I went against the grain

Greetings,

I went against the grain and invested in two new residential constructions over the last three or so years. I understand the arguments for buying established houses, although went with brand new because they ended up being substantially cheaper for what I was trying to achieve: getting my foot in the door. Buying new meant I could pull the trigger because established properties came with a heftier price tag in the areas I wanted to invest. Both properties were small developments and not set in large estates. Admittedly, cookie cutter homes but rightly or wrongly, it worked for what I was after.

I’ll give some details below then hoping for some advice from you legends.

Property One
- land purchased in 2017 and construction completed early 2018.
- small land size of 350 m2
- Mount Pleasant Victoria location
- 4 bed two bath double garage.
- no bells and whistles, just basic build by GJ Gardiner Homes.
- total land and construction cost $300,000
- rented to what seem to be good tenants at $340 per week.
- more or less identical house went for $426,000 the other day.

Property Two
- land purchased in Feb 2020 and construction completed April 2021.
- small land size of 440 m2
- North Bendigo location
- three bed two bath double garage
- again no bells and whistles, this time built by JG King.
- Total land and construction cost $350,000
- rented to what seem to be good tenants at $410 per week.
- Agent believes the property would sell for $450,000 ‘or above’.

About me:
I’m 32 years old, and never really had plans to sell either of these properties for quite some time. I didn’t expect the capital to rise at this pace given they are new builds and was content with having properties that were slightly on the negatively geared side. The out of pocket expenses for me are actually quite low to the point where I suspect I’m possibly looking at becoming positively geared at some point.

Penny for your thoughts:
Given the sales potential listed above, I’m considering selling at least one. I would likely start with the Mount Pleasant property given that the Bendigo North property has been owned for less than twelve months, which will mean greater capital gains tax.

I’m a ‘rentvester’ meaning I do not own a PPOR. If I do sell, the intention would be to buy again, likely an established home this time, down the track. I’d be taking a gamble with this though because I’d look to buy after house prices go back down. Who knows if and when this would happen.

I’m hoping to hear your thoughts on whether to sell one, both (approx one year appart if the market is still up) or just leave it as is. I’m not desperate to sell, had never planned on selling, and collect good rent from quality tenants. The type of gains I’m seeing were unexpected given the new build strategy so am tempted to sell as a result. However, I am concerned about the large amount it costs to sell a home then buy one again later. I’m wondering whether it would be a futile exercise and therefore an unnecessary risk.

I realise they have gone up in value given the recent hot property market in regional centres. I’m expecting this to calm down and prices to recede at some point.

It’s worth mentioning that I had wanted to buy a third IP, although my broker believes I am maxed out with my borrowing power. But, if I kept both then that would be something I’d consider down the line.

Do I pull the trigger, take the profit and wait for a bubble that might never burst? Or, do I literally just do nothing and be content with the properties pay for themselves, with the aim to purchase a third in the future when the banks let me?

 

Why not leave them be for a while..

Save for the next IP orPPOR deposit, diversify into shares or knock down some debt?

 

Selling doesn't make sense at all for your situation. If you want to expand, refinance if you have the serviceability and see what you can take out to buy more. Assuming you want more real estate.

 

Cant argue with a good outcome.

 

+1.
You need to be patient, especially in a rising market and resist the urge to change things so quickly. Selling + buying costs + potential CG would add up and you don't have sufficient equity to justify those costs.

Take the 'bubble' worry out of your head if you want to generate long term wealth in prop game - I have been hearing the B word for 20 years, yet have seen 4 compounded growth cycles for my portfolio.

Add on the fact that your prop are new, have tons of depreciation and you have great tenants and what you propose doesn't sound like a financially sound plan.

 

The math is actually very simple

currently the suspect house is 426k

—

Step 1: assess the actual cash position after selling

if you sold, calculate the amount you would have after CGT and selling costs, let’s say 2.5% selling costs and CGT assessed at 40% average tax rate, your house will get about 390k after sale

assume a 250k mortgage, you’re left with a 140k cash position and your borrowing capacity is somewhat improved

—

Step 2: assess the alternative situation of keeping

if you keep this property, you can potentially activate the equity difference x 80%, so you can potentially use up to 100k worth of additional security towards another purchase. This may be useless if your annual income is too low for servicing needs.

the other aspect to look at is net annual benefit of holding, so work out rent after all expenses x (1-vacancy rate) x (1- agent fees) and subtract owner ship costs like council and amortised renovation costs. Assuming 2% vacancy, 5% agent fees and 1% cost of ownership expressed over market value:

Your gross benefit is $12 200
Assume interest rate at 2.5%, and 250k mortgage, you’re benefiting 5950 per annum

—

Step 3: assess the alternatives

basically in your situation you can:

• sell and have 140k cash and a slightly better borrowing position
• Keep and have 5950 p.a. approx net benefit (net benefit is NOT cashflow, a lot of this will be going towards principal!!)
• Effectively the net benefit expressed over the cash position after selling is 4.25%, so whatever you do has to outperform that on an annual RoI perspective, not factoring in capital value appreciation. Capital value appreciation is harder to predict, but an example is below
• If your outlook study period is 10 years, and you assume 2% average annual growth and you assume you’re more or less 70/30 average leverage over the years, your return from leveraged growth is a hypothetical 6% on equity before future sales costs are factored in.

So only you can answer which one is better for you, if you need the liquidity and/or can chase better returns elsewhere do it! If you’re banking on good capital appreciation in those two houses compared to alternatives, don’t do it!

—

Personally I think entry level homes on land will continue to do well in australia fastest growing city.

if your goal is making money, the big one to solve is income from PAYG labour and other sources right now, this will help you accelerate faster and give you more options.

 

Thanks to everyone for their insights. I’ve found it invaluable and it confirms the direction I was leaning towards.

Whilst I’m now confident in what I’ll do moving forward, clearly still happy to hear thoughts from others who stumble upon this thread.

 

Would you have done better if you went for older houses?

 

I suppose. It’s a difficult question to answer but possibly. Also might have been better to have larger parcels of land but it just wasn’t within my means at the time and I was quite bullish on Ballarat and Bendigo, wanting to get in before a rise.

My journey for what it’s worth and should anyone be interested:

I had a deposit of $90,000 following the sale of a Frankston unit I had bought with my partner prior to separating. I was bullish on Frankston in about 2014 or so and we bought there. It had appreciated well when we separated in late 2017. My partner left with about $125,000 and I with $90,000 after a few expenses.

With that deposit and in 2018 from memory, the opportunity came up to build in Mount Pleasant for $300,000. I could not find anything established even semi decent for that kind of money at this time. I’ve never been handy on the tools and so a reno may never be for me. The bank valued it at $330,000 at the time of purchase so I couldn’t believe my luck really.

So after a year it was clear to see further capital gains based on sales of similar properties in the area. I thought to myself, ‘if this first venture has gone well due to xyz then maybe that success can be replicated elsewhere’. And as I said, I was keen on Ballarat and Bendigo.

I got into a small bidding war over another property in Mount Pleasant but they were willing to go higher than I was. Following more research, I could not see anything I liked around Ballarat for the price I was willing to pay for a house ($350,000). I wasn’t keen on going for a unit.

From there in late 2019/ early 2020,I ended up buying some land in North Bendigo for $124,000 and then chose a builder to go from there. This was a little bit of a more complicated process given that it was completely removed from developers of any sort really. For that reason, it was an excellent learning curve. This property was completed in April of this year and clearly the regions have done well in the time I first purchased the land.

Moving forward, I’d like to diversify as has been suggested and pay down debt at the same time. This will likely be in shares but I’d like to get an established property (likely a unit) down the track too if at all possible. I do like the idea of conducting my own small development to then sell off to first home buyers or investors but that’s a bridge too far I’d say at this point.

The story isn’t too exciting but thought I’d share if anyone’s interested.

 

Hey @Trainee
I received an email to say you replied but I can’t see it here. I’m new to posting on the forum so my apologies if I’ve done something wrong.

 

Have you had depreciation schedules made for each house?
Importantly depreciation can also be backdated a couple of years too. You can adjust something less ke the last two tax returns. It's worth doing even With an established property. In the case of a new build its probably trolley important to do.

Selling sounds like a waste of time and a fast way to donate money to the ATO.

If you want to make something of the improved property values then look into getting a loan that releases the equity of the properties.

This of course works best for purchasing IPs. By the sound of it you are interested in a ppor. However I don't see that as a reason to sell though.

Bendigo has legs to run much further. Your rent is covering a decent chunk of your repayments.

I'd start by lining up the small things..

A) depreciation schedule
B) calling your bank trying to screw down the interest rate.
C) reviewing how you use an offset account and paying your bills etc.
D) making sure you are getting good value insurance
E) making sure you are claiming every possible tax deduction.

It doesn't sound like you have much idea yet as to where or what your poor might be. Take your time and build up cash in offset. Or possibly in ETFs etc.

You need to decide if it's worth selling an IP for the purpose of buying a ppor. That's something only you can answer.

The other thing to consider is how long do you intend to live in your poor and what will you do with the house after you move out.

 

Thanks. With regard to your points, I feel like I’m on track with each of them. Thanks for laying it out like this so I can see I’m on the right path.

 

We're all going against the grain by actually taking action, rather than just sitting on the sidelines, like most people.

While I'm firmly in team "established", I wish you all the best with your purchases!

 

There definitely is an opportunity to keep and take advantage of the increase in value. For example you could choose to get a Line of Credit (or similar product) against the Mt Pleasant whilst the the value is high which can be used as a depositi for a future purchase. You don't have to do anything with the facility yet - just keep it for a rainy dat.
If you do things like this whilst values are high then if there is a correction you have already locked in the gain. However I do have to point out that if there is a correction that you may then owe more than the corrected value. The idea behind this is that it will have enabled you to purchase #3 which should help even this all out and better to access the equity when values are high than try and access the equity when values are lower
So there is Line of Credit, Refinance and offset products etc etc that you can explore so that you aren't burdened with selling costs and then repurchasing costs so that you can unlock that $140k. You can unlock it now and keep it

 

Thanks for the suggestion. I’ll look into it.

 

Hi again to those who responded to my initial post and welcome to anyone reading this for the first time. Check out my first post at the top for context, thought I’d provide an update and see what people think.

I’ll add property specifics below to save people the time of scrolling up and down, but add the revised real estate agent estimates for each.

Property One
- land purchased in 2017 and construction completed early 2018.
- small land size of 350 m2
- Mount Pleasant Victoria location
- 4 bed two bath double garage.
- no bells and whistles, just basic build by GJ Gardiner Homes.
- total land and construction cost $300,000
- rented to what seem to be good tenants at $340 per week.
- the estimate for this property now as of December 22nd is $480,000 to $510,000

Property Two
- land purchased in Feb 2020 and construction completed April 2021.
- small land size of 440 m2
- North Bendigo location
- three bed two bath double garage
- again no bells and whistles, this time built by JG King.
- Total land and construction cost $350,000
- rented to what seem to be good tenants at $410 per week.
- the estimate for this property now as of December 22nd is $530,000 to $560,000

Selling one could significantly reduce what I owe to the point where I’d be able to own one outright in a few years, after factoring all costs associated with selling. It’s worth noting that I’m maxed out with borrowers at the moment I believe, so a sale could mean I bank the profit and look to buy a PPOR as a current rentvester. That said, I’m in no rush to do by a PPOR necessarily, but it is the next step in my plan.

Now of course an estimate is just an estimate so who knows what they would actually go for. Previous advice from everyone here was to hold on, and now I am back to hear whether the advice stays the same. I never expected growth such as this on new builds so I suppose I’m just wondering whether I should cash in on the unexpected nature of this or sit tight regardless.

 

What you have done...I have been doing for years:

1. Officer - land 149k....build 170k turnkey in 2018 - Value today 650k
2. Mickleham - land 125k build 175k turnkey in 2017 - value today 600k+
3. Geelong - land 96k ...build 234k....turnkey in 2016 - value today 680k+
4. Geelong - land 98k build 162k turnkey in 2017 - value today 580k+
5. Geelong - land 140k build 215k turnkey in 2020 - value today 780k+
6. Geelong - land 155k build 240k turnkey in 2020 - value today 870k+

Great results....all the nonsense about no money in H&L is just that. As for selling...too many people focus on CGT. It is not much if managed ...for example if you sold mid way through a financial year you would still claim 50% of depreciation for that year plus you could also contribute some to super to reduce CGT liability.

It looks like you are up for about 180k in profits. After 50% discount you have added 90k to you income. If you have 5k reduction via depreciation and say you put in 10k into super....your CGT amount reduces to 75k.

Assuming your income is 80k....and you add 75k...you are up for about 27k in tax. Less if you have more deductions....via depreciation from the other property.

Great result to date ...congrats.

By the way doing more and being built currently or in planning:

Geelong - land 345k.....house 263k...end value 1.15m
Perth - land 177k...house 230k.....end value 570-650k (possibly more if market takes off)
Perth - land 153k ...house 235k...end value 550-600k (possibly more if market takes off)

 

Sash, given the amount of H+L that you do, how do you ensure the build quality is ok (i.e. avoid issues with the slab etc.) that can show up months/years down the track?
As it looks like you are interstate so do you hire your own PM? Or only use trusted long term building partners?

As after the stress of building my own house, where I had to watch the builder like a hawk (they tried to convince me they had put insulation in the wall only for me to insist they break it open and *surprise* we found nothing there), I feel my house would have ended up like Opal towers if I wasn't there to supervise the builders.

 

People worry too much about slabs...most never have these issues. Most issues are in plumbing/electricals.....brickwork...or plastering.

I use building inspectors at different stages...mostly 2-3 inspections.

H&L is 4 times less complex than buiding 3-4 town houses. Risks are much more pronounced in using a smaller builder than the mid sized or larger builders. Yes there will be issues but mostly minor...some people are just to focused on minor issues. I worry about the big picture.