Pros and cons of building an investment property

Real estate is one of the most popular investment choices in Australia. Property investments offer tax advantages, flexibility, long-term and short-term profit, and portfolio diversification, to name a few. 

Now, the next step on your investment property journey is deciding whether to build or buy. Although buying an existing property is a popular option, building an investment property also has its merits. 

If you’re considering building an investment property, weigh the pros and cons first. Consider your financial goals and figure out which option can help you achieve them. 

The Good: Reasons you should build an investment property

Let’s start with the positives. Here are some pros of building an investment property: 

Easily cater to market demands 

When building from scratch, you can tailor your investment property to meet market demands. There are many advantages to building an investment property with the amenities and features that renters or buyers are looking for. This can boost the property’s value and increase rental yield. Marketing the property will also be much easier as it caters to the area’s demographic.  

Get a clear idea of what people in the area want by doing your research. Look at a suburb report to understand the area better. Or talk to real estate professionals and get their insight on what buyers or renters are looking for. 

Save more when building instead of buying

In some cases, building a property could be cheaper than buying one. If you get a good land and building deal, you could see lower costs compared to purchasing an existing structure. 

Because building an investment property takes time, some property investors opt to purchase an existing one at a higher cost. However, if you’re not in a rush and want to save more, you could take your time and find the best land and construction deal possible. 

Take advantage of tax incentives 

You can claim several tax deductions for an investment property. For newly built properties, you may be able to claim depreciation on internal fixtures and fittings, which can reduce your taxable income. 

In addition, as your home is under construction, stamp duty is usually only payable on the land value, as opposed to the property as well. While land usually makes up the bulk of the cost of the total property, it could deliver thousands in savings.  

While paying interest on the home loan, interest payments made during construction can also be tax deductible at your marginal income tax rate, which could deliver more savings. Speak to an accountant to see how you could further minimise your tax burden when building an investment property. 

Instantly build equity

Although not a guarantee, building an investment property could help you gain equity much faster. Once the construction of your investment property is done, you can go to your lender and get the property re-valued. If the home is re-valued to a price that's higher than the initial value during your application, you have instantly added some equity to the property. 

The Bad: Reasons you shouldn’t build an investment property

You have to be aware of the drawbacks, as well. Here are some cons of building an investment property: 

Limited location options

In more established areas, finding the ideal empty block of land can be tough. You won’t find many lots for sale in major city suburbs. You may have more luck in rural areas, but it is still challenging. 

The alternative is to knock down an existing property or look further out if you can't find one in a good area. In areas close to the city, council permits can be onerous. You may also have to deal with ‘heritage listed’ or ‘special interest’ properties that you may not be permitted to knock down. 

Costs can go over budget

How often have you seen an episode of The Block or Grand Designs and seen the cost of building a new property blow out of budget? Materials and labour can easily be more expensive than first thought, the weather could halt construction, and depending on what’s happening in the world, certain materials may be in short supply. 

You might be able to get a fixed contract from your builders so you pay a fixed amount of money for construction, but there are still other costs that can be added on. You’ll also have to deal with council building permits, rates, and other expenses. 

New developments could hurt your property’s value

If you’re building an investment property in a newly established area, there’s a chance that surrounding developments could negatively impact your property’s value. A big apartment building could block your property’s view. Or new neighbours could start defaulting on their mortgages. 

Too much supply in the area (lots of new houses) can also lower the value of your house since price tends to be inversely related to supply. None of this is guaranteed, but it's worth thinking about.  

No rental income until the construction is finished 

Houses take a while to get built—a few months to a year. This is all the time you're making loan repayments without earning a rental income when you otherwise could be if the house already existed.   

The right home loan for your investment property 

If you’ve decided against building an investment property, a standard investment home loan could suffice. This loan helps finance the purchase of an investment property; it works like a typical home loan. 

For those who do want to build, you can get a construction loan for investment property. A construction loan is a loan with a short-term construction period used to fund the cost of building a new property. This loan usually lasts until the construction of the home is complete. When the loan term is up, you convert to a regular mortgage product set by the lender. 

You might be able to use a standard home loan for building a new house if you have enough equity in an existing property to begin construction, but this usually involves a rather large sum of money. 

Whatever you decide, loans.com.au is here to help. Speak with one of our friendly lending specialists about your investment loan needs. Or apply online and jumpstart your property investment journey! 

The basics of construction loans for property investment

Construction loans finance the construction process, from the deposit to practical completion. Repayments on a construction loan are interest-only, before reverting to principal-and-interest upon completion, unless otherwise agreed. 

Unlike a home loan, construction loans cover the expenses you incur as they occur. At loans.com.au, we follow a six-stage process which includes: 

• Deposit – The amount paid to the builder for construction to begin. 
• Base – The concrete slab has been put down or footings and base brickwork have been completed. 
• Frame – The house frame has been built and approved by the inspector. 
• Lockup – The windows, doors, roofing, brickwork, and insulation have been installed. 
• Fixing – The plumbing, electrical and heating systems, cabinetry, fittings, tiling, and the like have been installed. 
• Practical completion – The fencing, site clean-up, and final payment to the builder. 

These stages are commonly referred to as ‘progress payments’. You’ll only be charged interest based on the amount that you use for each progress payment. 

If you've been approved for a $500,000 construction loan, but that first 'base' stage costs $100,000, the lender will only charge you interest on that $100,000, until the next progress payment is released. 

Applying for a construction loan 

Construction loan applications are fairly straightforward. You’ll need the usual requirements such as identification, a list of assets and liabilities, financial history, employment history, and the like. 

In addition to the basic requirements, you'll need to present professional plans for the property, including an expected valuation. If you’re looking for a good low-rate construction loan, book an appointment with loans.com.au.

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