Buying Land to build IP.

[DavidN]

Hi all
Not sure if this is the right place to put this question but I wanted to know if people buy land to build their IP and what problems they see with doing this? My concern is having to buy the land and having no rental income to cover the interest payments until the house is built. Also since the land is intended for an IP are the interest payments claimable within the Fin Year if the house hasn't been completed and rented out yet?

Any other advice or ideas or links to other threads would be much appreciated.

Thanks
David

 

[regrow]

I wanted to know if people buy land to build their IP and what problems they see with doing this?

Buying land and building a house on it is just one way of investing. I have built 3 houses and just about to start the 4th. No problems as such but it takes some effort on your part to check the work at each stage of construction before you hand over the cash.

You also need to allow for blinds, tiling, paving, letterbox, tv ariel, clothesline, phone conection to name a few.

My concern is having to buy the land and having no rental income to cover the interest payments until the house is built.

Yes you will need to cover the interest until it built with no rental income. Although the interest will start out small and get bigger as you draw down the loan. I budget roughly 10k to cover this.

Also since the land is intended for an IP are the interest payments claimable within the Fin Year if the house hasn't been completed and rented out yet?

I have claimed interest and costs before it has been completed and rented out.

I suggest that you seek advise from your accountant prior to claiming anything though.

Regards

Regrow

 

[RumpledElf]

Be a cheapskate and subdivide. So instead of getting land at land value you get land for the price of a stack of government fees and a surveyor's time

 

[Pushka]

Claiming for Land for IP

The Ato booklet, Page 10 I think, is quite clear that you can claim interest from the time of purchase if your intent is to build an IP.

This is one from a couple of years ago but these kinds of provisions dont change:

I thought it was going to upload the whole document. Hmm will find the relevant bit and post it for you...

Similarly, if you take out a loan to purchase land on which
to build a rental property or to finance renovations to a
property you intend to rent out, the interest on the loan
will be deductible from the time you took the loan out.
However, if your intention changes – for example, you
decide to use the property for private purposes and you no
longer intend to use it to produce rent or other income –
you cannot claim the interest after your intention changes.

The document is available on the ATO website - should be easy to find.

 

[DavidN]

Thanks for the quick feedback and information. I'll do some more digging.

I was contemplating purchasing house and land package (sister-in-law works for a group) but never bought an IP in this way (bought existing properties before). Any one have thoughts on this?

Thanks again
David

 

[Propertunity]

I was contemplating purchasing house and land package (sister-in-law works for a group) but never bought an IP in this way (bought existing properties before). Any one have thoughts on this?

David, the best time to buy a house & land package IMO is when it is cheaper to do so than to by an established 2nd hand home.

Buying in new estates is risky also. If we have a market downturn, lots of new FHBs in these estates have to sell at firesale prices. Even if you don't have to sell, their comparative sales figures drag your house value down - not good . Also 2 streets over the developer is getting trouble from his lender and drops the price for brand new down to BELOW what you paid - and yours is now 2nd hand - also not good.

My presonal preference is to buy older property in an already established area. Already has schools, shops, transport etc - not somewhere out in the boon-docks. Or if you really want new - look for an infill site in an established suburb.

 

[sue78]

it's easer to just buy an established house, even better if it's already tenanted.

if you build, it's a lot of hassle. you would need to aim for immediate capital growth.

I always build houses, keep some and sell some. I prefer building coz for me, the risk is minimal since I make my money when I buy the land, I have immediate CG, and rental return is higher on brand new properties, easy to rent out and the depreciation is excellent.

But the main thing is the immediate CG. I ave $100k per house, maybe more...lost count. I only build one house a year.

 

[ems]

it's easer to just buy an established house, even better if it's already tenanted.

if you build, it's a lot of hassle. you would need to aim for immediate capital growth.

I always build houses, keep some and sell some. I prefer building coz for me, the risk is minimal since I make my money when I buy the land, I have immediate CG, and rental return is higher on brand new properties, easy to rent out and the depreciation is excellent.

But the main thing is the immediate CG. I ave $100k per house, maybe more...lost count. I only build one house a year.

Sue,

Hope you don't mind me asking but have you managed to achieve $100k per house these past few years? Obviously in the boom times it would be easier but a lot harder this time of the cycle.

David,

We have built both our IP's. IP one was built in 2007 for $440k and was valued last year at $680k. The land was a steel which helped greatly and the $440k was lock up stage. We did all the landscaping, built and rendered front wall and rear deck which took us 4 months. A lot of hard work but worth it. The second IP had no input by us. As soon as it was complete we had tenants in. The tenants have been very good in both properties and keep both places nice and clean.

Ems

 

[Philip Thomas]

Developing Vacant Land

Building an IP house works fine & has many benefits as long as you do your homework first & make sure its feasible / financially viable.

Before you make a move on the land….

Understanding where the market demand is, what the market wants (I gather its rental) & what they can afford is important. Talk to a few local builders / project home providers about the total cost of construction, including DA, CC & OC.

Also check out the cost of completed homes in the area to see how your stacks up. If there are no new houses in the area look at comparable real estate in similar locations. Check established housing prices the area you plan to build & see how they compare.

You also need to have finances in place for the land acquisition, assurance with construction finance & cashflow to fund both.

When you are dealing with vacant land because of holding costs, delays in development directly impact your bottom line. Look into possibilities of being able to control the site until DA approval. This way you can step straight into the build.

Sites that drain out onto the street are also often easier as they don’t require negotiation of drainage easements. If it’s a new subdivision & the block drains away from the street, check that an easement for drainage is in place.

Philip

 

[Minx]

Sue,

Hope you don't mind me asking but have you managed to achieve $100k per house these past few years? Obviously in the boom times it would be easier but a lot harder this time of the cycle.

David,

We have built both our IP's. IP one was built in 2007 for $440k and was valued last year at $680k. The land was a steel which helped greatly and the $440k was lock up stage. We did all the landscaping, built and rendered front wall and rear deck which took us 4 months. A lot of hard work but worth it. The second IP had no input by us. As soon as it was complete we had tenants in. The tenants have been very good in both properties and keep both places nice and clean.

Ems

Very possible. Would you believe if I told you that some people I know make roughly 500k a year doing this?
They are however reg builders and have the money upfront for these projects hence no holding costs.

 

[rugrat]

If you are checking out H&L packages - make sure you do all your homework and that what you are getting suits your requirements. Most of these H&L packages require you to purchase the land and then draw down on the construction (which, IMO, really is no different from buying a block of land yourself and then hiring someone to build for you). This may suit you, or may not. Depending on the company you are dealing with you may be able to negotiate payment on completion (although you still pay your 5-10% deposit) - although be aware they will likely hit you up for a little more money to do things this way. This is what DH and I have done, both for our PPOR and for our first IP which is due to be completed next year. We have had to pay about 8k??? (cann't remember exactly, have it written down somewhere) more overall, and of course stamp duty is on the entire purchase - not just the block of land - doing it this way. But it suited us better because it meant we didn't have to arrange finance until close to completion, or pay any Loan until the place is actually completed, about 9months (or more) after signing contracts. Financially it works out costing us about the same (maybe 1k more) buying with payment on completion, as it would have to buy the land and then build - but with alot less stress for us with the banks as I am currently on maternity leave.

The important thing with building is to make sure you have enough to cover the holding costs and contruction prior to receiving a rental income, researching the area thoroughly, and ensuring the quality of the the construction. Buying an already established property is probably a lot less stress (I am assuming I have never done it), But it really depends on what you are hoping to get out of the purchase and the final cost involved. No point buying old if it is cheaper to build, and vice versa.

 

[sue78]

Hi Ems, just sold one in April and it was about $100k. Will be selling the next one too coz it's too big to keep as an IP.

The next one may be a bit less, not sure but it's ok as long as I don't make a loss.

Minx - I wouldn't build 5 a year, it comes with a host of problems..especally if it takes too long to sell. Even builders have gone belly up in recent times. At the end of the day it's like a business and needs to be managed well, most important thing i sknowing how to manage cashflow. With building, a lot of out goings and profit takes a long time to be realised. But it's easy enough to do.

 

[Minx]

Hi Ems, just sold one in April and it was about $100k. Will be selling the next one too coz it's too big to keep as an IP.

The next one may be a bit less, not sure but it's ok as long as I don't make a loss.

Minx - I wouldn't build 5 a year, it comes with a host of problems..especally if it takes too long to sell. Even builders have gone belly up in recent times. At the end of the day it's like a business and needs to be managed well, most important thing i sknowing how to manage cashflow. With building, a lot of out goings and profit takes a long time to be realised. But it's easy enough to do.

Hi Sue. I totally understand where you are coming from. No doubt some builders are feeling the pinch. The builders that i mentioned are rather established and have the money there to build without the need for finance. None of those build in new estates, so they don't buy land per se, rather sites.
Must say after watching my partner work for these dudes over the years it has motivated us to go out there and do it our self. Wont be at their level as I dont have 2mill in the bank right now but hope to get up there in 10 years. These builders also provided valuable info and insight which made us realise that it's easier (as in less headaches) to build for ourselves and sell rather than build for others. Building for others as a builder also provides the least profit.
In terms of my investment strategy, construction and selling is where it's at for us. Sure there will be cycles that impact the level of profit over time but thats the construction game. Hopefully i'll write a book in 10 years time to report back on how we achieved our goals and hopefully early retirement.

 

[sue78]

Goodluck Minx!

I've been doing this for 6 years and no where near retirement or ready to write a book. But we have lived very well, lots of holidays, took time off work to pursue further studies, yeah..it's great just not having to live paycheck to paycheck on be completely reliant on your job. We paid down IP loans, paid off ppor etc

But then I'm on the slow, low risk road to wealth.

Hope you guys will will reach your goals.

 

[Philip Thomas]

Simple Real Estate Development with Priceless Benefits

I have a colleague that sold his business a few years back & now does one straightforward development a year & lives off that. It has provided a huge amount of freedom & flexibility to focus on family & a lifestyle. Perhaps at this scale its not millionaire status, but the benefits are priceless!!!

Philip

 

[Lukey75]

IP Building

Phil as usual you are spot on and to the point.

We are currently in the process of our first "Build IP" after 11 years of buying existing IP for CG. We have found that the biggest issue is the lag between purchasing the land (after due diligence) and the time it takes to enter the build phase. Something that is not a fixed time frame but a variable.

We found crunching the numbers that at this point in time it would best fit our strategy to build and appeal to a higher quality tenant, all the fundamentals of the macro economic data point to this, however be prepared for what can be a lengthy delay between buying the land and realising a return via cash flow. I would not consider doing this unless you had a bit of equity behind you and a good bank manager, as he told me they are def tightening the screws for those above 80%.

 

[Ogre]

Hi all
Nice to find this forum, my partner and I are looking into getting an IP as we have built up a fair bit of equity in our main residence.

We have looked at many options such as house and land packages and buying land and building an IP. Some of my questions were answered here about the shortfall of paying the land while the house is being built.

I like the appeal of building an IP as I feel if choosing the land wisely you can make up a lot of equity quicker than you would if you bough an existing house or a house and land package.

 

[blaster]

I've been doing a couple since last Dec now.

Was just about to start the second one when a new reno opportunity has just popped up, so the 2nd might go on hold for now if the reno place comes through. I was getting bored anyway so that's fine with me.

It's a lot of fun and satisfaction though creating something out of nothing if your into that kind of work as I am. My two were just sheep paddocks only 6 mths ago. Should see them now !

I find the downside is there's is so much messing about and outlay with councils and permits before you even start the jobs themselves that many a time to be honest I do wish they were just two renos instead .
So the second one I hope to take a break from and start the new reno instead , meanwhile think through a different strategy in building the 2nd one.
Might see if I can get all the shitty bits I'm not in the mood for done instead with that one, that way I can hopefully just go over at different stages and play around with the parts I do like doing.

Another property I'm eying off for next year will be a 6x , mind you this is only if all goes well in the meantime and that property is still available by then.
It's off the market right now for a stint though so I'm secretly hopeful.
Anyway if I do get that one I'll certainly be refining my system let me tell ya.
That one does have one house on it now , which I'll clean up and rent out and that should bide me as much time as I want to just spend the next few yrs messing round on the blocks left and all the building.
As long as I put at least one out after that within say the first 12-18 mths, I'll be in a position to spend years on the rest if I want , won't matter.

Ahh plans eh - lots of fun aren't they.

Cheers