build ip or buy established
- Thread starter belleran
- Start date
You'd think one follows the other, no? If land costs go up, so do existing buildings (which have land under them). If building costs go up, so do existing buildings (because of replacement cost).
Alex
Hi again,
it depends if you want to re-sell it or keep it as in IP. there are many factors. just be aware that although new houses command a premium sale price and let price, once it has been lived in...the value will fall as much as 15%. So if it's an IP you are after, you need to calculate the costs of exiting and building and weigh it up.
The houses we sold brand new, we did really well. the new houses we kept as IP all dropped in value once lived in within the 1st yr (still CG but not as much) but over time, you will gain CG anyway but that applied to an existing house as well.
But I still prefer building for an IP for the advantages of instant CG, premium rental and depreciation. But with the escalating price and low supply of land, we may look at buying existing properties in the future. I find it's not that easy to get a good deal even with existing properties and have given up for now.
it depends if you want to re-sell it or keep it as in IP. there are many factors. just be aware that although new houses command a premium sale price and let price, once it has been lived in...the value will fall as much as 15%. So if it's an IP you are after, you need to calculate the costs of exiting and building and weigh it up.
The houses we sold brand new, we did really well. the new houses we kept as IP all dropped in value once lived in within the 1st yr (still CG but not as much) but over time, you will gain CG anyway but that applied to an existing house as well.
But I still prefer building for an IP for the advantages of instant CG, premium rental and depreciation. But with the escalating price and low supply of land, we may look at buying existing properties in the future. I find it's not that easy to get a good deal even with existing properties and have given up for now.
Thanks for the comments. I really don't like building and selling to see the agents pocketing say $12,000 or so and then paying the ato at least a third of the profit. I know the argument that to pay tax you are at least making money but.... really to hold is so much better if your circumstances allow it and let compounding do its work. I was going to build two, sell one and keep the other as an I.P., but am wary of what the market may be like next year after an interest rate rise or two. Having an lvr of nearly 80% may be unwise if it is based on selling one.
How are others approaching the property market in Qld at moment? I know Michael Yardney is saying 2007 is a year of opportunity but there are others who are less optimistic about the effects of interest rate rises next year. Inner city well located properties weather well but what about 20km out??
belleran
How are others approaching the property market in Qld at moment? I know Michael Yardney is saying 2007 is a year of opportunity but there are others who are less optimistic about the effects of interest rate rises next year. Inner city well located properties weather well but what about 20km out??
belleran
Hi Sue - just wondering how things panned out for you. Would you currently consider building as opposed to buying at the moment?
Building your IP has some advantages like you only have to pay stamp duty on land price. You can achieve CG while its being constructed and also premium rent + full depreciations, as its new. BUT only if your builder does not delay construction, otherwise you have to keep on paying interest on borrowed amount while IP being constructed and there is no income from property. It could really make your cash flow very tight, especially if construction gets delayed in final stages when you would have borrowed maximum from bank .
Regards
Regards
Sorry if this seems like a silly question.
If you were to buy a block of land and build, you can claim the interest from the loan on the empty block of land as a tax deduction (if it will be an IP), yes?
Just say the land is $250,000 and the house will cost $150,000. Can you claim the $150,000 building costs as a deduction as well?
If you were to buy a block of land and build, you can claim the interest from the loan on the empty block of land as a tax deduction (if it will be an IP), yes?
Just say the land is $250,000 and the house will cost $150,000. Can you claim the $150,000 building costs as a deduction as well?
Yes, you can claim interest on your construction loan as well.
I believe that existing stock represents better value than new-builds nearly every time. The past few years, the market has been growing so fast that the CG during construction makes it appear that new-build is cheaper, because people only take into account the cost of the land at the time they bought it (ie 6 months or a year earlier).
So you buy land for $100K, build a house for $200K, and you say your cost is $300K. By the time you've built, the land has gone up to $150K, so you could sell for $350K. People perceive they've created $50K equity by building, but it's actually because of the CG on the land whilst building, not the act of building itself.
These areas are often "new" areas with little or no existing stock to compare to, but if there were established homes they'd perhaps cost $300K. People say "I don't want to pay $300K for an established home when I can buy a new one for $350K!". But as pointed out, the new home depreciates at first. Five years later, both homes will have the same/similar value. Even if the newer home was worth a bit more, you have to consider how much more it needs to be worth to compensate for the hassle of building and the fact you were without rent for 6 months whilst building.
Yes, you get better depreciation deductions on new-builds, but that's because they're actually depreciating more. I'd rather make a profit than make a loss just to get a tax deduction and get one third of it back!
I believe that existing stock represents better value than new-builds nearly every time. The past few years, the market has been growing so fast that the CG during construction makes it appear that new-build is cheaper, because people only take into account the cost of the land at the time they bought it (ie 6 months or a year earlier).
So you buy land for $100K, build a house for $200K, and you say your cost is $300K. By the time you've built, the land has gone up to $150K, so you could sell for $350K. People perceive they've created $50K equity by building, but it's actually because of the CG on the land whilst building, not the act of building itself.
These areas are often "new" areas with little or no existing stock to compare to, but if there were established homes they'd perhaps cost $300K. People say "I don't want to pay $300K for an established home when I can buy a new one for $350K!". But as pointed out, the new home depreciates at first. Five years later, both homes will have the same/similar value. Even if the newer home was worth a bit more, you have to consider how much more it needs to be worth to compensate for the hassle of building and the fact you were without rent for 6 months whilst building.
Yes, you get better depreciation deductions on new-builds, but that's because they're actually depreciating more. I'd rather make a profit than make a loss just to get a tax deduction and get one third of it back!
Just to confirm ozperp's statement, you can claim the interest on the land, so long as it is your intention to build for investment. See p 10 of this publication by the ATO, where it states:
ATO said:
Yes... see your accountant for specific advice.
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