In our recent post we gave you a sneak peek of the three major mining areas in Queensland—the Surat Basin, Bowen Basin, and Galilee Basin—which we will be reviewing in an extensive report as Lisa Parker and I go on a mining town road trip.
But before that, here’s a case study on a property in one of the towns in Surat Basin—Chinchilla. In this article, I will be presenting you with the numbers and some considerations before presenting three possible course of actions we can take on this piece of property.
Where is Chinchilla?
As mentioned above, Chinchilla is located in the Surat Basin, on the South Eastern part of Queensland. It is approximately 300kms northwest of Brisbane and has a population of 5487, according to the 2011 Census report. It is interesting to note that back in 2006, this town only has 3682 residents. But the significant growth in the area brought by the boom in mining resources in the Surat Basin saw Chinchilla providing residence to the mining project workers. Agriculture was the main industry in Chinchilla before it experienced growth due to the mining projects involving coal mining, coal seam gas and liquified natural gas.
In this sample study, we will be focusing on a three-bedroom Chinchilla property. It also has a study or second living area.This property is located on a 933sqm corner block, just five minutes from the parks and services.
The asking price for this property is $365,000 and current rental appraisal on the home is $460 per week unfurnished. Based on these figures, the rental yield on this property is 6.5%. This means that this property would be negatively geared at approximately $70 per week—that is if we assume 100% borrowings, a 38% tax bracket and an interest rate of 7%.
However, if we consider maximising the use of the existing dwelling and adding another dwelling (or even two), this property has some good potential, particularly given that this property is a large corner lot. There is loads of potential for increasing accommodation on this block to maximise cashflow.
Having said that, we must consider though the council restrictions or rules on block sizes and how many dwellings we can put on the block. We must also factor in the fact that Chinchilla was affected by the Queensland floods not long ago so I suggest looking at flooding zones in the area.
Below are three possible course of actions we can take on this sample property. Note though that the numbers presented here are just estimates to give you ideas on what we could do with this property. I’d recommend that you due lots of research and due diligence if you were actually going to undertake a project like this.
Action 1: Increase yield by turning the existing study or the second living room into a bedroom and rent it out fully furnished.
With renovation and furnishing cost of $5000 and a higher rental return of $600, our yield would be neutrally geared at 8.5%. If you believe there will be capital growth in the area then this action will reap its rewards as you add more living areas to the block.
Action 2: Convert the existing study/second living area into a bedroom; then add a three-bedroom, three-bathroom house. Furnish both and rent them out.
We’ve spent $5k for converting the study into a room and now we’re adding $225k for the three-bedroom, three-bathroom house. Let’s add $20k for additional costs associated. The new property is rented at $700 per week and the existing home at $600 per week. We now have a yield of 11.4% and earning about $215 per week or approximately $12,000 per year from this property.
Action 3: Convert the existing study/second living area into a bedroom and add a duplex (two 3-bedroom, three-bathroom dwellings)—all three fully furnished.
From the $5k worth of renovation and furnishings plus $450k for the two three-bedroom, three-bathroom houses and $20k additional costs, the house is now rented at $600 per week and the two new ones at $700. These give us a yield of 12.5% and earnings of $425 per week or approximately $22k per year.
So there you have it. It’s interesting to look at a property with an open mind sometimes and consider several options before committing to a course of action. Trying to obtain the best outcome – whilst ensuring you can fund the project – is the key.