Building an IP vs buying preloved dwelling

[Smouch]

I am new at all of this and I am looking at buying a few investment properties with a view to holding them for the long term. I am a PAYG government employee.

As such I would some thoughts from you boffins about building my own IP vs buying a property that is pre-loved and using it as an IP. More to the point issues such as depreciation of fittings and other tax type issues etc.

I am sure there is stuff like this in the forums but I would appreciate your thoughts and any links that discuss such issues.

Regards and thanks in advance

Smouch

 

[Perp]

Depreciation is a factor but shouldn't, in my view, be the deciding factor. You first need to decide what your investment objectives are (do you need to be cashflow positive? or could you afford to hold a negatively geared property for a while if you anticipated very strong growth), and this will dictate the kind of property that you're looking for.

If you're after long-term capital growth, and can afford to hold a negatively geared property for a while, then I'd go for an area where the fundamentals are strong. If you can build new in this area, and "land price plus cost of building" is comparable to a similar standard established property, then build and get the depreciation benefits.

But if this equation doesn't work, or you can only get depreciation benefits by building in a fringe area that may not experience strong growth for a long time, then I'd forget depreciation benefits and go for an established property with stronger prospects for long-term growth.

 

[yo yo ma]

Summarised from this post, the advantages of new properties include:

• Greater depreciation
• Less maintenance
• Easier to rent at higher price
• More appealing to tenants

Disadvantages of new properties include:

• Hard to add value
• Higher purchase price
• Usually get hit first if market is slowing
• Slower capital growth (in comparison to established properties in the same area) for a few years

Advantages of older properties include:

• Easier to knock down
• More historical price data
• More solid/consistent growth
• Purchase price set by vendor without commercial manipulation
• Potential to renovate/add value

Disadvantages of older properties include:

• Higher maintenance
• Future requirement for renovation
• Rent can be lower

All strategies have pro's & con's... pick which one is best for you.
Steve

 

[Smouch]

Thanks

Thanks for the tips. I appreciate the time you have taken to give me your thoughts.


Smouch

 

[Tin Tin]

My old man has made some money out of building spec homes and holding.. only just started doing it recently and the market has been moving too.

He is buying anywhere between 15 and 25km from bris cbd and his strategy is working well.

My only question is.. What happens when the market flatten out? Historically capital growth still continues in the areas closer to the CBD but slows in middle and outer suburbs.. For this reason I would prefer to buy established houses closer to the CBD.

On the upshot, he has made his money in the construction phase (as well as capital growth) as many people like to see a finished product and are obviously prepared to pay for this.

 

[The Y-man]

We found new properties had more unexpected repairs (which were often already fixed on preloved ones). Typically to do with plumbing, electrical, appliances (ovens, hot water units)

Tax benefits for fittings were on par either way - as you could put new fittings into an old place. The only difference would be building depreciation.

You might also have more of an emotional attachment to an ip you build - eg can you handle your very first tenant coming in and trashing the joint?

Cheers,

The Y-man

 

[Smouch]

For Tin tin,

Thanks for your advice, I see your point about changing markets but can I ask is your dads plan to hold for the longterm from now? when you say he made his money, is that from rent or selling a few years after they were built.

For Y-man,

Thanks for making me think, I hadn't actually thought about the emotional side of the IP. Also, when you bought an established property, would you consider upgrading things that generally might go wrong =>wiring hot water etc with a view to replace the 12yo hot water system now so that it doesn't break on a tennant and you can also claim the tax deduction?

For Yoyo mama, that link was very good and it is reflected in the FEB 2008 issue of 'your investment property' magazine pg 80 and onwards.

Cheers all

smouch

 

[Modal Harmony]

We built our first IP in early 2003; bought the next 4 'preloved" houses (3 standalone houses; 1 townhouse).

We would avoid building again (even though we had NO dramas with builders or their subbies) since you need to have capital tied up quite early (in the form of progrress payments) before the tenant actually signs the lease.

The other 4 properties are between 10 to 5 years in age and brick veneer construction and we have only had relatively minor maintenance issues to date. We had to get depreciation schedules prepared for each property for the Accountant.

Hope this helps!

 

[sparky23]

Hi Smouch

This is another subject which people have differing opinions on and there has been plenty of debate about. There has been plenty of success from investors favouring either way.

My preference is to build unless you are buying pre-loved on a large enough block to add to later if council will allow it. One big factor can be the rent, 2 of my properties are in an area where rents are generally around $220 - $250 pw with plenty of old houses around but I receive $340 and $365 pw for my new houses. I expect to be well ahead with the end values by completion.

Sometimes you can pick up an extended land settlement which reduces holding costs whilst you get plans through council and have everything lined up and ready to go so that whilst the area is achieving the growth you are not forking out too much whilst you are building.

 

[Wake]

Hi Smouch

We have done both. We built IP's 5,8 & 9, which were project homes by builders of our choice on land in new estates. In each case, the completed property was valued at least 20% higher than the land plus construct price, and each have continued to get good CG, plus being new properties in desirable locations they have better rent returns than older houses in the areas. In each case, we had time prior to the land being registered to sort out the building contract, and building was pretty straight forward so holding costs were not too bad, and were far outweighed by the CG we have experienced. For us the key has been finding the combination of land at the right place in the right location plus building costs which come in below end value. Not always easy to find especially with construction costs being so high in some areas at present.

We are currently building a duplex, and have another 3 lot devt ready to go in the next few months.

We have been just as happy with the outcome of most of our "pre-loved" IPs.

A couple of points to consider:
Building is not for the faint hearted - especially interstate projects.
If you sell within 5 years of building you may need to pay GST, which could seriously affect your profit.

Wake