stratagy question - property wise

[BMan]

ok after 4 hardcore months of learning and a few ides that have tweaked into my head over the last few months id like to know what to do, and whether this is the right idea or not. its alot different from what i used to think.

ignore this if u want to just see the facts
i purchased the block of land 2 yrs ago and was going to build... thinking i was doing the right thing so started saving up a bit so i could.
during the next year i worked out all the extra costs of building (shed, tanks, bore, septic system, power etc) were going to cost alot of money
infact more money than it cost to purchase my PPOR one year after the block.
then i though yep done the right thing now.
a year later i found these forums and wow what an eye opener i hadnt done the right thing although i got into property so its better than doing nothing.


so heres what i have and what i think i should do

Currently i have a PPOR 185K
and a block of land 85k
with the equity of both and my borrowing power i can get a loan of about 300k - 320k with some money in the offset as a decent buffer aswell

i was just going to ignore the block but its not making me any money and is limiting my borrowing power
-should i sell it.. knowing it probably wont sell straight away and will lose money on this purchase...
OR
- build on it
rent it out
claim good depreciation etc as its a new house and in ~5 years time move into that
only problem with that is should i build the extra shed etc or hold off until i move into it?
i would then have to build it differently to how i would if i was going to live there. not a big problem

in the mean time im looking for a bigger house so would rent my current house out and rent a house making sure i end up better off after tax
and also any problems with the house will now be tax deductible, eg replacing the hot water system as its been there since 98 so pretty old may be due to stuff up. low water pressure so pipes could probably be done with replacing. and or the pipe from sa water to the meter.

that way the block is then doing something for me rather than nothing
and once the house is built i should get a bit of equity from it

the pros
-this area has pretty low vacancy rates, all the REA keep advertising for more houses wanted to rent and realeastate.com.au only shows a handful of houses for rent
- i know the area
-it turns my block into a tax deductible asset rather than doing nothing

the cons
-the REA dont actively push for decent rent and rent increase so although rental return is probably about 5.2% i could be more around 6% if the agents worked for there landlords

-there would be mild capital growth. not as much as a great picked area but not having the experience to pick the right areas anyway it might be a better choice than what i would choose otherwise.


also should i look at doing a reno on my current PPOR that im looking to rent out or should i wait until its become an ip and do it a few years later just before looking at purchasing another property to gain some more equity? or reno it and then sell it (keeping in mind the 6 year CGT rule as i wont have a ppor) as its an old house and while very good condition for its age it may get costly with maintenance (will have to wait and find out)
if i do it now then i can just plod along and get things done (although i want to move into a bigger house so things can be put to use instead of packed away not getting used because there is no room)

i have what i believe is a low servicing amount so need to try and somehow utilize it the best i can and being young i have a long term approach option

i know alot of you dont read posts that are too big but i hope you could skim read it if u dont choose to read it properly and can offer some valuable information

cheers

 

[Aaron_C]

Bman,

I am a bit concerned about this actually. You say that on preliminary calculations you can afford/service an additional ~$300,000 debt. To actually build a house on the land could prove to be a very expensive exercise - plus if you get a construction loan you would be paying interest for 1-1.5 years without any income at all until the new house is finished.

Will you be able to wear this? If not, then you're probably better off selling the land and going for an asset that produces cashflow from day 1. I can honestly say you won't make much (if any) money on a land+construction build for 1 dwelling. You have no economies of scale or bargaining power with builders.

Just my two cents.

 

[BMan]

thanks for the input aaron
the fact that i dont have a holding cost for the land as i have paid a chunk off and offset the rest will help me out and if i dont build everything i want to and just build what i have to it will keep costs down
i understand i would have holding costs while the construction was taking place and that i couldnt bargain the price down due to only one house but theres still money to be made (like i said earlier maybe not as much as a great pick but who knows if i will pick right anyway)

i could wear the holding costs the only downside is not having more property but going either way i will have hit my limit. as in not being able to buy anything else.

being that the land isnt in the equation it would cost me less to build a new decent house than an already established house the same size. it being new, great depreciation, low maintenance
the costs before building will be less than i anticipated first off as i wouldnt build a shed for a start id overestimate about 50K for everything before building leaving me with 250-270 for the house

it would also depend on what sort of house people would be willing to rent for what price

if i sold the land i would get about 50k out of it if i can sell it
the land could also have sub dividable opportunitys down the track
and i have plenty of time on my side

i also agree though cutting my losses with and extra 50k cash and increase serviceability will help me out more looking at buying another place but if i plan it this way i will have a PPOR to move into in a later date and hopefully draw the equity out of it to get more IPs

not that i wouldnt mind renting for ages but i see a PPOR as a place that you can build CG by slowly adding to it and put extra money into it and withdraw it for IPs lowering your non tax deductible debt that way aswell

 

[jingo]

although i got into property so its better than doing nothing.

Congratulations on your good start.

Currently i have a PPOR 185K
and a block of land 85k
with the equity of both and my borrowing power i can get a loan of about 300k - 320k with some money in the offset as a decent buffer aswell

i was just going to ignore the block but its not making me any money and is limiting my borrowing power
-should i sell it.. knowing it probably wont sell straight away and will lose money on this purchase...

I'd probably do the following:

1) Establish an offset account against your PPOR loan (if you haven't already). Put any savings into this account and add any further savings from your salary.

2) Use the $300,000 loan to buy a neutrally or positively geared property. (1st IP)

3) Once there is equity in your IP, draw the equity out of your IP to use as a deposit to buy your 2nd IP. Or save the deposit for your next IP.

4) Wait for the block of land to appreciate and either build on it, or sell it off and put the proceeds into an offset account linked to the loan on your PPOR.

All the best with whatever you decide to do.


Regards Jason.

 

[Ergophobia]

4a/ use the equity in IP1 and the PPOR to build on the block. Put in a series of non compliant development applications in the meantime so you can demonstrate an intention to build on the block and claim a tax deduction for it while you wait.

 

[Jake D]

Put in a series of non compliant development applications in the meantime so you can demonstrate an intention to build on the block and claim a tax deduction for it while you wait.

Do people actually do this on purpose? is the tax deduction worth the cost of DA? (I have no idea what a DA costs, but i assume there is some sort of fees involved in lodging the aplication.)

 

[Aaron_C]

Do people actually do this on purpose? is the tax deduction worth the cost of DA? (I have no idea what a DA costs, but i assume there is some sort of fees involved in lodging the aplication.)

The planning application itself costs about $1,500.

 

[Jake D]

The planning application itself costs about $1,500.

So, on an $85k block of land, paying $6k interest, for a deduction of maybe $2k tax.... no, it's not really worth it.

I suppose if you were holding $400k of land or in a huge tax bracket, or both, it might be worthwhile though, right?

 

[BMan]

i have got the block paid down a fair bit and have drawn equity out of it for a deposit for IP1 so theres no point trying to claim the deductions