House building tips for an investment property

Hi All,

So my land gets titled in 5 months and I have started looking for a builder that gives the best bang for the buck! This IP will be based in Rockbank, Vic and I am looking to build a 4 2 2 house. The goal is to rent out for two years and eventually sell.

I thought the process would be not that difficult until this week - when i actually started visiting few builders/display homes. The biggest challenge was to take the emotions out which i was able to do, finally! But here are some questions that i have and need assistance with. I would appreciate if you can assist -

1. A 4 2 2 house can range from 16sqm to 26sqm on a 400sqm land. What would be the right sqm for a potential rental property.
2. Is having two living rooms a good idea? One for the guests? One for family? Or having one Theater and one living lounge is okay?
3. What is an appropriate ceiling height? 2400mm is the standard. Is it worth to increase that to 2550mm?
4. Is 20mm stone bench top okay or is it better to upgrade to 40mm bench top?
5. Upgrading the entry door to a wider door - Is this a good idea?
6. Is having a walkin pantry better than a large cupboard panrty?
7. Flooring - What flooring is appropriate for such an IP? Tiles can be dearer but can attract a lot of potential buyers. Any tips?
8. Installing an 8 point evaporative cooler via builder - Is this a good idea?
9. Should I get the driveway done via the builder?
10. Any other tips that I should consider?

Currently I have visited JG Kings, Mimosa and Sheridon homes. Any other recommended builders? I am trying to keep the cost down as much as I can but als build a reasonable quality homes. Budget to build is approx $210K but hoping to get it done well under $200K.

Looking forward to some guidance.

Thanks

 

Are you building “investment grade” or “owner occupier”?

Beware GST and CGT implications of developing for eventual profit. Are you registered for GST?

Get some advice from your accountant.

Who is the customer? A family with 2-3 kids? Multiple living rooms are helpful. High ceilings are nice. No one might notice the thickness of your bench tops apart from you.

I presume you are referring to “squares” in terms of size, where 1square = 9.28m2.

 

1. 16-20 sqm is reasonable but check what is selling well. It will vary with each area.
2. It probably does not matter too much. Just make the areas flexible. Given the choice I would want two living areas with a big family (your target market?). Also see what is sellling well in the area.
3. Higher ceilings always make a house feel bigger - worth every cent in my opinion.
4. Thinner bench tops are fine. A bamboo bench top looks good and is long lasting too (cost effective.
5. Wider door will not add much value but make sure it is good quality and the entrance is appealing - check which houses are selling well.
6. Pantry does not matter that much. Just make sure it's easy to access food. Non walk in can be better.
7. Depends on market - look at what is selling in your area. Probably tiles and carpet.
8. Not sure. Would have thought an electrician would install via the builder so probably fine. Talk to your builder about any concerns.
9. I do not know. Get some quotes?

 

Thanks Hamish.

Investment grade. I want rent it out as soon as the build is finished. Sell it after two years if the gains are good. If not, hold.

No i am not. Does it make a difference?

My target market is family with 2-3 kids.

That is correct

Any recommendations for Melbourne based builders?

 

How do i check it? I am assuming check the 'Sold' list on realestate website?

family with 2-3 kids.

Thanks. I saw them in the display homes and the ceiling does make the house look bigger.

Alright thinner it is then. I'll check bamboo bench tops too.

Alright, I will keep the door size normal but have a good strong door.

Does upgrading the Facade add overall value?

Can you recommend any Melbourne based builders?

Thanks for taking out the time in responding to the post.

 

Yes, check the sold listings on real estate websites. Might be worth talking to a local agent or two to see what is selling at the moment.

To be honest, stone bench tops will probably have broader appeal, but bamboo might be better for families for rental purposes.

Sometimes upgrading the façade can add value. Again, see what's selling, talk to agent/s.

No, do not have any Melbourne builders on call

 

It might be worth going to a few open homes of houses that would be similar to get a feel for the market and what people are looking for. You can learn a lot from listening and talking to people.

 

GST beware! Seek advice.

 

Thanks Hamish. I have contacted my Accountant to discuss the overall strategy.

I still dont understand what has GST to do with an IP?!

 

Thank you. I'll start doing that straight away to understand what does families want in the area. Luckily I do have some real estate friends who should give me some advice.

 

I still dont understand what has GST to do with an IP?!

Because if you are renting it out right away and sell it within 5 years, you have to pay GST.

 

Or if you sell immediately you will have to pay GST out of the proceeds. Research ATO GST Margin Scheme.

 

GST applies to sale of new residential premises and it takes over 5 years for them to lose that tag BUT...It requires that the vendor (you) is conducting an enterprise. Your plan to build to profit and sell within five years seems an enterprise to me. An example of something not being an enterprise may be if you had planned and built your own home then had to move for work etc. But your intention to build to profit and sell seems very clear. There is no requirement for regular trade etc. It is a isolated profit making intent. So CGT doesnt even apply and GST would likely also impact. And since there is no CGT full income tax applies. This is how laws have existed for decades long before Keating introduced CGT.

Can you wait for 5 + years to avoid the issue ? Yes. But only for the GST and it will eman you cannot claim any of the GST on the dev so its not a real benefit. And the loss of CGT discounts may still impact too.

These matters will change any numbers you run and will erode profit. If you are clever there are ways to manage GST so it INCREASES profit. eg being regd, claiming GST on all costs of build, perhaps even the land. The margin scheme MAY be available but often for new estates you will be unable to use that since you bought the land under the margin scheme. The MS can only ever be used once. So GST can really erode profit.

If your accountant takes a different view perhaps they may not understand property taxes and GST that well. The sale of new premises is a high focus for the ATO as the avoidance through reckless indiferrence is high.

Its all explained in our developer toolkit. Have a read.

 

Here are my thoughts. Hope you will find value in them:

1. GST might eat a big chunk of your profit. Very important you’re clear on GST implications. Your accountant should be able to clarify this for you.

2. Why 2 years? What happens if market goes backwards in that time period (very possible)? What’s your plan B and C?

3. Main profit would be from the sale, not from the rent so I would build with the buyers in mind, not the renters. As most buyers are owner occupiers then I’m not sure the build needs to be investment grade and not OO grade...

4. Super important to know your market and target audience. Most of your original questions are area specific. Your REAs friends should be able to help answer these questions better than anyone here.

5. Know your market involves IMHO more than just asking your REA mates. It involves going to open houses, tracking sales online, seeing the eventual sale price, knowing the rental yields. The idea is that you know what’s happening in the area and can make your feaso before you start the build.

6. Project homes are usually cheaper but may not take into account site specific features so I would think twice. And then once more.

7. Did you run a feaso of what would be the profit if you sell after build (relying on the market providing capital gain within 2 years is risky these days I reckon) vs if you sell vacant land? You might be very surprised. Seen it happen!

Hope this helps?

Best regards,
Ethan