Buying an investment property is always an exciting time, but it also requires you to make some really big decisions. It’s not uncommon for some investors to feel overwhelmed and confused by all the (sometimes conflicting) information out there. One of the most problematic debates is whether you should buy or build your investment property. Both have valid pros and cons, so to help determine which option is best for you, we’ve done the research. There are a few things you need to consider when making your decision, such as your personal circumstances, what you want out of your investment, and what type of property it is. But here is a few reasons why building an investment property could be either a good or bad idea for you.
Pros For Building:
First and foremost, you should always seek advice from a professional accountant regarding anything to do with tax – property included. That said, depending on whether your property is positively or negatively geared, building can have great tax benefits. A newly built property means you can claim maximum depreciation on internal fittings and fixtures, as well depreciating the cost of construction over a number of years.
Customise it for the market
One of the greatest benefits to building an investment property is having the ability to build it according to market needs. Doing some research and talking to agents will give you an understanding of what renters want and what pays well. Very rarely can you find an established property that ticks all the boxes of a premium rental.
Could be cheaper than an established investment property
The key here is that it’s the right property, because not all new-build deals are created equal. The construction process can sometimes be lengthy and stressful, and not everyone is willing to see it through. But if you can get a good deal on the land and the build, the overall property could end up cheaper than one already established. The trick is getting the right property for the right price. It doesn’t always happen, but it is possible.
Potential for instant equity
Who doesn’t love money for nothing? Assuming you’ve paid a great price for the right property, you could actually add value to that property straight away. After purchasing the land and building the house, you can go back to your lender and have it re-valued. If you’ve done your research completed the job to plan, you could potentially be looking at instant equity. You can then use that equity for other things such as leverage into purchasing another property.
Cons For Building:
Limited in location
The reason for this, quite simply, is because vacant blocks are limited. It’s getting harder and harder to find vacant land, and moreover, vacant land that is suitable for an investment property. New land estates are being developed, but these often come with covenants which can guide or restrain how you build your property. Aside from new suburban or semi-rural estates, finding a vacant block anywhere is extremely difficult.
Future developments in the area may hinder growth
The property market works on a supply and demand model. When there is more demand than there is supply, prices tend to increase. So if you purchase land in an area with potential for future development, this could hinder your property’s growth. If the demand is constantly being supplied, your market value goes down due to properties in direct competition with yours. And remember, in five to ten-years time, that competition will be against modern, newly built homes in your neighbourhood.
No income until the property is finished
The most obvious difference between purchasing an established investment property over building one yourself is the wait on return. You will still have to pay your mortgage on top of construction costs, and this is a big financial risk. Only once the property is finished, signed-off and ready to move into can you start receiving any rental income. You will need to have a plan A, B and probably even C for 6 -12 months to ensure you can cover all your costs.
Potential issues with the build could increase budget
Things in life often don’t go to plan, and building a property is no exception. Unfortunately, this usually means extra costs. Asking your builder for a fixed contract is one way to help protect yourself from unforeseen, sky-rocketing construction costs. However, there will always be things going wrong that are beyond your control. And if they don’t cost you money, they add time and delay the finish date.
Whatever you decide is the best option for you, be sure that you’ve done plenty of research, talked to relevant professionals, and considered your personal circumstances and desirable outcomes. There’s no one-size-fits-all when buying an investment property, you just need to make smart decisions based on available knowledge at the time.