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From: Mike .


Building vs Established
From: Michael
Date: 2/25/00
Time: 4:36:48 PM

Hi,

My wife & I own one IP and are looking to grow our portfolio. We are currently trying to decide whether to by an established property or take the plunge and purchase a block to build a couple of villas on. We aren't sure of the pitfalls of this or how to structure a loan to achieve it.

Our bank lent us 100% for our 1st property and expect the same second time around. Any advice???

Thanks, Michael
 
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EAB

Reply: 1
From: Mike .


Re: Building vs Established
From: EAB
Date: 2/27/00
Time: 8:36:23 PM

Hi Michael. I have had hard times building new property, but the rewards can be good if you keep explicit records. Just watch out for GST after the 30th June if your building work and contract go past this date... 10% TAX. The good news is no GST on established buildings, only on refurbishments and other management costs.

Good luck EAB.
 
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Richard

Reply: 1.1
From: Mike .


Re: Building vs Established
From: Richard
Date: 2/26/00
Time: 10:11:34 AM

Hello Michael, I think I can answer some of your queries. I am buying a block and building a free standing house on it for investment. I have a financial arrangement with my bank (NAB) that they call a "building and construction loan". This provides me with a pre-approved limit with amounts drawn down for the block, legals etc and then for builder progress payments. I am also having the bank capitalise the interest until the house is complete so we don't have to find money from our own pockets to service this non tax deductible loan. The pre-approved maximum loan amount is based on an LVR of 80% (based on our own place and the conservative value of the completed IP). When the house is complete I will be converting the variable construction loan to a fixed IO loan.

The disadvantage of the this approach is that the interest accrued on the construction loan is not tax deductible (because the house is not yet an income producing asset until it is built - then when ready for tenanting the interest from there on in will be deductible) The advantage is that I only pay stamp duty on the price of the block of land (Vs land + building if I bought the property already established). I calculated that the saving in stamp duty will easily cover the interest accrued during building (which becomes a capital cost).

I am very happy with my IP because since commencing construction the value of land has gone up and the price of finished homes nearby is greater than what will be my outlay once mine is built (and purchasers of the built homes will be paying full stamp duty!).

Hope this has not confused you!
 
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