Owner Builder

[Sly_Stallone]

Hi everyone, first actual post.

I just wanted to get some advice on a weird owner builder situation. A close friend is trying to convince a group of us to let him build houses under our names. He has built 2 houses (one for himself and his brother) and believes he can turn a profit of around 20-30% for constructing a house in 6 months (20-30% over 6 months). Most of us still live at home with our parents or renting, so he says we would claim it as our PPORs? Move in temporarily and then sell it for a tax-free profit… I trust the guy in the sense that he won’t run off with our money, but I was wondering if anyone can shed some light on this.

Are the returns realistic? Is it better than investing into existing properties or shares? Is the lack of CGT true or is this scheme a bit dodgy? Is there anything else that would be helpful I have missed out on asking?

Cheers

PS. My friend had incurred some financing issues when building the second home, but with our combined savings we won’t need a loan

 

[Propertunity]

Are the returns realistic?

In theory, yes. But be careful that the 20-30% profits quoted do not include capital growth that occurred recently in Canberra anyway. You may only be looking at 5-10% profit that actually comes from building and if the market has a slight downturn, then all of that profit could be lost.

Is it better than investing into existing properties or shares?

Over the long term, the growth from shares can be shown to be on a par (or even slightly exceed the growth in property). However, property can be geared at up to 95% (or more), but with the volatility in the share market, it would be a brave (some would say foolish) individual that would gear shares at more than 50% presently.

Is the lack of CGT true or is this scheme a bit dodgy?

It is true. There is no CGT payable on your PPOR.

Is there anything else that would be helpful I have missed out on asking?

Yes, many things.
What is your Plan B?
What if your friend dies, goes broke, gets injured or sick? Where does that leave you?

I'm pretty conservative and to me this is a high risk strategy for a first investment unless you have implicit trust in your friend (and I'd suggest that if you did, you would not be here asking about possible pitfalls) and it all comes off as planned.

As the Owner Builder you carry all the risk. If your friend is keen to build houses then maybe he should go and get his builders licence.

 

[Sheryn]

Your friend wants you to fund his income and take on all the risk!

And what is your friend's profession is he a qualified Builder?

By the time you paid the friend to build your house there would be no profit for you BUT you would carry all the responsiblity for any structural building fault. Say you have to pay him $1000 per week for 26 weeks = $26,000 to build your PPOR or does he want $15,000 per week for 26 weeks = $39,000 because no friend is going to do this for no money and be onsite each day to supervise subbies and answer the many questions that crop up daily.

The reason I say there would be no profit is because you will have to pay your ? unqualified friend to build a house for you.

Now the bit about live in the house for six months to claim the FHOG and then sell for a profit is another reason you would not make any profit. A newly constructed house that has not been lived in may attract up to a 10% premium when put up for sale but once you live in the house it is second hand and the opportunity of a premium is gone.

Since we have recently built a property as a Home Owner Builder let me tell you the cheapest house you will get is built by a volume builder not an owner builder (a volume builder is someone that builds say at least 10-15 houses per year as they can obtain a good discount on the materials they use which an owner builder cannot achieve + they get a better price from subbies as they supply the subbies with fairly continuous work, not one off's from an Owner Builder).

In some instances licenced tradepeople refuse to work for owner builders or put a premium in their quote as their past experiences working for Owner Builders is that the jobs take longer as owner builders don't have the experience to project manage the job.

Another difficulty would be getting a loan but I note that you say you have the money and would not need to borrow. Personally if you want to keep this person as your friend I would not take up his offer.

Also you have to complete an Owner Builders Course in order to get a permit to Owner Build and part of this course tells you you can only use qualified & licenced subcontractors.

Now if the friend is a qualifed builder and licenced, then that is a different matter but I would expect him to be building his business up and wanting to build under his own name.


Cheers
Sheryn

 

[Aulyna]

I think owner builder can only build the house for his own, has no rights to build property for others, and only can build one property within a few years.

Better check it ;-)

 

[Sheryn]

A close friend is trying to convince a group of us to let him build houses under our names.

Is the group say 4 young guys who have well paid jobs or a girlfriend boyfriend situation?

He has built 2 houses (one for himself and his brother) and believes he can turn a profit of around 20-30% for constructing a house in 6 months (20-30% over 6 months).

The selling of real estate is really slow at the moment and there are some good bargains for buyers not sellers.

Most of us still live at home with our parents or renting, so he says we would claim it as our PPORs? Move in temporarily and then sell it for a tax-free profit…

If a group of 4 or couple buy a block of land and build a house together and live in it it is classed as their joint PPOR so therefore only one lot of stamp duty concession and only one FHOG is payable. This would be a definite disadvantage for a group of guys or girls IMHO as you can only do this once

One point too make here...
If you were to buy or build a house, live in it for a 6 - 12 months as your PPOR and gain the advantage of the stamp duty concession and FHOG why would you sell your PPOR and move back home?

A better option would be to keep the PPOR after you live in it and then rent it out and you rent somewhere else as there would be financial advantages, please see your accountant to discuss.

The reason I say this is because you would incurr fees in selling of on average of between 20 -30 K and then later on in life when you do actually want to move into your own house you would have to actually pay stamp duty on the purchase price.

I trust the guy in the sense that he won’t run off with our money, but I was wondering if anyone can shed some light on this.

Your mate is trying to do something dodgy, Builders are licenced by the Office of Fair Trading to help protect people from dodgy (unlicenced and unqualified people). The biggest purchase most Australians make in their life is to buy a home.

Are the returns realistic?

A well run building company would aim to make 20% on top of the actual cost of building as the building company is responsible for fixing problems that may crop up from any of the subcontractors they use.

It takes many years for a building company to streamline their processes and get good quality trades to work for them.

Is it better than investing into existing properties or shares?

There are some good buys out in the housing market (houses for sale and land selling for less than it did 12 months ago) atm where I live as some people are deperate to sell and there are some good returns in the share market IMHO.

Is the lack of CGT true or is this scheme a bit dodgy?

You do not pay CGT on your PPOR if & whilst you live in the house. IMHO it is dodgy to have a friend who wants his mates to toss in all their life savings, I can only see financial disadvantages to the group of mates from my experiences.

Is there anything else that would be **helpful I have missed out on asking?

Continue to read this forum, save and start reading books on building wealth, property and later on shares.

** Also a good strategy if you are living at home may be to buy an investment property using a small deposit first and an interest only loan.

And continue to save your money so you have a deposit for your PPOR when you are ready to actually live in your own PPOR.


Cheers

PS. My friend had incurred some financing issues when building the second home, but with our combined savings we won’t need a loan

Banks are very wary in lending to Home Owner Builders they want increased deposit eg 35% or 45%.

People can be wary about buying a house built by a Home Owner Builder.