Property investment is one of the most popular and recommended investments in Australia. Along with long and short-term opportunities for profit, there are potential equity and tax benefits for an investment property. In this article, we’re looking at the advantages of purchasing vacant land and building an investment property over purchasing an existing property.
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What are the different types of investment properties?
Flippers and Renovators
One approach to an investment property is to buy or build a house to sell it for profit. There are a few ways to do this including fixing up an old house, building a home to sell it, or purchasing an existing home to sell. This is a more aggressive and short-term approach that’s arguably more of a gamble. Preparation and research are key to pulling this off.
The pros to this are you can make a lot of cash quickly, but this relies on everything going well. The longer you can’t sell the property, the more your investment starts to burn a hole in your bank account with upkeep costs. There’s a risk of losing money but also a chance to make a nice payday.
Rental income/passive income
This is the long-term option for making money from an investment property, where you become a landlord who rents the property. Though it isn’t going to have the short-term gains of a well-executed sale, it can be a very profitable source of passive income. There will be ongoing maintenance costs and you will have to accept there will be times when you won’t be making money (when tenants change, for example).
What are the benefits of building an investment property?
Easier to cater to market demand
Like anything, there are trends when it comes to houses. Certain things remain timeless, while other factors go out or in style. By building an investment property from scratch you can research the current market and try to build the perfect property to cater to it. A quick example, older homes may not feature open-plan living which is highly in demand and this could limit your potential market.
Research what’s popular in the suburb you’re building in. For example, if it’s near a school, families are going to a target market, whereas if you’re near the CBD, there will be a higher demand from professionals.
It’s often cheaper to build than buying property
Though it may sound strange, there are times when building an investment property is actually more affordable than buying a pre-existing property, especially if you get a good deal on the land and a grant to help you along. When you purchase land and build rather than buy an existing house, you only pay stamp duty on the price of the land. This may not sound like much, but it can actually add up to tens of thousands of dollars.
Tax deductions
Beyond the stamp duty benefits mentioned above, there are several tax deductions you may be able to receive on an investment property. Beyond the above-mentioned stamp duty reduction, you may be able to claim interest on loans, council rates and borrowing expenses among other things. Talk to your accountant or financial advisor for more information tailored to your specific scenario.
Build equity
It’s not a guarantee, but building an investment property could be a quick way to raise equity. Once construction has finished on the house, you can have your property re-valued by a lender. Hopefully, the price will be higher than before and you will now have higher equity. Remember, investments are always a risk and there’s a chance this won’t be the case.
What are the key attributes of a profitable investment property?
Location
If you listen to the news, it may seem that having land is an automatic money maker, but the location of a property will make a huge difference. Choosing the right location and making the most of said location is all about research. Some things to consider include:
- Is this an area people are more likely to rent in or purchase a home?
- What is the median income in this area?
- Are there any future developments, such as a highway or shopping centre, that will affect the location’s appeal for either better or worse?
Sustainable energy
It’s no secret energy bills and the general cost of living has skyrocketed in recent years. Sustainable energy sources make your home more affordable to maintain and also make it a more enticing buy to potential buyers.
Identifying target tenants
The main reason you’re building an investment property is to eventually turn a profit somewhere down the track. A key part of this is knowing your target audience. Are you building in an area full of young people looking to rent? Is it somewhere known for retirees, professional young couples, and families? Is it a coastal area or somewhere full of luxury homes? Knowing who your target tenant is is a huge advantage in the building and designing stages of your investment property.
Tax benefits
You can claim tax deductions through your investment property. When you pay interest on your payments, these can be tax deductible in the right circumstances.
How to finance your investment property?
When it comes to meeting your investment loan needs, there are a few options on the table.
Construction loans
The most common method of borrowing money for a new home is through a construction loan. Like a home loan, except you’ll be given your money in progress payments throughout the building process rather than in one lump sum.
Talk to a financial advisor and research a few options to find a good value construction loan for your home.
Through Home Equity
If you have an existing land, you may be able to use that equity to help fund your knockdown project. How much you can get will be calculated based on how much the land is worth compared to how much you still owe.
What are your property management options?
There are two main types of property management which are:
Traditional Property management
This is the oldest and still most common option. Walk down any main street and you’ll likely find a traditional property management firm (think your LJ Hookers and Ray Whites). The role of property management is they’ll take care of all the day-to-day running of your investment property including dealing with tenants, finding tenants in the first place, collecting rent and so on.
The pros of hiring a traditional property management is you’ll (hopefully) have someone looking after your property who knows what they’re doing.
DIY management
This is where the property investor forgo hiring a real estate firm, and handles the property management. The pros of this are you won’t have to give a percentage of your earnings to an agent, you’ll have more overall control, and you’ll have direct contact with the tenants.
The downside is everything is on you now and, when you think about it, do you want to be your tenant’s first point of contact for every little thing? Some people think if they’re renting to family members or tenants they really like, there’s no need for a property manager, however, this can lead to all sorts of issues.
When it comes to property management, around 80% of property investors hire a property manager. The reason behind this is pretty simple: doing all that’s required to manage property is time-consuming and a lot to take on. Handling conflict with tenants and staying on top of forms is not everyone’s bag, and it’s easy to get in over your head. It can be a full-time job and that’s asking a lot of someone who may already have a full-time job.
While we think there are advantages to DIY management, it’s a big undertaking. Consider how much time it’ll take away from family, spare time and your other work before committing to this option.
Investment properties can be a great way to make both short and/or long-term profit, but it’s essential to do your due diligence and have a plan. Buildi can help you build your investment home, including finding the right builder and ensuring you avoid costly mistakes along the way. Get in touch today to discuss your project with our friendly team today!
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