Why Not Build New????

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From: Simon St John


Howdy all!

Over the past months I have been interested in the odd post where reference had been made to building as opposed to buying.

The "I'd never build" camp often say something like "I'd never build because I'd rather buy something without the builders profit margin" etc.

But surely we buy property on the assumption, that (granted with varying degrees) it will grow each year.

On this reasoning, at what point does the original builders' profit magically disappear and make the property a good buy?

I would have thought It's always there and that the value of a property is made up of cost + profit margin + capital growth.

I know that there must be an answer but I've searched the forum for one and racked my (small and now tired) brain - so any help most appreciated!

Cheers,

Simon
 
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Reply: 1
From: Les .



G'day Simon,

A very valid question - I tend to relate many of life's little questions/problems to CARS. Mainly because most people are familiar with them, and have bought/sold a few of them (compared to houses).

In this case, consider the new car - you buy it, drive it around the block, and then attempt to sell it - and IMMEDIATELY lose 20% - 25% ..... True??

"The Millionaire Next Door" addresses this, and suggests that if you are buying a car, NEVER buy new, but instead buy a 2 year old car.


I tend to think that a similar situation would apply to property. When buying new, you are paying the developer's margin, and it takes a couple of years of non-growth to "catch-up". i.e. if you were to buy a "non-new" house, you could reasonably expect the average growth for that suburb. But, with a new house, you would likely forego the first two years of growth just to "pay back" the developer's profit.

As always, there will be exceptions, and if you have been able to nail a "real deal" with a developer, this may not apply.

Please note, I have never bought a new property (or car, for that matter) so I could be talking thru a hole in my hat ;^)

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 2
From: Kristine .


Simon

I built to rent about five years ago now, a lovely two storey Pioneer home of four bedrooms, large study, 2.5 bathrooms, rumpus, jetmaster fireplace, ducted heating, ducted evap cooling, double garage with rear roller door to the garden and with internal access through the laundry, dishwasher, wall oven, fitted carpets, swish lightfittings and custom made drapes and curtains, landscaped gardens and extra paved parking areas, backing onto reserve lands through which flows a tinkling creek visited by native birds.

This house has never been empty, and has always been rented to professional people. The current tenants are in their third year. They have a housekeeper and maintain the property to a high standard.

My investment was the block of land, everything else was borrowings, and it's paying itself off nicely on a 25 year principal and interest loan.

Capital growth has now more than doubled the entire build package, proven by houses immediately opposite selling in a highly competitive market.

My internal rate of return based on yield only is nearly 30% per annum, and the property rents for about 5% against current market value. This does not take depreciation or other tax benefits into account.

Would I do it again? In a flash. Pioneer were great builders, very cost effective, and came in on time and within budget. We even got a small refund against capital provision items.

If you are thinking to build to rent, let me encourage you. There will always be quality tenants wanting a better than average home, and willing to pay for it. Make sure you have good entertaining areas so they can have client meetings at home, and a large study with separate phone and internet connections. Double storey are ideal, as the bedrooms are private and away from the more public areas of the house.

Simon, get the Herald on Saturday and check out the builder's specials. You may be very surprised at some of the deals going at the moment.

Good luck

Kristine
 
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Reply: 1.1
From: See Change


The benefits of building depend a bit on the position of the property cycle.

When the market is booming people tend to pay a premium for a new house , while when the market is in the doldrums the cost of building a new house maybe more than the price of buying an existing one.

We sold a house in sept last year which was one year old and the people who bought it off us paid a decent premium on top of what we paid to have it built.

see change

it's better to be guided by your dreams than your fears
 
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Reply: 2.1
From: Manny B


Howdy there,

contrary to what you hear, you can sometimes get bargains when building new, ie. house & land package (not too common but can happen)...

2yrs ago my friend bought one at Caroline Springs (West of Melb) for $115,000 ONLY brand new... he just had to add curtains & do the landscaping (which I helped him) & was let out immediately for $210 per week (no delay at all)... Now that place is worth at least $200,000 & on top of that gets a nice depreciation & top rent (it is up to $220p/w now)...

I hope I had bought a couple then ;)

Now in terms of building new, I built 2 villa units on a block I had around 12squares each plus single garage & cost me a little over $160k (although I only did the painting myself) with all fees (council & utils) to complete, at the time I started the block I had was valued around $50k... on completion I got them valued at around $200k each (equity gain of $190k if I sold, but I'm a buy/hold advocate)... so if you ask me if I would build again :) you should now know my answer (& I love my depreciation schedule), YES!

Cheers,

Manny.
 
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Reply: 2.1.1
From: Simon and Julie M


Hi Simon

Build new or buy old - I'm sure you can make money either way - the bottom line is what is the land worth?

Land appreciates
Buildings depreciate

Regards
Julie
 
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Reply: 3
From: Simon St John


Hi everyone!

Thanks for the replies (Julie - nice to hear from you again!).

Les, I do wonder about your concern about paying the builders' profit. I'm sure it does happen that prices of newly built homes can stagnate for a few years, but the examples others have cited seem to suggest this is not always a given - in fact it's more common to find appreciation occurring.

Cheers,

Simon
 
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Reply: 3.1
From: Les .



G'day Simon,

See Change came to the party with this:-
"The benefits of building depend a bit on the position of the property cycle." And the most recent 2 - 3 years possibly has given the impression that a new house will just go gang-busters. But, what if buying new (say) 1 - 2 years from now - imagine the bubble has burst, and property has settled down again for a few more years. Is the same thing going to happen?

With new property, depending on MANY factors, you could win big, or you could be set back for a number of years. What I like about buying 2nd hand, is that you only have to look around to see how this area will turn out ('cause it's already happened!!). With new, your property is often just another one of many, with schools, shops, etc. planned but not yet completed...

That sounds to me just a wee bit like gambling ....

But, really, it all depends on how well you've bought. Did you buy OTP, thus minimising purchase costs? Or is this just a "house and land package" or "spec" home? Each of these have their own risks, and (of course) so can buying 2nd hand. I guess it comes down to each individual's comfort levels, or knowledge of each type of purchase...

You said - "in fact it's more common to find appreciation occurring." If you are referring to the answers to your post, yeah, it sounds like others have done really well - but how much of this success hinges on See Change's statement?

And, with the recent "good times" in property, let's hear from those buyers of 2nd hand property who have also had their properties scream up in value. I suspect a rising tide is lifting all of the boats, and that's been terrific for IP.

Let's finish by saying I am more comfortable with buying 2nd hand at this point. And I believe one can generate far more growth by buying the right 2nd hand property (and adding value) than by buying new.

Thanks for the question, Simon. I hope others (who have done just as well with 2nd hand properties) will put in their 2c worth too. This is probably another one of those "whatever you think is right, is right for you" type of situations. What do you think, Simon??

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 3.1.1
From: Mike .


Hi guys,

Is it just me or has the water been muddied in this topic. The title is Why Not Build New???? not Why Not Buy New????

I agree with Les' comments about buying new which I am guilty of. Yes, I was lucky and had some growth but not as much as others who bought land and built or who bought old and improved.

I think Simon was asking whether it was a good idea to buy land and build rather than buying new ready built or Off The Plan. I've bought new both ways and in both cases I paid a premium for the builder's profit as well as the developer and marketer's profit. So I've got loads of depreciation but the growth is so-so since the prices were already at the top of the market.

My old 2 bed flat, however, which I renovated, put on some good equity despite sales of similar unrenovated places in the same area.

So lesson is: cut out developer's and marketer's profit. Build new on land and pay builder's profit only. Claim heaps of depreciation. OR

Buy old and improve. Cut out everyone's profit and claim heaps of depreciation on improvements. Which is my choice? Location, Location, Location. If the vacant block is on new release land where dozens of new houses go up together I'll bypass that for a good reno in a hot suburb. However, if the land is a single plot somewhere good, perhaps near water or good school, then I might build instead.

Regards, Mike
 
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Reply: 3.1.1.1
From: Tibor Bode


I am seconding Mike and Les. I bought OTP property which finished about 12 months later than should have, lots of problems for 145K ($220 rent) and sold it 12 months later for (spending another 3K on it) for 160K (early nineties in Sydney West - Quakers Hill). Now I am buying in Logan for 44K ($95 was the rent) spent 11K on it property worth close to 70K, and intending to tenant it for $130 per week with long lease). Albeit it will not have building write-offs (pre 84)
but still have reasonable depreciation (organising next week QS report). I settled on it 6 June this year. Beats the new one (as far as I am concerned) and I have considerable equity in it. I've done it a couple of times in the past 6 months and it seems to me that it is working brilliantly (and I am still trying to figure out how to spend less and increase the value more as well as building up an excellent team of tradesmen for future work).
And the biggest beauty in it? It is cash flow positive without depreciation, which I love the most in it. Due to the location, I am also confident that growth will also be good over the next 3 to 5 years, but even if I am wrong, it is still an ASSET (puts money into my pocket every week). The growth will be the cream.

Just the usual 2c.

Tibor
 
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Reply: 3.1.1.1.1
From: Simon St John


Hi all,

It's been a few days and I'm not sure whether any of the above posters will come back to this topic, but thank you all for your brilliant replies - I learned heaps (as usual).

One poster was right in saying (Mike?)I was really referring to buying land and building rather than OTP.

I should have made a distinction as personally I would not buy in a ne release area. I have relatives that have done this in Brisbane and gone backward for a number of years.

Personally, I bought land in a QLD seaside location where land is now SCARCE and it looks like the day the (very modest) place is finished it will be worth 20K above what I paid in total. Crikey - how lucky for an innocent!

Well, perhaps not all that lucky as the important factor in my decision was scarcity of the land and proximity to beach.

I was however really interested in the Caroline Springs example - something to ponder in relation to buying in new areas and that perhaps it can pay off.

Thank you to all for your views!

Cheers,

Simon
 
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