Expert Advice with Cam McLellan01/02/2016

I was recently sent a very specific question via our Facebook page and thought it would be a perfect topic to blog on this week. The question came from an investor who was trying to understand if there would be any value in paying less for a property due to smaller land size, if you’re achieving the same number of bedrooms:

“How would a 250 square metre block of land, with a four bedroom house on it compare to a 350 square metre block of land also with a four bedroom house?”

It’s a great question because it gets to the heart of what I talk about with respect to optimum size and quality and the way we are able to buy close to more expensive comparable houses and pull the value of ours up.

There are a lot of moving parts to this response because there are a lot of variables at play when comparing 250 and 350 square metre blocks, as opposed to if the options were 400 and 500 metres squared; so please bear with me as I go through it.

Basically, we need to look at three key things when making this decision:

  • Tenant Appeal
  • Design Guidelines
  • Valuations
At face value you would say that the property on the smaller block would be more beneficial because it is cheaper and would bring in the same amount of rent because it has the same number of bedrooms. However, when we are talking about smaller land sizes of less than 300 square metres, there are different factors which need to be considered. The first is tenant appeal; a four-bedroom home is most likely going to appeal to a family but would this property work for them in terms of appeal?
  • Are you mitigating vacancy risk?
  • Are you going to be able to get a tenant?
  • Are you going to be able to get a good rental return?

There is every chance that the rent for the house on the smaller block might actually be a little bit lower because it would only cater to a small percentage of the rental market in those who are looking for a four-bedroom house, without much of a yard.

We also need to consider design guidelines. Developers put together design guidelines to control the quality of a particular estate which they have invested heavily in. For example, they might wish to control setback from the street, roof pitch angles and make sure that rubbish bins can’t be seen from the street.

These guidelines are usually set out in a 35 or 40 page booklet which can be found in most land contracts for quality estates where developers want to maintain their reputations.

To achieve optimal size and quality a four-bedroom house should take up about 205 square metres. Given normal setbacks and so forth, there is no way a 205 square metre house could be built on a 250 square metre block. The only way to achieve it would be to build a double storey house.

Double storey homes cost more to build and you would therefore be spending any money saved by buying the smaller block. Spending additional money on the building means that you have more invested in the part that depreciates, which isn’t optimal. On the other hand, four-bedroom homes on 350 square metre blocks work quite well and the design guidelines can be met.

As always, valuations are key. While in essence valuers look at land size and bedrooms, they also consider comparable sales and the fire sale price; if the house was sold at 9am on Monday, what price would the property achieve? I am speculating that a four-bedroom house on a 250 square metre block wouldn’t appeal to a large number of people but I don’t know for sure and if I don’t know, neither does the valuer.

There are not a lot of these properties on the market and therefore the valuer would probably provide a more conservative valuation.

So while you might head out with the best intention to take advantage of nearby properties that could pull up the value of your property, there are a few concerns about having a four-bedroom house situated on a small block of land.

 

Director of OpenCorp, Cam McLellan is committed to sharing his passion and property investment knowledge with everyday Australians.

After thriving in the telecommunications, technology and recruitment sectors and making six BRW Lists in 8 years, alongside accomplished OpenCorp. entrepreneurs Matthew Lewison and Allister Lewison, founded OpenCorp eight years ago.

 

Cam started investing in real estate at a young age and quickly mastered the art of building sustainable wealth. He has used the same wealth building strategy to develop a multi-million dollar business, sharing his knowledge and skill with ordinary Australians. Cam has personally bought, sold and developed numerous properties and has an extensive residential and commercial investment portfolio.

Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.