Class 1B: first class investments

By

29/06/2018

More investors are becoming aware of the great investment opportunities offered in property, but there is an area that remains largely overlooked that can deliver impressive returns to investors.

Defined as a boarding house, guest house, hostel, or the like by the Australian Building Codes Board, Class 1B category buildings require far less paperwork and planning compared to traditional dwellings, so investors are able to circumnavigate the reams of red tape that is often associated with property development.

Frank Days is a property specialist from Modo Project Builders. He’s an expert in the field, and he talks about the Class 1B category in the July 2018 edition Your Investment Property magazine.

I was fortunate enough to be able ask him some questions about this untapped opportunity.

Listen to the interview now:

Transcript:

Kevin: Hi, Frank. Thanks, and welcome to the show. 

Frank:  Thank you for having me, Kevin.

Kevin:  This is something that very few investors are aware of, to my knowledge. Tell us a little bit more about the benefits of this, Frank.

Frank:  Absolutely, Kevin. And I do believe it’s one of the untapped areas of investment, and not just from a providing affordable housing perspective but also for the investors themselves returning fantastic yields.

There’s a growing demographic of Australians out there looking for this type of accommodation, which means that our uptake… We can have these built within six months from breaking ground, and once they’re completed, hand over the keys. We can typically have these fully tenantable in four to five weeks.

They offer incredible yields, positive-cashflow properties, deriving multiple streams of income from the one asset, which means reducing your risk of vacancies, and the overall timeframe is really condensed compared to most of your projects that would return this type of yield.

Kevin:  Yes. The moment we say things like boarding house… My memories of boarding houses are that they were very problematic in terms of maintenance and the type of tenant that they attracted, but that was largely because they were just old homes that were converted into boarding houses.

How has that changed, Frank?

Frank:  Good question, Kevin. And that’s not an uncommon perception. We’ve taken that old concept of a boarding house and brought it into the 21st century. As you’d mentioned, the old-school way of doing these was taking an old property, slicing and dicing it. We’ve actually built these built for purpose.

We’re a small boutique building and design team that specializes in the shared housing space, and I do prefer to call it shared housing or shared accommodation as opposed to boarding houses because it does give it that back of the mind [2:52 inaudible] when you do hear that word “boarding house.”

Kevin:  It’s a bit of a stigma. In fact, in your article in Your Investment Property magazine is a really good example of the layout, which we’ll get into in just a moment.

Frank, can I just ask you, is this type of development being encouraged by state and local governments? And if so, what sort of incentives are on offer for investors?

Frank:  At this point in time, they are being encouraged by state and federal governments through land tax incentives, but I personally believe that we’ll see more incentives come along as the pressure for affordable housing comes upon us.

Kevin:  Yes, it’s a very practical way for people to live, especially people who don’t mind living in shard accommodation. But there are some great benefits, because each of these accommodation places is pretty much self-contained in a sense, aren’t they?

Frank:  Absolutely. Each room is self-contained with its own living area, bedroom area, and its own en suite, and we include a wet bar, which is effectively a small kitchenette setup as well.

Kevin:  It all sounds fantastic, but there are always pros and cons with all of these things. Take me through some of the pros and some of the cons as well that we should be aware of before we jump into this.

Frank:  I could list a large number of the pros – we’ve already talked about a couple – minimizing your risk with multiple streams of income, the yield that’s available, the fact that it’s a zoned res 1, so your red tape through council is reduced dramatically, so the timeframes are reduced, there’s no middle man, so you’re dealing directly with the builder, so there are no commissions involved with your real estate agencies as such.

The only con I can think of off the top of my head is at this point in time, we’ve been doing this for six years and we don’t have any resales yet, so it’s a little bit of an unknown quantity what these will look like as a resale product.

Kevin:  My experience with boarding houses – and I use the term “boarding houses” because that’s exactly what they were, not shared accommodation like what we’re talking about now – the take up on those for investors is quite good because the returns are quite high. So, if you’re valuing it on return and you’re getting a better quality tenant, I would have thought the resale value is going to be fairly good.

Frank:  The closest we’ve had is one of our early adopters was able to complete his project for $900,000. He did take it to market and got an offer as much as $1.3 million. And he knocked it back because he felt like he was better off keeping the product for himself and cashing in.

Kevin:  Of course, one of the cons in the old days was that it was very hard to get insurance, but I understand now that that’s totally changed and there are insurance companies who will take on these shared accommodation properties.

Frank:  Absolutely. And I think it’s much more tightly regulated these days, which has made things a lot easier for both insurance companies and financers to look at the product.

Kevin:  You mentioned about no commissions, but does that mean that to get your help, we’d have to come to you to get the site as well? What about if I had a site that I thought was suitable and just brought that to you?

Frank:  Most of our clients do come to us with a site in mind. They may already own it or they’re looking at a particular site. If that’s not the case, we do have a network of agents who will come to us with off-market properties, suitable properties they think we could use for our projects, and we then put that out to our database.

Kevin:  Frank, what makes an ideal site?

Frank:  Ideally, Kevin, the perfect site is 600 square meters – so 15 meters across the front edge and 40 deep – and flat. That is ideal. We can do the most. We can fit the most car parks. The site costs are reduced dramatically by making sure that it is flat. We can work with any size block. We will look at alternatives, but that will be the ideal block.

Kevin:  You mentioned zoning. What sort of zoning would you need for this?

Frank:  Res 1. That’s it. We don’t need any special permissions through council. There are no zoning requirements. It’s just a res 1, same as building a family home.

Kevin:  Let me ask you then, from start to finish, once a site is found, to finish it, to complete construction and ready for tenants, is there an indicative timeframe? I think you mentioned a number of weeks, but what would it be from the word go?

Frank:  Once the planning is completed, the build time is six months, so completely determined by the planning stage, which could take a month or two depending on the individual’s requirements. But yes, a soil test, survey, and we’re into it.

Kevin:  So, we’re looking at about eight, maybe nine months if you have a site.

Frank:  Absolutely.

Kevin:  You mentioned there about the experience you’d had. In closing, are there any other successful 1B developments that you’d like to mention?

Frank:  The only thing I could say is they’ve all been successful. They all maintain over 95% occupancy rates. They all provide exceptional returns. Each one is specifically built for the owner, so they reflect their requirements. But they do continue to evolve, so if we were to say what was the most successful recently, you’d always say the last one, because they are evolving.

Kevin:  Well done, mate. Okay. Frank Days has been my guest. Frank is a specialist in this at Modo Project Builders. We’ll put a link, I think, in this commentary as well. Your website?

Frank:  ModoBuilders.com.au.

Kevin:  Frank Days has been my guest, and you can read a lot more about it of course in the current issue of Your Investment Property magazine.

Frank, thanks for your time, mate. Catch you again soon.

Frank:  Thanks for having me, Kevin.

Real Estate Talk – the only place where you hear all Australasia’s leading property experts.

 

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