You’re buying land and building a house. Here are a few things to consider:
Consider your intentions. You can:
- Buy, build and live there – If this is your Forever Home, you won’t have to consider the future repercussions of selling however in all these scenarios it’s important not to forget stamp duty (unless you’re eligible for a stamp duty concession…your conveyancer will be able to advise) – on a $300,000 block of land it comes to around $9,000.
- Buy, build and rent it out – If you go down this path you have to start thinking of this property as either a tax deduction (negatively geared – do you have the income to support this scenario?) or an income stream (will this put you over a particular tax threshold and cause your tax bill to go up?). You also have to consider that your investment is subject to future government’s tax policy, the ups and downs of the property market and future interest rates.
- Buy, build and then sell or buy the land, hold a while then try to on-sell the land at a profit – In this scenario your biggest financial consideration will be capital gains – ask your accountant. Also something to consider is that in the current land market, putting a house on a block of land does not always result in a bigger profit – right now land is at a premium whereas building costs are continually rising. So if you’re just speculating, you may save yourself a LOT of hassle by not taking on a build. There are costs associated with holding the land anyway – Council still charge you rates minus the garbage pickup fee…and of course the interest on your loan if there’s a mortgage on the land. This investment scheme can also sometimes affect where you can buy – some developers have special conditions in their land contracts that try to prevent this exact scenario.
Have a look at THIS website for more info.
Length of Settlement Period
If you’re buying from a developer and the land is already divided up and build ready, you’ll have to produce the settlement figure very quickly however if you’re buying off the plan and the land isn’t ready yet, you could have a much longer settlement period which can turn out to be a huge advantage.
The position of your block should be just about the first thing you look at – if the block isn’t good there will be a lot of different future challenges, some you’ll be able to cope with and some will mean huge challenges that might put you off the block altogether.
Is it on a hill? If so your build costs will go up through earth-works. If this is the case, is the purchase price low enough to cover that? Remember in a future selling scenario, the sale price of your home will not reflect any earthworks or landscaping you had to do in order to build.
If it is on a hill, what side? If you’re on the western side of a hill, your house will tend towards being cool and dark in the morning and really hot and bright in the evening…which is OK you just have to plan for it. Also, there’s an advantage to having a north facing outdoor area.
Do you know the suburb and the area immediately surrounding the block? What is there to recommend it? What is there to detract from it? Is the area a former floor plain? Look for massive TV/Power/Telecom towers nearby. What about busy roads or flight paths? Keep in mind that flight paths can change in some areas although not likely if you’re within 15kms of the airport. Towers and roads are not going anywhere.
Whatever you do, don’t over-capitalise – unless there’s a freak spike in the market you won’t get your money back for a very long time…possibly decades. Fine if you’re young and in it for the long long long haul but not great if you’re looking at a 10 year relationship with the block.
Work out build costs as much as possible. If the block is sloping you won’t be able to get a volume builder like Metricon or Perry Homes so your build costs will be at least $50,000 more than what they can provide. A 4 bedroom 2 bathroom 1 storey custom home (non-volume builder) on a slight slope averages approximately $300,000. Something to consider here is if the development has a design committee that will have to approve your design. If so, this can affect the cost of the build and also the style of the home.
If this property is going to be an investment, you need to check out the local rental rates for the style of home you’re building. Also make note of the number of comparable homes sitting on realestate.com.au empty. If there are LOADS in the area available, the market may be flooded with rentals. Compare the annual rental income to the current annual mortgage rates to see if you’re likely to be positive, neutral or negatively geared. Keep in mind that a rental property will have constant costs associated with it such as Council Rates, Insurances and if you’re not managing it yourself, property management fees (usually about 8% of the rental income).
When buying land off the plan you need either a very experienced conveyancer or solicitor who is very good at reading contracts, especially the Special Conditions. There is usually a lot of paperwork to read through and understand. You don’t want to waste your time trying to read it all and try to catch everything yourself, because there is always the chance that you will read right past it in a stupor because you’ve gone to sleep or if you do see it, not even understand the Contract Language and think nothing of it.
You want a mortgage broker/lender who you trust and knows your situation 100%. They will know which lenders are doing the best deals for buying land but also the building loan. Some banks are more painful than others in the building stage. Also, some mortgage brokers are more “creative” than others.
Let your accountant know you’re buying land. Don’t ask them whether or not you should do it because chances are they are not licensed to give you financial planning advice but definitely mention it to them before you go ahead in case there are any direct tax repercussions for you. If you’ve been with the same accountant for a while and they know your finances well, they might have some professional advice that makes a difference to your decision. Also, they will have something to contribute from an investment/tax write-off point of view so it’s always worth it to find that out in advance.
Obviously everyone’s situation is different and we don’t know everything but this is a good jumping off point – good luck buying land!!