7 things to consider when building an investment property

Tip 1: Look for a fixed price contract

Fixed-price contracts are building contracts where a constant price for the build is agreed to upfront. Some builders may prefer variable contracts which allow 'unexpected' expenses to arise during construction that push the price up, but there's often a limit on these.

Finding a fixed-price contract will mean there won't be any nasty surprises during construction and can also help you budget accordingly, as you know exactly how much you'll need to pay to get the job done. 

Tip 2: Look for high-quality fixtures and fittings

Some builders skimp on fixtures and fittings (like lighting, plumbing, kitchen benches etc.), which lowers the value of the property. Poor-quality inclusions are more likely to break and need fixing and/or replacing down the line, whereas high-quality choices will not only improve the value of a house but also tend to last longer and cost less to maintain. 

Not to mention, having high-quality inclusions installed can help attract better tenants...

Tip 3: Consider who your tenants will be

What kind of tenant are you looking to attract?

  • Are you looking for uni students who'll take whatever they can find with not much fuss?
  • Are you looking for a young family with nearby facilities like schools and parks?
  • Or are you maybe looking for rich single people to stay in your well-furbished place? 

Many renters are willing to pay a premium for modern features and a nice layout, while others won't care as much and will just take a house that has four walls and a roof. The better your property suits the needs of your intended market, the more rent you are likely to get over time.

Tip 4: Maximise your stamp duty benefits 

Building an investment property instead of buying an existing one can have major stamp duty benefits, since stamp duty is only required on the land component if a house doesn't yet exist. For an existing house on the other hand, you'd have to pay duty on the land + the house itself. 

For example, if the house and land package you buy costs $600,000, but the land itself costs $200,000, your approximate stamp duty would be as follows based on an online stamp duty calculator:

State Land stamp duty  Total stamp duty (with house) Potential savings 
Victoria  $7,070 $31,070 $24,000
New South Wales $5,490 $22,490 $17,000
Queensland $5,425 $20,025 $14,600

So you can potentially save tens of thousands in stamp duty costs by building a house from scratch. 

Tip 5: Maximise your tax benefits 

Among the usual investment property tax benefits that exist (interest deductions, loan fees etc), builders of new investment properties can also claim large depreciation deductions.

Investors can claim depreciation losses on newly purchased items, such as appliances, blinds & carpets, furniture and water systems and more. A newly built property will likely have brand new fixtures and fittings (see above) which means more depreciation deductions. What's more is you can also claim the depreciation of the cost of the construction of that building over a number of years, so building an investment property from scratch can be highly tax effective. 

See the Australian Taxation Office (ATO) for more information on the tax benefits of investment properties. 

Tip 6: Look for a turnkey package

A turnkey house-and-land package is basically a house where all you have to do once it's done is 'turn the key', since everything else is 100% completed. And by everything, we mean everything, from the driveway to the letterbox, to the doorbell being in working order to fences put up, from flyscreens to air-conditioning installed. 

People who are building a home to live in might choose to pass up on this option since they want to personalise the house but an investment property isn't personal: they're purely financial decisions and you can choose a turnkey package to suit the broader renting market. 

A turnkey house-and-land package can be a more expensive option but can save time for investors who don't want to deal with the excessive admin of deciding every minute detail. 

Tip 7: Get a good value construction loan 

Finally, if you're constructing an investment property from scratch you'll need a good value construction loan - the lower the interest rate, the more you'll save in interest. 

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 Includes
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. 

Click here to learn more about construction loans, including what you need to apply for one and how you can find a good value construction loan. You can also learn more about loans.com.au's investment home loans here

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