Where to start when planning your build
If you’re thinking about building an investment property, it can be
challenging to know where to start in learning about each stage of the
process. From securing your loan and finding the ideal block of land, to
choosing the type of development you want to build and finding the
right builder to construct it, there's plenty to understand in the real
estate business.
In all the excitement, it’s easy to miss the most vital step in the
whole process, which is laying down the foundation that will help you
make smart and informed investment decisions from the beginning. Before
getting stuck into what to consider if you’re looking to build an
investment property, we recommend reading our article about the Seven Common Property Investment Mistakes people often make.
If you’re confident your foundation is set and you’re ready to begin
planning your build, Director of Australian mortgage management business
FinancePath, Chris Collard shares his expert knowledge on the key things you should consider to be a successful property investor.
Numbers
The first and most important consideration for property investors is understanding the numbers as they will largely determine what you can afford to build and the areas you can afford to build in.
“Understanding your personal borrowing power and your ability to make repayments and cover ongoing costs associated with an investment property is the first thing you should think about,” says Chris. “There’s no point researching areas you want to build in and choosing a particular type of development if you simply can’t afford it.”
Finding a mortgage broker you can trust can help you understand home loans, rental returns, capital gains and more. While they're not property investment advisors, they still have a lot of knowledge to share, especially if this is you're new to property investing and this is your first investment property.
Reputable builder
Always choose a reputable, third-party builder as it gives you more options when it comes to securing finance.
“Very few lenders will consider loaning you money if you are an owner-builder because there’s too much risk involved,” says Chris. “If a bank lends money to an owner-builder, it means they have to back the person to complete the build, but banks prefer you to have a valid building contract that outlines exact costs and deadlines.”
“If you have a third-party fixed-price contract in place with a reputable builder, the bank will assess your personal circumstances and ability to repay only the loan. And because they can see the history and quality of the builder’s work, they’ll know that the job will be completed within the budget and will be able to evaluate the property.”
Another key reason for engaging a reputable builder is to ensure you don’t build an investment property and later discover it has a whole range of defects and renovating needs. By choosing Metricon, you have more than 40 years of experience behind you and a Lifetime Structural Guarantee so you can be confident you’re investing in quality. You also have the opportunity to walk through one of our display homes before making any investment decisions. We also offer handy new home and land packages to make it even easier for you, taking care of everything.
Property type and location
The location of your property and the type of property you choose to build is another key consideration as it needs to be attractive to tenants. Ensure your investment will have the fundamentals of a desirable property including access to schools, transport, freeways and amenities. These are hugely important in terms of rentability but will also contribute to the saleability of the property.
As highlighted earlier, the numbers will impact the type of property you choose to build, but Chris points out that an increasingly popular investment strategy is buying a block of land with a future title date.
“Choosing to buy in a new estate can be a smart move as you can secure vacant land today but settle on it in the future. The advantage is that you have a clear timeline and in a lot of instances it gives you 12 months or more to continue to save for your new investment property,” says Chris.
“You do however need to be mindful that to be able to secure finance, the funder will only assess you at the time of the land titling. Therefore, you need to be confident that you will be able to secure finance in the future.”
You also need to ensure you can afford to finance the build when the land settles; otherwise, you’ll be left making repayments on a block of land with no income being generated.
“There is no point buying the land if you can’t afford to build on it,” says Chris. “Often, people get excited that a block of land is cheap and within or lower than their budget, but forget they need to consider building costs. They risk going backward financially if they can’t afford repayments on the land without a rental income.”
Another popular investment option is locking in a fixed land and build contract so if prices increase over the next 12 months, you’re locked in at today’s prices. This is a good idea when the property market is turbulent.
Cashflow and tax
Before building an investment property, it’s important to understand the ability of your property to generate cash flow. Chris recommends asking yourself these two questions: What will your cash flow be once the property is built? Where will you stand once you pay mortgage repayments, cover maintenance cost and other fees, and write off depreciation costs?
“It’s important to understand what the post-build costs will be and how that will affect your cash flow to ensure you can afford to hold the property. Work out if you will be left with a cash surplus or deficit and if it is the latter, consider whether you can you afford and sustain that."
There can be tax advantages associated with choosing new property over established property, and one is that you may be able to take advantage of the depreciation benefit on the fixtures, fittings, and build of the property which can assist with annual cash flow and holding the property long-term. It’s always recommended you seek taxation advice from a qualified professional to understand what you are eligible to claim.
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