Building to Invest

Is it worth going out and buying land then build on it to invest in property rather than just simply buying established houses and units. I see that in some areas that are growing that it is stil quite cheap to buy land and build compared to buying the equivilent already done.

From what I have learnt from people i know that are just building homes to live in, as soon as they are done the value has already dramaticly increased past their initial outlay.

To me this seems like a good way to get into the property market a little cheaper but also then the house is new so greater depreciation value. And the rent to loan interest ratio should be a little better.

What do others think on this idea especially ones that have been investing in properties. Me, I am only starting so would like to hear what others think.

Thanks
Glenn

 

Hi again Glenn

We only have a couple of IP's and one was a new build next door to our existing house.

Personally I agree a new build can be a good option, provided you have the cashflow to sustain it through the period of nil rent while its getting built. This might depend a bit on the state of the market as you might get some bargains in established property, particularly if there's another .25% interest rate rise.

Some of the 'instant gains' people have made building in the last few years probably aren't typical. In a slow market or one experiencing a downturn, people might spend well above what they could buy an established place for.

Here's a non-exhaustive list of advantages and disadvantages of new vs old :

ADVANTAGES
Good depreciation allowance
Lower maintenance
More sought after by tenants
Ability to include exact types of inclusions local property managers say tenants are after
Possibly quick added equity if project goes within budget
Possibly better quality / range of tenants
Less stamp duty (offset by the GST paid on the build)

DISADVANTAGES
Long period of nil cash flow while build happens
Potential for delays and bureaucracy from local authorities
Hidden costs for stuff that is forgotten in an established place (driveway, garden shed, turf, letterbox, fees to connect services, etc)
Land in good positions, if its scarce, can often be overpriced in comparison to an established, ready to rent house
Increasing costs due to environmental and other building regulations
The potential for typical building horror stories
Might need a bigger deposit or have more hassles borrowing the dough

If you find a really good block of land that has some rarity about it, could all be worth the risk. If its a block in a 'typical' estate though, it might be cheaper and easier to buy a finished place straight from the developer, or somewhere else established. Probably need to run the numbers depending on the suburb and rental demand etc

HTH
Cheers
Carl

 

I guess I'm biased in this regard, but the only property I buy is for builds.

I have bought established properties in the past, mainly run down neglected ones, that needed a quick facelift to make them habitable.

But since 2001, its only been demolition jobs for the land value, or vacant land to build new.

To date, the value has always been much greater than the initial cost. Usually much higher than what I had planned. This is a function of the market rising much higher than what could be predicted, and quite often because the underlying block value has increased dramatically.

Carl pretty much sums it up with regard to the pros and cons, so in the end it probably comes down to personal choice.

I guess for me, its because I'm hooked on the building process, and the fact that the instant equity hit has been intoxicating.

KEvin

 

Hi again Carl

It seems in my area there really hasn't been a slump in the market. The houses seem to be still moving quite well and as far as I'm concerned are often well over priced yet people are still paying the prices. Example is there is not that large of a cost from buying a small 3 bed house on 1/4 acre (nothing special about the land position either) to bulding one of twice the size in house on a similar size block. I would probably consider only building the first house just to get started and in on the mini boom we seem to be having here. The land that i'm looking at is sort of a more up market area.

I am going to start looking a lot harder for a bargin which may arise if an increase in % goes through but from what I have seen around here in the last 10 months I might have trouble. Mind you i'm talking around $250000 - $280000 houses not $500000 ones

Glenn

 

Blade,
Notice you are on the Sunshine Coast.
I would target places that have access to the train line around Landsborough and surrounds.
Large blocks with unit potential with a rentable house.
Now you have holding income, options ( develop or not develop), and potential.
Perfect investment property in my opinion.

Kevin..

 

So whaddya think land and build cost would be mate ? ie. how much would the block be and how much would you allow for building ? Is there a strong demand for rentals ya reckon ? Just interested

PS just saw Kevin's advice - sounds like something to look into Kevin - where are most of your builds ? Any recommendations for builders etc ?

Cheers
Carl

 

I'm at the nothern end of the sunshine coast, well actually gympie (not my fault they call it the sunshine coast hinterland). Anyway

Land is still available for 79 to 95k. And most just seem to be putting the cheap mass builder homes on the blocks. So what i've know from people they are getting out of it for around 280 to 300k and immediately selling for at 50k more than initial. Growth for the area is predicted to be quite good for the next 5 years.

As for rental demand yes there appears to be quite alot and units seem to do well from what I have simply observed. They always seem to be tenated. And the estate agents are aways calling for more rental props for the last 18 months. The town may be known as a welfare haven but these people still rent and often pay good amounts. Guess thats why units seem to always be filled.

I will also be looking for large blocks because many of the older ones are actually 2 blocks in one (like my parents ) so potential to divide and build.

Just one thing if you look at this town as a potential keep in mind that there is a highway bypass upgrade coming and potentially a dam. No point getting a place if your tenants need scuba gear to live in it or they have to leave the front and back doors open so the traffic can go through.

Glenn

 

Hiya Carl,
Building all over at the moment.
1. Perth...coastal suburbs near the beach, using a spec. builder on a turnkey basis.
Cost of land was $138k and $150k, build cost is $195k and $186k.
Market value $495k each.

Have used a few different builders in Perth over the years and always had a happy outcome.

2. Karratha ... land cost $82k and $87k, build cost $205k plus 40k to complete. ( long delays with builder tho')
Market value $590k each.

3. Mt Isa .... land cost averaged $64k, build cost $310k turnkey, market value $495k.
Started with four of these, and have since organised syndicates with investors and doing another twelve.

Learnt from the above drama with a builder in a regional area, so we organised to take our builder from the Sunshine Coast up with us and speed up the process.

Blade, Gympie has been going gangbusters.
South Ridge has been really successful I hear.
A lot to do with the brilliant marketing lady handling the sales.
We're doing a 60 acre rural res subdivision on the outskirts.
Just got DA for 32 lots so now the fun begins.
We've enlisted that same brilliant marketing lady to handle ours.

Probably do some house and land packages as well as sell the vacant blocks.

Then its back to Karratha where we are gearing up to start building in conjunction with our Qld builder.

Kevin..

 

Kevin

Southridge is one I was looking into. It has the location that is in demand and from memory some not to bad of contoured blocks. Some estates here a mountain goat would have trouble getting around safely.

While i'm on holidays this week i'm going to go out and have a look around and see what is there. There was another estate but I think all the decent blocks have gone.

One of my operators from work has a brother in developing and I think he is about to open up some more of his land soon so I'll have to get him to keep me up to date.

I think there is a real good opportunity to buy larger blocks of land near the cbd and move the existing building and replace with units. The best part about the units is that none of them are flash. Just very simple units yet they seem to always be full. I guess that alot of people in this town that rent really aren't that concerned what the place looks like as long as they have somewhere to rent.

glenn

 

I met a guy 2 wks ago from Noosa who has bought over 25 blocks in that area, and has done really well.
Gympie, apparently has taken everyone by surprise.

The govt. I hear is planning for it to be a regional hub.
This can only help with property values.

I'm really keen on investing in Qld.
Was planning to move over next year, but it looks like we will be too busy in WA for a bit longer.

KEvin

 

Kevin, what can I say ? WOW ! And I thought I was busy building one house per year, and that's only been for 2 years ;-)

 

Thanks Carl.
I started out doing just one at a time and on my own, then did a jv with with another keen, motivated and like minded investor buddy, and its grown from there.
It sure has speeded up the process by teaming up with others.
Its a lot more fun too.
The network just keeps building and its really turned into a journey now.

Quite life changing really...

Kevin..

 

Hi Kevin

Sensational story. Are you doing this full time or do you still have a daytime job? where are you based and how do you find dealing with projects interstate eg. do you employe a local project manager or do you make frequent trips to check on things?


cheers
Gazza

 

Hi Gazza,
I still have a full time job working shiftwork with lots of time off.

Was planning to do the developing full time after this year, but in reality these projects are horrific cashburners, and any delays ( which are inevitable) just puts back the date when we can pull the pin.

Its not far off though.

I am based in Karratha atm. and most of the interstate dealings is easily done by email, attachments, skype and phone calls.

The builds in Perth are turnkey so the builder handles everything.

We have an excellent relationship with the Qld builder who is handling Mt Isa, so once again we just keep the communication lines open and they report back.

For me the key, is this relationship building, and to have at least one person on the ground in each location, as so far its working out.

However, I do get away probably every other month for 10 days to 2 weeks and this gives me a chance to visit the various sites, but this is more by choice than by necessity.

At the end of the day, my buddy in Qld is an ordinary Joe Blow and so am I, and all we did was dare to dream and have a go.

If what we have achieved serves as inspiration to other Joe blows' then I am a happy man..

In fact its the next phase of our investing journey.

Kevin

 

Well I'm going out this arvo to have a look at a few of the estates and see what they have left to offer. it will give me somewhere to start. I've got to do further research on a builder though but know what land looks like will probably help me out there a bit. I guess blocks that offer best utilisation and least earthworks / retainer walls is alot better and probably cheaper in the long run if they aren't initially.

Any other things i should look for in a block of land??

cheers
Glenn

 

I'm still muttering jealously about Kevin's projects (nice work Kevin! - no idea how you manage that stuff remotely ) ... but I'll throw my 2 cents in about earthworks etc.

In comparison to Kevin's figures, ours not as rosy but it was still fun :

Land (2003) $90K
Stamps etc $3K
Council and approvals $2K
Earthworks $8K
Retaining walls $6K
Connections $3K (needed property pole etc)
Construction (3 bed plus study 2 bath, security, dlug) - $146K
Flooring $6K
Concrete paths etc $7K
Driveway $3.5K
Septic treatment system (no sewerage) - $15K
Extra stuff $10K

It was the extra stuff that took me by surprise even though I had allowed for it - I dunno how best to describe it but all the cr_p you do't realise add up so much - eg. stuff for tenants like digital tv aerial, 2 x split system air con and installation, clothesline, shed, window coverings, phone, fencing, turf, mulch, bobcat etc. plus the filthy council hitting us up $750 to connect to the water which was right on our front boundary, anger management course etc!)

So I guess my point was, the land was a bit of a bargain at $90K (now $160K), and we knew we could get a house done for around $145K, but the final finished price was one year of holding costs plus the additional $60K or so mentioned above. There weren't really any huge project blowouts or over-spends

$15K in septic treatment system is a bit of a killer, it its an estate with sewerage that would reduce to connection fees. (Also since then I have found the Maleny-based Biolytix mob who do a system for about half that price)

If it had been an easier block, we could have saved $10K on the excavation (and wasting 6 months with Coral Home who in the end refused to build on the block because it wasn't 'easy' enough), but there would still have likely been 'some' earthworks. An easier block wouldn't necessarily have saved a lot, but might end up more attractive for tenants.

In fact you might buy a challenging block a lot cheaper - I stuffed up the earthworks for the above project and had to re-do it, hence the cost overrun in that bit ... with the right combination of a drott, excavator and tipper working together you can get a lot done for not much money, if the operators are good (Kevin will no doubt know a hell of a lot more about this than me).

Hope that helps mate - have fun ! BTW the value on the place above is now around $400K and helped fund some more cash for our PPOR we're building, so it was all still good

Cheers
Carl

 

Kevin

thanks for your reply. What is your strategy once a project is completed? Buy and hold, draw down the equity and repeat? or do you sell and take the profit less CGT?

Carl

how long is your project and what is the interest holding cost or was that already taken into account in your breakdown? What is your strategy on completion?

thanks
Gary

 

Hi Gazza

I'm a strategy-free zone ;-)

The only reason we bought the land was its position next door to our PPOR - and we risked someone building right on our boundary and destroying our privacy.

So we bought and built to protect the PPOR aspect, but now we're moving out of that one anyway

The area is good for rentals (meets the rental reality and other Navra criteria, with the exception of public transport thanks to the useless local Council )

We're only buy-and-hold now - after letting some gems go in the past through lack of education, we're determined to keep developing/fixing things that can generate some equity and move on to the next one.

And no, I didn't include interest holding costs in those figures - and it was a lot longer than it should have been thanks to Coral Homes bailing on us. Its a long termer for us though, its a nice solid house on acreage and it rents well so we reckon we'll be right. Touch wood.

Cheers
Carl

PS edit ... sorry to answer the other question it took about 18 months

 

Some good costings there Carl,
All reasonable in my opinion ( I guess I am used to prices in regional areas !!)
Love the pics of your building progres btw...

We look to be engaging the Maleny based bio system in ours as a building covenant.

The subdivision has been squarely pitched as 'environmentally best practice.' which is a first for the area and has got lots of attention which is a huge positive.

We used the local Landcare branch as one of our consultants, and it has made a big diffeence.
Resulted in a DNR problem being resolved very quickly.

Also, there will be no dozers on site for the clearing. We are using a mulcher to mulch all remnant vegetation and leave the mulch on site as ground cover.
WIll try and post a pic in a sec..

Fact is I am no expert.....I just say 'yes' when they make suggestions on how we should proceed next.

Gary,
Because its a 'development' one of the lenders requirements is the need for presales.
Essentially, they want coverage of the total lend (negotiable) before they lend on the infrastructure costs.
Then they want the money back first, before you can have any of the profit. Nett result is you take on a mindset of 'sell...sell...sell' to retrieve your initial investment, and get some profit out.

Having said that, we will keep one or two blocks each, as they can also legimately form part of the presles.

Strategy, like Carl is to keep it loose ( no set strategy).

Plan is to turn over the Mt Isa ones ( reduce risk and allow us to cash up quickly) and then start to hold the better located ones closer in to the city areas.

The land subdivision was purchased in October 2004 and settled in Jan 2005, and we have been working on it ever since.
Biggest hurdle was DNR signing off in March 06, and we got DA from the council last week ( Aug 06)

Its a low entry project to start with, and holding costs were approx $850 per month ( interest repayments)

Once we start the marketing ( effectively now) and commence with the siteworks, the lender typically allows 12 months to completion. I am hoping it will be a lot sooner than that..

The ones in Perth are keepers.( for now any way !!)

Kevin

 

Mulching...not dozing..

Its a bugger being a techno phobe...
Tried to add pics to the previous post and failed.....