Land and house package as IP

Hi all, hoping to get opinions on this

My husband and I are contemplating if we should purchase this land and house north of Brisbane.

We have the option to build a 4-2-2 double storey home on this ~400sqm land which would cost us $430000 and the land is $500000

The finished home could rent out for $750-800 per week in current market

I mentioned this to some friends and they didn’t think this is a good investment given that the rent can barely cover the interest

One of the reasons of this investment strategy is to reduce tax as we are on the highest tax bracket. I appreciate this may not be the best strategy but we don’t have much experience in investing (and time poor)

Plan is to hold this for 5-10 years and sell when there is profit

We welcome all comments

 

930k of debt plus stamp duty ... open any mortgage repayment calculator and input that money at P&I repayments . Write that figure down . Add 5K for council rates , property management , insurances etc ... write the total figure down . That’s how much it’s going to cost you to hold onto after 5 years. Then grab a calculator and multiply 750-800 rent x 52 weeks . That’s how much rent it will bring in. What’s the difference between the 2 figures ? Can you afford to pay that year in and year out ? Unless you are extremely confident it’s going to grow in value by a significant amount , it seems a dud set of numbers .

You can achieve the deductible losses you say you want and also generate a surplus after tax income if you do it differently - but it’s entirely your call

 

Thank you for your quick response

I know this may be a stupid question to ask -

Should I take depreciation or tax return in that equation?

 

$930k for a house on 400sqm NORTH of Brisbane.
Ouch. How far north?

You could do a lot more with that money.

 

Chermside

 

Short answer no,

Reasoning?

1. You are reliant on capital gains.
2. You are trying to do this for tax reasons (who spends a dollar to save 45 cents?)

But I am curious, what amount of deposit/savings were you going to put into this?

Regards
ComPropAgent

 

I would never include it in calculations for feasibility.

 

10% of the total purchase price. Will be using equity from our IP

 

Ok, I'll bite a second time

What is your current position (property wise) i.e.
Approx Value:
Debt:

Also what gave you guys this idea?

Regards
ComPropAgent

 

What are established properties with big land component selling for in Chermside?

Tax should not be the driver.

You will pay premium for an asset which may only depreciate overtime.

Compare established properties and land component with this brand new one.

For $930k you could do 2 x $465k properties a bit further north, with larger land component and potentially properties close to infrastructure with development upside (good land banking).

 

We have 2 IP and recent valuation shows we are able to take out $240000 from equity (in total)
Debt $1.3m in total
Total value $1.9m

Peer pressure probably. We have friends in the same income bracket as us and a lot of them purchased brand new properties ie townhouse or apartment. We are not a fan of those due to high body corp fees so I thought buying a house and land may be a good idea

 

Good you posted on PC to get feedback then!

 

Well done!

You're in a good position, have you spoken to a mortgage broker as lending criteria has changed from what I am hearing.

So I don't really like residential property due to the low return/yield (why buy something returning less than a decent term deposit?). Buying a house and land will also mean that capital gains take longer to manifest as well (lots of supply)

If you believe the news, to many people have mortgage stress and whilst I am not running for the bunker I am a fan of paying down debt at the moment.

I am not a fan of negative gearing OR investing to "save tax", it is a poor strategy.

Also the interest rate on your mortgages is like what between 4 - 6%pa? (don't answer this lol)

 

Peer Pressure. Your friends might be buying their properties for whatever reasons, but your job is to invest Your funds to best benefit You. Herd mentality - think lemmings.

There are many better choices for investment than the one above.

 

Just as an example of how to put 930K to work while achieving good tax deductions as you have stated you want - I am about to launch some 3 bedroom and 2 bedroom townhouses in Goulburn with NRAS. The 3 bedders are 460K. You could buy 2 of those for about the same amount of money as the 1 property you were considering

Those 2 properties would generate pre tax deductions of @ 18K each ( so 36K in total) but they would also generate @ 8.5K each ( 17K in total ) of surplus after tax income because of the NRAS tax credits - if you ran them IO. If you ran then P&I they'd run about neutral but you'd be paying them off, and within a few years they'd be running CF+ even under P&I conditions. Besides the fact you'd be paying P&I and slowly reducing the debt, vacancy Rates in Goulburn are well below 1% so aggressive rental increases are likely as well.

I'm not suggesting you buy them necessarily - I'm just providing a real world example to demonstrate that you can achieve the deductions you want while operating at P&I and while paying them off. It represents far less risk and means that you arent relying on pre APRA growth cycles to make a buck. Even without growth ( if that were to occur) you'd still end up debt free and achieve a strong retirement income. Dual Occ's offer very similar protections....

What you have proposed is speculative - and that's really dangerous in a credit environment where past growth cycles are extremely unlikely to repeat . What do you do when your loans switch to P&I, your repayments jump 50% or more, and you haven't had the growth you thought you'd get, and rents havent grown because the same guys your friends and you bought from have sold hundreds more of these to other interstate investors...? You are left holding 1 property that's going to be hard to offload, and it will be costing you @15K out of your pocket each year in NON DEDUCTIBLE principal repayments - year in and year out .

What I have outlined is much safer for this credit environment . No out of pockets. property being paid off . No P&I cliff.

So there's an alternative view on how 930K might otherwise be deployed towards meeting your objectives

 

Hi Ostrich,

Glad you're not putting your head in the sand on this one!

It looks like you're in a great position equity wise and income wise - as others have stated, you can do a lot in Brisbane for that money and while depreciation might be good I think you can do better.

It would pay to even use a buyers agent if you're time poor, and look at something you can retain and build in the backyard instead - this will still give you good depreciation, but give the benefit of manufactured gains as well, rather than over-paying for a brand new house and needing a fair whack of organic growth to even make back the new-house premium.

I think you'd get some value from the report in my link below - it goes into a few relevant topics.

Good luck!

 

Hi, you're getting some valuable comments from this forum.I'll add my 2 cents.

Your basic intentions are correct. You'll get a lot of advantages by building.

The choice of H&L is not the best. A large 930K property is unlikely to get you the cap gain you're after. You'll probably get the -ve gearing.

The much better choice is to get 2 properties each about 500-550K

Why not buy an old house, sub-divide and hold 2 rental properties? You could even increase your total investment to 1.3M

You'll get 3 advantages: GST refunds on building costs, ongoing depreciation [this is a BIG number especially if you include white goods] and ongoing -ve gearing.

Don't be put off by the hassle of building. It's worth the effort. If you run the numbers first, you'll find that it's really worthwhile.

I knew nothing about building. What I did was to inform selling agents that I wanted to subdivide.

If I could do it, anyone else can.

KY

 

Hi all,

Thank you all for the valuable input on this topic

I understand there’s no bullet proof investment strategy. Another reason why we chose this strategy was because we have decent holding power and relying on capital gain (and negative gearing) is one of the few methods I know. Of all these capital gain is probably my focus

On top of the hassle of building what about the hassle of subdividing? I’ve heard stories where people waited a few years for council approval?

And yes we are considering getting buyers agent. Perhaps to invest in other states like Melbourne since we have had 2 IP oh Brisbane

 

$930K would get you a Double block 810sqm a lot closer to the CBD with sub div potential, id see this far out pacing that option in growth imo

 

It's a fair bit money to spend in an outer suburb. In that price range you will be completing with properties closer to and with better access to the CBD. I assume it's a infill site where the existing house has been demolished and the block subdivided.

There actually is plenty of demand for this type of product but I would be looking much closer, 5-7km or even closer, north or south side.

I know a neighbour who recently built on a 400sqm block next to a property I own, it has average specs similar cost and it was quickly rented for 850 per week.

There is a lot of dislike on the forum for new builds especially in outer green field sites but they can work in the right location, with the land purchased at the right time.

If you already own 2 in Brisbane a purchase of land worth 500k will mean more land tax ? If so could you diversify into other areas?