Next IP, land and build or buy existing?

We are planning for our next IP in Brisbane inner city / ring area. We are trying to decide whether to buy land and build or buy an existing property that we could improve later on.
So these are the different strategies we are assessing.

We’re trying to work out if the effort of maintaining an old queenslander and the lower potential yield is worth the the value increase we might realise in the future if we do an uplift and expand the house.

Versus just building something new which we can depreciate, have minimal maintenance to worry about, but won’t have anything to upgrade.

Thoughts appreciated!

 

If it's just an IP to hold, then I wouldn't be looking to build but rather buy an existing one with great development potential. It all really depends on your goals, risk profile, skillset etc.

 

Yeah but our concern is;
1 - We don't live in Brisbane, so the cost and time of managing any refurb or uplift to an existing property could be large.
2 - we forgo all depreciation benefit of buying a house that is already fully depreciated due to its age.

 

You need to also take into account the risks involved with building an IP. Weigh that up with any deprecation benefits. If you can build an IP and extract a good amount of equity on reveal then it could be worth it. But if you're end value is the same as new stock on the market then you need to assess the risks of building vs any benefits. At least that's how I'd approach it.

 

Old debate, have a look to the old posts about H&L. Just crunch the numbers and see what better suits your investment strategy. I assume H&L is in one of the new estates.

H&L: usually less land component, lot of comparable stocks, your new today will be old in 2/3 years time, massive depreciation, less maintenance, less troubles in general. Need to make sure you have at least $50k/$100k in equity once finished.

Existing: if you buy well usually better potential in terms of growth, more management required.

 

Interesting thought, how is that different to trusting someone to build you an entire house?

Are you buying property for the depreciation benefit?
Is your strategy to buy and hold for potential capital gains?

 

As per the above comments, there are so many questions to be answered before a useful decision between new and old can be made.

Goals - start here. What do you want this property to do for you.
Affordability - everyone has a limit (or chooses one)
Cash flow limits (how much can you comfortably loose each week, or must it be positive cash flow in yr 1)
Stress - Building isn't passive. Are you ready for it?
Finance - building also adds a layer of loan complexity, be aware.
Tax - yes depreciation is a factor and will impact your cash flow. 2nd hand properties often still have some depreciation, not as much but sometimes you would be surprised.

etc
etc

 

Big believer in creating equity so building new is always a good strategy unless you can find a better deal of course. if you buy the worst house on the best street for instance.

 

I’m not sure building new always produces equity, or at least not always quickly. Don’t forget the builder has also built in their marketing overhead into your build price, so you are always paying a premium upfront to build new. This can take time to recoup, especially if building in an area where they’re plenty of new land being released.

Having said that, we are about to start building a new IP, but only because we couldn’t get finance for anything established two years ago and buying land first with 2 years to title allowed us to build our savings and get our tax returns and financials up to scratch for the bank prior to settlement. IP will be negative cashflow for a few years which isn’t ideal, but we’ve saved enough that we can afford to cover the cash outflows until it’s neutral or positive cashflow.

Really depends on your goals and financial situation. Dealing with the banks for build finance hasn’t been as straight forward as I would have liked, but that’s also due to both of us being self employed. Oh the joys! There are definitely times it feels like a slow burn to build up any kind of momentum!

 

Exactly, building new in those types of areas doesn't automatically mean you'll have equity once it's finished.

I would suggest you could've done the same and bought existing, you still had to wait two years.
The risk of buying off the plan then waiting 2 years is that values can drop in the time between signing the purchase contract and settling. The reverse of this is also true, market moves upwards and you still get to pay the original purchase price, definitely agree it comes down to individual goals and financial situation.

 

You are absolutely spot on, we could have waited and bought established. In our situation it suited us to buy untitled land as it forced us to be disciplined with our money during those two years because we knew we were going to have to settle on the land purchase. Waiting for two years to buy established I think we may have been less disciplined and not saved as much as did in the mean time.

We also got incredibly lucky that our land value increased by $40k in those two years, which is more than we could have saved in that time! So more money for us to make investment choices with. As you said though, all comes down to individual situations and goals.
As a side note, we also learnt a lot during those two years about contracts, builders, dealing with banks and finance and property investing while we were waiting for our land to title, so we tried to make the most of the waiting time!