In the markets and suburbs exhibiting Sound Property’s 15 Key Investment Drivers for growth and rental yield, the detached housing market still has great potential and affordability. However, older houses tend to have more maintenance issues, high stamp duty, less depreciation, lower rental yields and therefore more negative cash flow. Purchasing land and building a new dwelling can alleviate many of these elements which also results in numerous benefits for the investor. Going through the construction process may initially sound daunting, but with the right management team building an investment can be quite an easy procedure. Sound Property has experience and great success in guiding clients through this process. Outlined below are some key aspects of this strategy, including the benefits and risk mitigation.
As the name suggest, a House and Land strategy involves the purchase of a block of land and establishing a fixed price build contract with a reputable builder. The end dwelling will be ‘turn-key’ meaning everything will be included in house, right down to blinds and letter box, so the owner or tenant can move straight in. The house plan, fixtures, finishes and colours are usually pre-selected and packaged by the builder and Sound Property to streamline the process, maximise the profitability and save time for the client. The land may be purchased ‘unregistered’ which means that the land has not been subdivided and developed into individual lots at this stage. In areas of tight supply, purchasing unregistered land may be a necessity to secure a parcel of land as there will be no surplus registered land around. Depending on the stage of the sub-division it can take 12 months to develop the land into individual lots, connecting services and establishing a road network. Once registered, the land can be settled and the building approval sort. When the council gives permission to start building, the average time for a 4 Bed, 2 Bath, 2 Car family home is around 4 – 6 months. At the conclusion of the build an independent building inspection will check for any defects in the work to be attended to by the builder and finally the property can be marketed for prospective tenants.
TIP: Buy in ‘Infill’ rather than ‘Greenfield’ estates surrounded by existing development and infrastructure. Land tends to be more limited in these areas and therefore can appreciate quicker.
There are many benefits to the House and Land investment strategy. A few of these are listed below.
- Buying wholesale: Essentially you are buying raw parts and the end product should be worth more than that sum of the parts.
- Less finance or borrowing risk: Unlike an off-the-plan purchase you can obtain your finance approval before being fully committed to the contract by supplying the bank with a land contract, building plans and list of inclusions and finishes for them to conduct a full upfront valuation and calculate the borrowing capacity of the investor.
- Stamp duty savings: Stamp duty is only payable on the land component, not the full purchase price potentially savings thousands of dollars.
- Depreciation: A brand new dwelling attracts high deprecation and tax deductions.
- Higher yields: Getting in at a wholesale level and building new attracts a higher rental premium to older dwellings in the same suburb.
- No body corporate: Although there will be building insurance to pay there is no body corporate and other parties to deal with.
- Home Owners Warranty: Depending on which State you buy in the building contract will contain around 6 years of structural warranty.
- Finite land availability: If you buy in an Infill estate it wont be long before land supplies are exhausted and this is reflected in appreciation of value.
There are generally 6 stages in the build process after land registration and settlement: Slab, Frame, Roof, Enclosed, Fixing and Practical Completion.
There are some obvious risks associated with the House and Land or construction strategy. However, once understood there are ways to mitigate them as outlined below.
- Timeframes: In our experience it is the land registration that can blow out rather than the build. For the investor this just means more free time in the market for the land to appreciate as the price is locked in on exchange of contract but no interest is paid until land settlement and the loan is drawn. Once the build starts you can keep the builder to time by adding a liquidator damages clause to the contract which specifies an end date the build must be completed by (less holidays and weather delays). If the build goes over the specified time a penalty interest, usually the weekly rent, is paid on a daily rate at the conclusion of the build.
- Costs: So that there are no extra cost surprises it is important to enter a fixed price build contract, making sure that the end product is ‘turn-key’ and has all the inclusions needed to occupy. Also make sure that there are allowances in the build contract to cover situations where rock or bad soil are discovered on the site and who is going to pay for the removal or alterations to design.
- Builder going broke: This is one of the risks which is not directly in the purchasers control so it is very important to engage a reputable builder with a strong history and pipeline of projects. In the odd event that a builder goes under during the build it is possible to source a new builder to finish the project.
- Structural and minor defects: Most build contracts will have a 3-6 month minor defect period where the builder is responsible to fix things such as connections, leaks, loose fittings etc. Depending on the State in which the investment is purchased there will also be around 6 years structural Home Owners Warranty (HOW) for any major issues if they arose.
- Overcapitalising: The package price must be around the median house price for the suburb. Do not over spend on items such as fixtures and fittings. Remember it is not your own home to live in so does not need to be fitted as such. Finding a middle level of finish is the key.
A basic 4 Bed | 2 Bath | 2 Car design
Brief: Budget $500,000. Seeking house and land in a capital city that can provide growth, strong rental yields and tax benefits. Client is a busy working professional and very time poor so needs the process managed and delivered with minimal involvement.
Solution: House and Land (Managed Build) strategy
Land- Infill site 12km to CBD
Dwelling- 4 Bed | 2 Bath | 2 Car
Land Price: $260,000
Build Price: $219,000
Total Package: $479,000
Value on completion: $530,000
Current Rent: $450/w or 4.9%
Positively geared cash flow
6 month minor defect period and 6 years Home Owners Warranty
The final handover stage of the property, project completion time: 6 months for land registration and a 6 month build.
“I knew I wanted to be investing in property, but work keeps me extremely busy! I would have never had the time to become a researched expert in the market and decided to enlist the help of a professional. Someone who lives and breathes this was going to help set me up in a way I could have never done for myself. I’m so happy to have brought them in to my network. I couldn’t have done it without them and have been thrilled with the result”
Written by Andrew Cull, Sound Property Group
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For further information on the House and Land strategy please contact a Client Manager at Sound Property on 1300 655 899 or firstname.lastname@example.org
This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.