Promoted by loans.com.au
If you’re building an investment property with the intention of renting it out, investors need to be aware of this important distinction and keep it top of mind throughout the building process.
Here are some top things to consider when building an investment property.
1. Consider who the tenants will be
As you obviously won’t be living in the property, you need to consider the tenants who will be. What kinds of tenants are you looking to attract? This will depend on where you’re building the property (is it near a university? Is it in a regional town or suburban area that attracts families and workers? Is it in an inner-city area with a wealthier demographic of singles and couples?). Consider who the ‘target tenants’ will be and make sure the property appeals to the demographic of the area. Depending on the demographic of the area, some renters are willing to pay a premium for high-end finishes and a well-thought-out layout, while other demographics are happy with four walls and a roof.
If you’re building in an area that commands properties with high-quality fixtures, fittings, and excellent interiors, skimping on these things could be costly. Similarly, speccing out a property with high-end finishes in more affordable areas could be just as costly when the target tenant is unable to afford the asking rent.
Remember that you’re building an investment property to rent out, you’re not building your dream home -so don’t make the mistake of building it to your own personal taste.
2. Look for a fixed price contract
A fixed price contract is a building contract where a set price for the build is agreed upon upfront. There are some builders in the industry who may prefer variable contracts which allow unexpected expenses to arise during the build that can push the price up.
A fixed price contract will prevent any unexpected costs from arising during the build and make it easier for you to budget accordingly.
3. Look for good quality fixtures and fittings
Some builders and developers like to skimp out on the quality of fixtures and fittings but doing so not only lowers the value of the property but also means they will need to be replaced or fixed more often. It’s common to see cheap tap-ware, lighting fixtures, toilets, sinks and so on in rental properties because it’s an easy way to cut costs. But in the long run, you end up paying more in maintenance or replacements than if you’d bought higher quality fittings to start with.
4. Consider a turnkey package
As the name suggests, a turnkey house and land package means all you have to do is ‘turn the key’ as everything in the build is taken care of and completed - from the front letterbox to the back fence, and everything in between.
While many people who are building their own homes generally don’t like turnkey packages because they don’t offer much in the way of personalisation they’re ideal for investors as the property is a purely financial decision, not an emotional one.
If you’re considering a turnkey package, be aware of builders or developers who keep package prices down by using poor quality/cheap inclusions as you don’t want to wind up replacing items a year or less down the track when they inevitably break.
5. Maximise your tax benefits
Builders of new investment properties can claim big depreciation deductions, as well as all the usual suspects like interest deductions and loan fees.
Investors can claim depreciation losses on newly purchased items, like carpets, blinds, water systems, appliances, fixtures and fittings, and more.
Investors can also claim the depreciation of the cost of the construction of the property over a number of years, making building an investment property a highly lucrative tax option.
6. Maximise your stamp duty benefits
Stamp duty is a cost that’s only required on the land component if a house doesn’t exist yet. If you’re buying an existing home, you have to pay stamp duty on the house and the land. This is why building an investment property can potentially save you thousands of dollars in stamp duty.
Take out a good construction loan
If you’re building an investment property from scratch, you’ll need a good value construction loan.
Construction loans only charge interest-only repayments on the stage of construction your property is at, which is a method known as progressive draw-down or progress payments. This process usually consists of five to six stages, which might look something like this:
|
Stage |
Typical Components |
|---|---|
|
Deposit |
Paying the builder to begin construction |
|
Base |
Concrete slab complete or footings |
|
Frame |
House frame complete and approve |
|
Lockup |
Windows/doors, roofing, brickwork, insulation |
|
Fixing |
Plaster, kitchen cupboards, appliances, bathroom, toilet, laundry fittings/tiling etc. |
|
Completion |
Fencing, site clean-up, final payment to builder |
So if one of these stages (such as the base including the deposit on the base) costs $100,000, then for the duration of that stage you'll only be charged interest on that $100,000. The progressive drawdowns are cumulative in nature, so you don't have to pay interest on constructions that the lender (and yourself) hasn't paid the builders for yet.
How to apply for a construction loan
You'll need all the usual items required for any home loan application, including:
- Identification
- Employment information
- Payslips and pay summaries
- Lists of assets and liabilities
- A savings history
In addition to all of this, you'll need to present professional plans for the property, including an expected valuation. Having a bigger deposit can help too.
If you’re interested in building a new home, chat with one of our lending specialists today to get pre-approved for a construction loan.
