Originally published in the November 2015 issue of Australian Property Investor magazine.
Making money in small projects is not a cakewalk, but with tenacity and smarts, the payoff can be both substantial and, sometimes, beneficial to society.
So it is with 46-year-old Hitendra and 43-year-old Jyoti Jagdale. The couple now live in Northmead, New South Wales, but their journey from Mumbai to Sydney’s west was a trial unto itself. Hitendra was an accounts manager with a polymer manufacturer, while Jyoti held a great accountancy role at a large corporation. Around the time Australia was looking to introduce GST, there was a call for immigrants with accountancy skills. Hitendra says the lifestyle in Mumbai had become unpleasant and Australia presented his family with an opportunity.
“Mumbai generally had a lack of planning, no proper foresight, lack of infrastructure and was congested… It was a very busy lifestyle and there was no life, it was mostly work. We thought there’s a better life.”
In the mid-1990s the Jagdales applied to emigrate.
“For two and a half years nothing happened. I changed jobs, Jyoti changed jobs and we were doing quite well. In 1998 suddenly this thing came.”
This “thing” was immigration approval. After a short trip to our shores, they liked what they saw and decided to roll the dice in 2000. They arrived with a few hundred dollars, their nine-month-old son and a lot of ambition.
Jyoti’s experience and qualifications landed her work as a cost accountant, while Hitendra started working for a polymer distribution company, but was made redundant in 2005. Never one to sit still, he started his own mortgage consultancy business and completed an executive MBA in general management and strategy. He eventually gained his real estate licence in 2012 so he could offer property consultancy services to help clients build portfolios.
When the couple arrived in Australia, they bought their first home in Seven Hills, Sydney, for $250,000 and set about paying down the mortgage as quickly as possible. After their second son arrived in 2005, they decided to upgrade to a larger house, which is where they live today.
“In 2009, we invested in our first duplex site. I bought the property without doing much research. I had no idea what a duplex was. Somebody said, ‘you can build a duplex on this thing’. I didn’t know it, I just bought the property.”
Despite initial reservations, Jyoti urged her husband to take on partners and tackle the build.
“The finished duplexes were sold in 2012 at good prices and we made a return of 14 per cent that time due to subdued market conditions.”
The big deal
With the foundation set and their teeth cut, it was time to tackle another deal.
Hitendra was actively seeking duplex sites, believing the process of subdivision and creating multiple titles is a great way to build value. By staying in contact with agents, he was first to a site.
“A corner block with an 835-square-metre area came up near Wentworthville in a suburb called Constitution Hill [NSW]. I felt that Wentworthville was getting over-valued at that time and the best value was offered by adjoining suburbs, hence I moved a bit further from the railway station but still accessible by arterial roads and close to bus stops.
“There’s also a big Indian community out there, because there’s a temple and they want to conglomerate near the temple. It’s also accessible to the Sydney CBD and there’s lots of infrastructure.”
It was a deceased estate and the owners were keen on a quick settlement. The agent was listing the property for $380,000 to $420,000, so Hitendra put down a 10 per cent deposit and offered the top of the range without having organised finance or a building inspection.
“It was a corner site away from the station and I thought the corner site meant I could make detached duplexes.”
Light bulb moment
During discussions with the consultants, Hitendra discovered a way to raise the development ante and create a greater return.
“I consulted with an architect friend of mine to do concept plans for a duplex.
“My architect suggested that this was absolutely no problem, however if I wanted to take a bit more risk I could build units.”
This higher density option came about as a result of an affordable housing State Environmental Planning Policy (SEPP). In most jurisdictions, the state government may provide overriding policies that change what’s permissible under a local town plan. This SEPP meant Hitendra could apply for units to be constructed on the site, raising the yield and the potential profit, as long as the new accommodation would be made available for affordable housing.
“I approached the council and checked with the town planner who confirmed that if the proposal ticked all the boxes, potentially I could build units on the site. The risks were that there was significant community objection to this policy as some large developers had abused it, and if the state government changed, which it did in March 2011, the new government would change the policy.”
The Jagdales got things under way quickly. Their architect submitted a proposal to gain a development approval (DA) for the construction of eight apartments over two buildings in February 2011.
“The state government then changed in the March election and the new government changed the affordable housing SEPP significantly. Since we’d lodged the file in February 2011, our application would still be assessed under the old policy subject to certain revised criteria.”
“After we lodged the file, council came back with significant issues and we had to reduce the development to six units with above-ground car parking.”
Their new proposal had to address possible flooding issues to the proposed basement car parks, as well as setbacks. Hitendra says council didn’t want the site to be overdeveloped so he and the architect created the six-unit design.
“The council planners liked the new proposal, which blended in with the local street scape, and the floor-space-ratio was similar to the zoning permissible. The planners approved the project, however it was rejected by the councillors at the council meeting, along with many other similar projects.
“It was more of a political statement than based on policy.”
Another hurdle is the stigma that’s attached to affordable housing. There’s something of a not-in-my-back-yard (NIMBY) mentality because existing residents assume the tenants of affordable housing will have a negative impact on the community.
However, the scheme is actually designed to make housing available for workers on lower incomes, including nurses and public servants.
“There was an objection from one of the neighbours who made a lot of noise at an onsite council meeting. She made all her friends from outside the area park on the street on the day of the council meeting to prove the street had no parking and was congested and there was no room for any more development.”
Hitendra says some of the problems stemmed from bigger developers taking advantage of the SEPP guidelines to produce large-scale projects. The pushback had seen council take a hard stance on any developer looking to improve site yield under the scheme.
“[SEPP] was a good policy in principle, but it wasn’t implemented correctly and it got abused by some large developers.”
Hitendra says their architect advised them to take the matter to the Environment Court.
“A decision was taken to test my case in court and the result was positive on just a single hearing.”
Hitendra says it was one of the most exciting times for the project.
“It was a great feeling, especially after the months of uncertainty and anguish.”
Hitendra says in the end, the legal costs weren’t too bad as it only took one hearing to get the right answer, so the $25,000 outlay was worth it.
With approvals in hand, the team started in on the nuances of construction, and complying with the Building Code.
“For units there needs to be sound and fire separation, along with other requirements, which presents challenges during construction and can add significantly to costs.”
The design is such that the Jagdales’ complex looks like a small townhouse development, but actually provides for three upstairs and three downstairs apartments. Each unit has two bedrooms and some have two bathrooms. Every apartment also comes with a designated car space – three are onsite parks and three are on-street spaces.
“The first slab was poured in December  and around July  we got our interim occupation certificate. We were pretty fast once it started.”
Construction went relatively smoothly, although there was one moment when Hitendra thought he could be in for a nasty surprise.
“If your [floor] area is over 500 square metres, then you need fire hydrants and boosters in place. The certifier said, ‘Have you got the fire hydrants in place?’ We were really scared because the building was already there.”
As luck would have it, there were already fire hydrants with the correct water-head pressure outside the building, so no need for the Jagdales to do anything extra. It could’ve been a costly omission, however, and was certainly another lesson in being right across the legislation.
In the end, Hitendra and Jyoti sold three of the units and retained the remainder, which have assessed market rents of $440 per week to $500 per week each.
“The profit in pure numbers was an after effect, however more satisfying was the social aspect of providing affordable housing to key workers who would otherwise be facing financial hardships. The demographic that’s renting our units includes a single mother living with her son, a couple of recently migrated families, a pastry chef and a childcare worker.”
They had intended to retain all the units themselves but the construction funding required three pre-sales, so Hitendra achieved these via his client network.
“Some of my clients had faith in me and they bought those units. It was good timing actually – they got them at a reasonable price and made a great return.”
Hitendra says apart from a great financial outcome, he and Jyoti learned valuable lessons along the way. Firstly, success isn’t all about the quick money.
“Property development is like a five-day cricket test match – a tedious struggle but satisfying at the end.”
He also believes small projects like this create fiscal independence that gives freedom to small investors.
“Another advantage with subdivision is you can reduce debt by selling some of the titles so you’re not only creating equity but also getting out of financial slavery.”
Finally, Hitendra says support from family is all-important. He doesn’t believe the project would’ve gone ahead without one of his biggest fans cheering him on – but there was a melancholic footnote to the story.
“It was a very stressful period in September/October. September, my loan got rejected from one bank. Then my mother wasn’t doing well. She called me to India to come and see her because one of my cousins was getting married in late November, and I said, ‘No. I’ll come in January once my construction starts properly and everything is on track, then the builders can take over and I don’t have to be here.’
“She was there with my sister. The first slab was poured here and then I got the news that she passed away.
“She had recommended that I complete the project rather than selling the DA-approved site and she wouldn’t be around to see the completed apartments.”
Advice for those having a go
Hitendra has some advice for would-be developers.
“Prepare for the worst and hope for the best is my philosophy.
“It’s important to be in a learning mode constantly and not let your emotions get in the way of rational thinking and decision-making.”
Finally, Hitendra says there should be more support for mum-and-dad style developers looking to do small projects that help fund their retirement.
“Right now there’s a massive debate happening about superannuation.
“[The] government should encourage these forms of development as a form of reducing dependency on pensions. If investors achieve financial freedom, they don’t have to rely on government pensions.
“[It] should make it easier to achieve small development below a certain value or numbers, say under eight units or less than $3 million in end values.”
It’s a strategy that Hitendra believes would be a “win” for all – owners, government and tenants. api
Originally published in the November 2015 issue of Australian Property Investor magazine.