hi all,
im reasonably new to these forums (have done some reading but no posts as yet) and have what may be a naive question:
i have read and heard (cant remember sources) that "generally" it is unwise to build a house as an IP. By this, i mean buy a block of land, build ONE house on this land, and proceed to rent it out…Obviously, if the sums add up there is potential, but there are the obvious pitfalls of building eg. long time before initial rental income (without the increased capital gains of building multiple dwellings/subdividing and ending up with 2/3 or more properties to either sell to offset initial outlay or rent out.)
The reason i ask the question is because my financial situation will soon be good enough to enter the property market (finally!) thought i do not possess the capital or borrowing capacity to develop more than one property at once. Again, i fear there is a hidden pitfall to building singular houses for IP but cant put my finger on it – can anyone help out with pros/cons and what they have learnt from experience?
many thanks in advance,
JamesSorry I cant help Cracker but I am waiting to see replies. I am in the same boat, new to site and investing, we are looking at building IP so I wait with anticipation to any replies.
Apart from the obvious nightmares that go with building a house from scratch, there is no rule that says it will be a bad investment. Building a house can be a stressful time.
The depreciation on a new building is excellent, so the tax returns will be good from that respect and this is one of the more overlooked aspects of property investing. If you build at the right price and can achieve a decent rent return, you can end up with a pos cashflow property after tax – tax free profit and the property costs you nothing.
Also, as far as I know, and I will stand corrected if wrong, the PURPOSE of the finance for the Land AND the Building is investment, therefore you can claim the holding costs from day one, even though there is no tenant in the property. Check with an accountant on that one. You would want the house to be built and a tenant put in within the same financial year I think.
Try to buy a block of land that will allow you to build multiple buildings on it (2 or more).
The only other problem I can see with building from scratch is the end cost of the new property may be too high for the equivalent existing homes in the area, so you may struggle to get a good valuation on it, and may not get that good a rent return either.
For example; you spend $300k on your new place, but the existing, but newer homes similar to yours are going for about $250k. You are over-capitalised a bit, and after 1 year it is just like all the other established newer homes around, so may in fact drop in value to what the established ones are worth. Run the numbers carefully and know the values in the area very well.
Personally, if it's your first investment; you may be better to buy an established, newer (less than 10 years old) property to get the right value, maximise the depreciation/tax advantages and you can still add value to increase the equity faster.I agree with Marc,
As a builder I'm used to what's involved with building a new house, and see time and time again clients ripping their hair out over the process of building a new house. If you do decide to hire a registered builder please keep in mind they are the professionals on site and they're the one that should take the stress and responsibility of building the house. If your a worrier I would buy an established property that is fairly new, to benefit from a decent deprecation. At the end of the day get quotes, do your sums and if you decide to build use a registered builder. Sleep well.
Thanks for your comments guys esp. mark, they are much appreciated. I was enlightened (if in fact it is correct) by the fact that holding costs may be claimable from day one. This is a handy little "cost break". Also, im not particularly concerned with over-capitalising, as i feel comfortable that with the research i have done my proposed IP will be bought/built at below market value. Im beginning to think it was a less informed friend/colleague that made me think twice about building, though further research can only help. Marc re: your comment on building more than one house, i agree entirely and as far as i know i am exhausting every avenue of building two properties at once, though it may prove beyond my financial reach currently. Despite this, with any luck, ill be posting here soon with some positive experiences for people to take reference from…
Cheers,
JamesHi
I have built probably 15 houses int he past 3 years, and love it, the key is planning, having the right builder, get the land for a good price, and do a worst case scenario and best case scenario spreadsheet. Im building another 3 now at Coomera nr Dreamworld, have a good builder, and I shall go to site weekly and also I ask for a mgt report weekly. It helps that I have a degree in property/ construction, but when I first started I was specific with every single room, things, paint colours, carpet, handles, letterbox, fans, kitchen design- builder appreciated it though as no dramas, stress, or problems.
Havent had any bad experiences yet! but they may come- life cant always be rosy, and I have a saying if you cant handle the heat get out of the kitchen!!- go find another profession or way to make some money, as yes sometimes things do stuff up.
Do heaps of research- and mainly learn from agents, what is selling, for what price, what are buyers looking for, and what do women want in the kitchen and bathroom!! and dont scrimp on bad kitchen applicances, cheap cupboards, or basic dishwashers!- goodluck
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