fully inspected, I’d very much like to do my own, thorough inspection and snap a million photos of all the nooks and crannies while it’s new and before tenants arrive. The property manager will also provide evidentiary photos before tenants move in but I’ve got eagle eyes and want to ensure all the defects are spotted so they can be addressed by the builder now.

Speaking of which, Open Wealth will have now completed their first inspections and the builder will have the next few weeks to address any issues. If all goes well, we’ll have a tenant lined up by the time we handover formally.

The pictures below look great—if not slightly out of date as the fencing and gardens obviously aren’t complete. Gotta love the security screens—at least they should stop tenants from coming and going through the windows!

Enjoy,

Michael

23 – Progress Update: Fixing Stage Complete

On Monday came the “enclosed” invoice for a not-insignificant chunk of cash; today the “fixing” stage invoice arrived for about half that amount again. Apparently the builder was hanging on to invoices around the end of financial year period.

If nothing else, it seems like progress is moving quickly now (quicker than it really is!). In either case, we’re now nearing the end of the construction phase with “practical completion” the last outstanding invoice.

Stacey, our Client Liason Manager at Open Wealth, called this morning to let me know the fixing stage invoice would be sent through and we also spoke briefly about inspections, insurance, and property management. Notably, the real estate agency recommended by Open Wealth will send us an updated rental appraisal. The initial appraisal we received late last year was (a conservative) $380/week and I’m curious to see whether this has moved up or down (Open Wealth suggested the actual rental income on many of their builds in this estate is closer to the $410/week mark—I based my forecasts on the $380 figure). As more new product becomes available in this estate, and on the back the health of the national economy, I’ll be interested to see where we land—hopefully above the $380 benchmark and also in relation to the higher $410 figure.

It’s hard to believe we’re already nearing the point when a tenant will move in and the property will become income generating. Although I’d obviously prefer to be on the ground supervising the details of the build and feeling in-tune with this aspect of the process, I’m also comfortable knowing we don’t need to be there—that we’ve put our trust in Open Wealth and paid them to stand in our place while we undertake more productive activities.

With this stage complete, items like the plastering, tiling, kitchen, and laundry have been ticked off. With the next milestone, tap ware, sinks, shower screen, light fittings, air conditioners, blinds, and kitchen appliances go in, the carpet will be laid and the house painted, feature walls will be rendered and the driveway poured, the letterbox will be built, and the house will be cleaned.

Meanwhile, the property manager will be rounding up potential tenants for short-listing by Open Wealth and, ultimately, selection by us. The builder will have two weeks to address any issues found during inspection (following the practical completion milestone) and it may be possible (I’d guess likely—given the rental guarantee) there will be a few pre-handover inspections before any formal open for inspections take place after handover.

Enjoy,

Michael

22 – Progress Update: Enclosed Stage Complete

We recently hit the 50% mark with construction of our first investment property and are now at the “enclosed” (aka “lockup”) stage. This milestone also brought with it the largest invoice of nearly $80,000 so it’s definitely starting to feel real now.

Without a doubt it will be a great sense of accomplishment to have a tenant installed (hopefully) within the next few months. It will also be a relief knowing the rental income will cover the majority of the holding costs—especially while we’re negatively geared in the early years.

As “enclosed”, the roof is on, the windows and doors have been installed, and the external cladding is on—so the outer shell is in place. During the next phase (“fixing”), the internal plaster will go up, the internal doors will be hung, the kitchen, laundry, and bathroom fixtures will be installed, and the wet areas will be tiled. I outlined the various stage milestones in my previous progress update, if you need some context.

Open Wealth supplied us with these exterior photos. I’d love to see more of the rough interior to get a better sense of the space but those pictures will come in due course.

When we built our family home I snapped hundreds of photos in my excitement and to document the process for family overseas. I also snapped what I thought might be important areas of the construction that would eventually be covered over by brickwork and plaster, etc (for example the bulkhead in our lounge room covers the edge of a drain from the shower upstairs—it’s an extensive bulkhead that’s largely empty, which may have come in handy for an air conditioning unit if it had been 10mm deeper).

Now I need to follow up that bank error from the last milestone…

Enjoy,

Michael

19 – Bank Error

When our last progress payment came due for the frame stage, our mortgage broker (Mortgage Choice) sent us a form to be signed, authorising the bank to draw down against our mortgage for the amount of that invoice. This was the first construction invoice paid by the bank as they asked us to pay the first invoice for the base stage.

Our invoices to date have come through on a Thursday and payment is due within seven days. Our builder has previously returned a receipt to us within a day of payment so I became suspicious something had gone awry when I hadn’t received a receipt by Tuesday.

After following up with Mortgage Choice, I was informed the bank (one of the big four) had paid the builder, in a single payment, both the amount for the frame stage invoice and the builder’s 5% deposit. This would have been great if we were still back in December when the deposit was due but, as we’re now in May and I’d already paid the deposit myself from our line of credit, I raised an eyebrow.

Specifically, why did the bank pay an invoice we hadn’t authorised them to pay? That invoice was issued before land settlement and before this mortgage was finalised.

In speaking with the builder, they confirmed they weren’t sure what to do with this extra money, hence the delay with the receipt, and we agreed it would be credited against the next stage invoice. This plan was also communicated back to the bank, presumably through the builder to Open Wealth and then through Open Wealth to the mortgage broker (did anyone say “Chinese whispers”?).

And then it dawned on me: would the bank—one of the big four Australian banks, as mentioned, with annual profits in the billions and who charged me interest when they overdrew our transaction account during the land settlement process—reimburse the interest charged on the amount that was paid in error?

Simple question.

I put this one to Mortgage Choice and their initial response was ‘no’. Obviously I wasn’t happy with that answer and asked them to please explain.

They followed up with the bank and [after a few days passed] I was informed there will be an adjustment to compensate for this error once the next invoice is been paid.

The math is simple and the funds are not significant but it’s the principle of the matter, gosh darn it! And I hate it when banks steal my money!!

5% builder’s deposit = ~$11k
Annual interest rate = ~5%
Annual interest = $550 ($45/month)
Estimated time to next invoice: 1-2 months
Money that’s better in my pocket: yes

I’ve written in the past about keeping an eye on your banks and insurance companies. Here’s yet another example to reinforce the point. Hopefully future progress payments run more smoothly.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

18 – Progress Update: Frame Stage Complete

Things are moving thick and fast now: last week we were invoiced for the base stage (the slab pour); this week the frame is up and construction has reached the frame stage complete milestone. We received a corresponding invoice for $33k precisely one week after the base stage invoice. Seeing the house truly out of the ground is inspiring.

It’s funny, I should be used to the speed of timber frame construction. I originate from Canada and have a very keen boyhood memory of peering through the school bus window at a construction site one morning as the framers were starting on the ground floor… by that afternoon, on the way home, the second storey frames were already up! I suppose I’ve become accustomed to the slower pace of double brick construction here in WA. I must say I like our brick construction here in Perth as it’s sturdy but it also a slow process by comparison.

To recap then, this is where we are in the broader construction process, showing indicative time estimates for each phase (and with corresponding percentage-based invoices attached to each milestone completed):

Base: 2 weeks. Complete.
Frame: 2 weeks. Complete.
Enclosed (lock up): 3 weeks.
Fixing: 4 weeks.
Final: 4 weeks (note this stage isn’t included within our build contract but is depicted on an indicative progress flow chart supplied to me by Open Wealth—I include here for the timing information).
Practical Completion: 6 weeks.

Enjoy,

Michael

16 – Base Stage Invoice

In my last post I mentioned the slab for our first investment property had been poured and we were now at the ‘base stage complete’ milestone. I also wrote that it was time to pay the base stage invoice of $22k to the builder. Our mortgage broker forwarded a copy of the invoice for signing to authorise payment by the bank (from our main loan).

That would have been great as I’d prefer not to pay anything more than I have to from our line of credit due to its higher interest.

Naturally, things didn’t work out as intended. The bank asked that we pay this first invoice in full as part of our contribution so we had to pay the full amount from the LOC.

Again, not a biggie as it’s there for a reason but it’s amazing how random this process seems—would it not be sensible to expect the bank to provide some sort of payment plan or schedule so we can know what we’ll need to pay and when? Cash flow isn’t a problem thanks to the LOC but I can only imagine it would be for some customers. We had seven days to pay this invoice and I got the invoice paid across two payments with a day to spare, thanks to the bank stuffing around.

Open Wealth mentioned late payments are taken into account should they need to pay the build guarantee or rental guarantee and that’s apart from the fact I do not like being late with payments.

Hopefully the next one will go more smoothly.

Enjoy,

Michael

15 – Progress Update: Base Stage Complete

Well that happened quickly! We have a slab (and a corresponding invoice for the base stage of around $22k). It suddenly feels like progress is moving quickly—at long last. Looking back, I see the approvals came through around mid-April so it’s not that speedy but I’m happy given the weather.

I should note I’ve been very impressed with our Mortgage Broker this time around. As I’ve no doubt mentioned previously, we used Mortgage Choice when we bought our PPOR (land and build). They were involved then to the finance approval stage but I don’t recall interacting with them beyond that point for progress payments on the build.

This time, we received a copy of the builder’s invoice for the base stage from Open Wealth and that very same day, Mortgage Choice sent me the same invoice to approve for payment by the bank. It’s only a little thing but it’s nice knowing the broker is still involved to grease the wheels between us, the bank—and Open Wealth too for that matter. In theory, this means this invoice and future invoices should get paid on time and help us avoid any penalties for late payment.

As we’ve not yet seen the block and live on the other side of the country from Brisbane, it occurred to me it might be time to enquire to Open Wealth about how I go about approving payment for $20k of works when I haven’t seen the slab and have received no other reports as to quality, correctness, etc. Admittedly I should have asked this question before committing to the build with Open Wealth but I wasn’t thinking along those lines at that point.

I was happy with the answer from our Open Wealth Client Liaison Manager, however, and it turns out there are several inspections which occur throughout and after the build. She emailed me this helpful response:

“The builder employs a Certifier who conducts multiple inspections. The Certifier is governed by the council and legislation.

Here is a list of the certifier and other inspections:

Prior to the slab being poured the plumbing, and then the slab form, is inspected by the Certifier. In particular the drainage and sub-drainage; the piers and slab are inspected for form.
Once the frame is up, the inspector checks the carpentry is to code, Australian standard.
After the frame, the inspector also inspects: the plumbing pipe work, this is referred to as the rough-in inspection. There is also a plumbing inspection by the certifier at the final stage.
At completion stage of the build the Certifier produces the Form 21, which is to assure that the build is complete and meets Australian standards. This form is sent to the bank to release the final payment.
After Form 21 is received by the bank, the bank sends out a valuer with a copy of the plans and specifications to make sure that the builder has constructed your property to plan and included all specifications.
Open Wealth then organises two independent inspections; we employ a company in Queensland to go out and check the quality of the work. This is mainly for finishes to paint, craftsmanship and visible defects – it is very thorough.
During the property manager’s first inspection any additional visible faults are identified.
At the property manager’s six-month inspection, any outstanding faults identified are to be fixed under the builder’s warranty. Because your house is made from natural materials and as your house settles, there are always a few adjustments to doors, towel rails that need to be tightened, etc and is at no cost to you.”

When we built in Perth in 2007 through a “project builder” we had only the word of the site manager to go on (at practical completion) and we commissioned an independent inspection at a cost of $500. I’m sure the bank had a look in some shape or form but this was never made evident to us. Despite living in this house for nearly eight years, we’re still dealing with issues from the build (long story for another day…). Perhaps it’s all smoke and mirrors but from what I’ve seen so far the level of rigour in Queensland in 2015 seems greater than that in WA in 2007/08.

Enjoy,

Michael

14 - Progress Update: Plans Approved

We received a quick note from Open Wealth today noting the builder has confirmed building plans and permits have been approved. The start date for construction—preparation for the slab pour—is next Monday!

I’m certainly ready to see this house built so we can get tenants in and start recouping costs. The holding costs have been minimal to date but now that we’ve settled on the land we’re accruing interest on the mortgage for that component and our first interest payment of nearly $700 came due just this week. That amount is paid from our line of credit and capitalised as interest during construction so it’s no problem from a cash flow perspective—and was budgeted for—it’s just a bit scary seeing it all start to happen for real now.

In contrast to our new build, Gemma’s father recently popped into town (they live south of Perth) with the intention of buying a second residence to accommodate them when they come up. They located an existing house in one day, put in an offer that equals the asking price, and settlement is due in the next few weeks. In effect, they’ll be able to move in soon and the time between their offer being accepted and move in day will be less than a month (if everything goes smoothly).

Two of the reasons why Open Wealth advocates building over buying is to take advantage of depreciation as a non-cash tax benefit and to avoid paying stamp duty on the building component of the purchase (i.e. the house). With a new build, we’ll pay GST to the builder (10%) and while the depreciation will be a substantial bonus, we’ll be accruing interest for many months before the house is tenant ready (again, assuming the build goes smoothly). I haven’t done my figures to determine which is the most cost-effective route but I imagine it would be close.

Note building new also brings builder’s and structural warranties, greater tenant appeal, of course, and potentially a greater valuation so you can leverage the equity and do it all again.

Enjoy,

Michael

12 – Progress Update: Settlement

Settlement day today and everything went smoothly, as far as I know. I received an SMS from the bank to notify us settlement is complete, an email from our solicitor, and an email and phone call from our Client Liaison Manager at Open Wealth to say congratulations. So I’ll call that done.

I’d suggest this would be a good occasion to pop a bottle of bubbly but the wife is pregnant and heading out for dinner with the girls tonight, no less. So, in our usual way, we’ll let the occasion pass without much excitement. What investment property?!

Here’s a picture of a pile of dirt—but it’s our pile dirt (er, the bank’s pile of dirt rather)! Good to see the skies are blue in Queensland so hopefully progress can be made without too many disruptions from the weather.

I’m told by Open Wealth “the builder has arranged the soil test, engineering plans and working drawings and the plans have been submitted into council for approval”. “While the plans are being approved the builder will be organising the site works, retaining walls, sediment barriers, driveway shake-down and signage.”

Open Wealth expect 6-8 weeks for permits (ideally six since we paid the 5% builder’s deposit up front and should have jump-started the process) and then things start to really get underway.

I would have preferred to be further along by now, with the original aim of having tenants in place by the end of the 2014/15 financial year but settlement has pushed us out to October (worst case, on the basis of the 30-week construction guarantee Open Wealth includes). Naturally, this will be particularly awesome timing—he said sarcastically—as I’ll likely be overseas as we transition from construction to rental.

The base stage complete milestone is next, which is everything before framing starts.

All said, I’m impressed with myself for a) doing this and b) doing this as well as I possibly could using my newfound knowledge. When we built our PPOR in 2006, we were clueless and did as we were told. Rather than try and understand the process, we followed the bouncing ball. We lucked out in general, but for an investment property I felt complete engagement was necessary. This will be one of several (future) income generating assets which I intend to run as a business and I believe it would have been amiss of me not to dive deep into the semantics. Yes, we’ve still followed the bouncing ball in general because the process outlined by Open Wealth is aligned to my knowledge and strategy but I now understand why the ball bounces and I’ve not hesitated to correct its trajectory when I felt it was heading in the wrong direction.

Time will tell whether we’re doing the right thing but right now I’m comfortable knowing I’ve taken the first steps to secure my financial future and done it in a way that I understand and believe to be correct.

Enjoy,

Michael

10 – Progress Update: Survey Plan Registration

In all honesty I’m not 100% certain what this means but we received a letter from our solicitor on Friday noting “the Survey Plan relating to our purchase has registered in the Titles Office” (which seems to be the Department of Natural Resource and Mines, Queensland). We now have a settlement date of 20 March—finally!

Like I said, I don’t fully understand what this means, but I think the land developer has now completed the necessary developments for the land we’re purchasing and the rest of the development (sewerage, street lighting, paving, etc). We’ll still need building plans to go through council, which can likely start only now (or post-settlement).

The solicitor also sent a draft settlement statement, part of which caught my eye.

Specifically, the bank (that is, the bank covering the main loan for this investment property) will be advancing around $185,000 at settlement and we are required to make up the balance.

Now we’re fine to do this through the line of credit we established to cover the 10% of the purchase price and costs but my naive assumption was that our main loan would be drawn down in full for the land purchase and part of the construction costs, before we’d start drawing down the LOC.

But of course that would be too simplistic. More importantly, to the banks thinking anyway, we could theoretically run out of money to pay for the build. No build means no income, which to the bank means greater risk that we’ll default on the mortgage. The bank which holds our main loan has no idea about our LOC.

No matter, we’ll do things this way and everything will balance out in the end. It does mean we’ll have to pay a tiny bit of extra interest because the interest rate on our LOC is slightly higher than that of our main loan. At least it’s all deductible interest.

Enjoy,

Michael

7 – Progress Update: Land Settlement

As mentioned in previous posts, settlement on our Queensland block of land was delayed in late January; apparently adverse weather conditions over Christmas and throughout January “may” have led to delays for the developer—presumably in to relation finalising all things tied up as part of the land division such as sewerage and services, roads, lighting, etc.

I’ve now been told to expect settlement in the coming days (now late February) and this will mean building plans can be submitted to council for approval and building permits obtained.

This process is very opaque to me but from what I understand, the land developer is required to bring the land to an agreed standard as part of subdivision, council will then approve that work, and the development process for individual developments (i.e. construction) can then commence subject to the rigours of the council building process.

Enjoy,

Michael

About Me

Hi, I'm Michael. I'm a first-time property investor living in Western Australia. I'm also a stay-at-home dad and husband. Follow along with me as I recount the day-to-day activities of buying a block of land in Brisbane and building a new house for investment purposes. If you're thinking of doing the same, I hope you'll learn something from my mistakes--which I'll share openly. If we're successful this time around, I hope one will become two and two will become four and so on... as interest rates no doubt increase and the Australian economic landscape shifts and slides and evolves. Should be interesting! Thanks for reading.

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