Looking to invest in a new property? Since the government announced its massive overhaul of property taxes, new developments may well be on the radar for some investors, however, while new builds come with plenty of tax benefits, they don’t always add up to a sound investment decision. So what should you look for when investing in new property?
Propell Property managing director Michael Pell is no stranger to building investment properties. Not only has his business specialised in helping clients with their own builds for the past 10 years, he has also completed his own.
He says the vast majority of investors choose the established property route over building new. His research has found that the most common fears around building an investment are that the cost might blow out, the builder might go broke and that it might not be built in time.
However, there are ways to mitigate these risks, he says.
CHOOSING A BUILDER
When choosing a builder, it’s important to choose one with a good track record of finishing projects on time – and one that fixes costs.
He warns to be wary of provisional sums, which are amounts that could potentially blow out during construction.
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“That’s where people do get caught up and that is absolutely something to be careful of,” he says.
He says while many people think they should avoid house and land packages, that isn’t necessarily true. It’s the greenfield estates where oversupply is an issue that are better avoided, he says.
CHECK THE FUNDAMENTALS
PIPA vice chair and ASPIRE Property Advisor Network CEO Richard Crabb says the fundamentals of good property investment don’t change when it comes to building. Choosing a good location where there is scarcity of housing and strong demand, economic growth and a strong demographic of owner-occupiers is especially important – and buying for tax benefits alone should be avoided.
“Get the strategy right and understand that first,” he says. “Make sure you’re looking at understanding the fundamentals of the location, the asset and how that’s going to achieve what you want for your strategy.”
He says it’s important to look carefully at the building contract to see what inclusions you are paying for, given that you can’t walk through the property. While the build has to make sound economic sense, he warns against going for the cheapest options like laminate benchtops and low ceilings as these could impede the resale value.
Both Crabb and Pell caution against relying on display homes as an indicator of a builder’s product, saying they usually are the highest-spec, most expensive options and that it’s better to check out previous builds instead.
KNOW YOUR WARRANTIES
If you are buying a brand new property, or you are building a property, it’s important to know your warranties. The structural guarantee of a building should be set out in the building contract, Crabb says.
“You normally get a three to six month warranty on all the works and then there’s normally a six plus year structural guarantee,” he says.
If you are buying a brand new apartment, things can be more complicated, he says.
“If you’re buying in an apartment complex with 400 apartments you are tied to the strata,” he says. “What’s the quality of the build? Who’s behind it? What’s their track history? It’s really important to understand those if you are buying brand new.
OFF THE PLAN
Pell says he never buys Off The Plan apartments for his clients.
“Too much can happen in that one to two to three year time frame before it’s completed,” he says. “Buying a block and building’s different. You settle on that land in the first sort of one, two, three months – you own the block. With off-the-plan apartments, you’re going 10 per cent deposit down then you don’t pay till it’s completed at the very end. You don’t actually own anything with that 10 per cent down. You own the right to settle on the property at the end.”
TOP TIPS FOR BUILDING AN INVESTMENT
Propell Property managing director Michael Pell shares his top tips for investing in new property.
1. Choose an established area – it’s better to build in popular areas where infrastructure like shops and transport already exist while avoiding greenfield estates
2. Choose the right builder – look for a good track record, good financials and a good product that is consistently delivered on time
3. Avoid provisional sums – make sure your builder offers fixed pricing without any provisional sums hidden in the contract
4. Build at the right price – the key to building is the ability to manufacture equity. Make sure the cost of house and land enables you to do that, remembering that buying a brand new property, in contrast, would likely come at a premium
5. Keep a buffer – while you’ll likely save on stamp duty by buying land versus an established house, you’ll need to afford to pay interest on your mortgage throughout the build process
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Originally published as Property experts reveal the biggest pitfalls to avoid with new build investments
