NEW BUILD VS OLD VS LAND/BUILD

Apr 27, 2021

New Build vs Old vs Land/Build. A good question. New-build homes get lots of tax advantages. How do they stack up against old (existing) rentals, and land/builds? Each scenario has its merits, and it does depend on whether you are looking at a positively- or negatively-geared scenario.

OLD

Ok, so here’s the good points: You buy a house: it’s built, with tenants (usually), you’ve got your LIM report, you know what you’re getting (hopefully) and you’re good to go: that is, the investment property scenario starts rolling straight away. Rent comes in, expenses go out, wealth grows. Done.

The bad points: You actually have to find that house, in the right street, in the right suburb, and then once you’ve done that, hope that you win the auction or get your offer accepted.  Provided that the LIM report didn’t show up anything nasty.  Hope it’s not leaky.  

The value of the chattels is usually low, so the depreciation isn’t great.  Also, as it is older, you have more repairs and maintenance. Potentially you have to spend some money on insulation, and sooner or later it’ll need a new kitchen and bathroom.  Those last three expenses very likely aren’t tax-deductible either.

#NewBuild vs Old vs Land/Build: thinking about

#NEWBUILD

Woh! So you’ve got a brand-new place. Awesome!  That means you’ll get maximum depreciation on your chattels – remember to get a chattels valuation.  And, repair and maintenance will be low. Plus it is well-insulated, and might even come with a MBG.


On the other hand, you might have had to pay a lot more because it was brand new… and it is not likely in a central City suburb.  More likely it is on the outskirts, which is OK, but not as desirable as a suburb which is closer in. Next in the New Build vs Old vs Land/Build line-up is:

LAND/BUILD

Good bits: all of the above under “NEW”.  Plus, there was no auction, no putting in offers and waiting anxiously to see if they’d be accepted.  Look at the stress you’ve saved.

The bad bits:  The builder probably said it’d be 6 months, but that didn’t include getting consent from Council.  Then there were weather problems, and other problems, and so it has actually taken a year to build.  Throw in a COVID lockdown or two, and that might take you to 18 months. So you are only just getting tenants in now.  And you’ve been paying interest on the land and the progress payments all that time (although the interest is tax-deductible) OR on your deposit (if you borrowed that). Finally, you hope that the developer doesn’t go bust during the process and you lose money (make sure you really do your due diligence re the developer/builder. See your lawyer about this).

However, returning to the plus side again: assuming you’ve got a good contract with penalty clauses for delays by the builder/developer (talk to your solicitor), and you paid a reasonable price for the land, it has been appreciating in value all that time.  And it probably means you’ve come out with an asset that’s worth more than what you paid for it. Some of the costs you’ve incurred may even be deductible.  Plus, the weekly rent that the property can attract has doubtless increased, and so that just about covers the property management costs.  

However, you also need to consider what type of land and build package you’ll choose…

TURN KEY VS PROGRESS PAYMENTS

There are two types:

  1. Turn Key. This is where you pay a small deposit, then nothing until the house is built ie you can “turn” the “key” in the door.
    • Cash up-front, then nothing til it is finished, so great for cash-flow
    • Generally costs more, as the builder or developer has to carry the cost through the build process. This tends to eliminate the cowboys, as they don’t have the funds to do that.
  2. Progress Payments. Usually you pay for the land, then pay as the build progresses.
    • Cheaper, but you need to keep an eye on actual on-site progress.
    • And not as easy to get the finance for

LEGAL ISSUES

In either case, it is essential that your lawyer thoroughly reviews the build contract. Why? Well, there are risks of the builder or developer failing, supply costs going up, delays due to COVID lockdowns or Council, and nasty things called “sunset clauses.” The role of your lawyer is vital in checking your contract so that you are protected.

LENDING ISSUES

The bank will give you (hopefully) pre-approval at the start. However, this pre-approval often will not last the entire length of the build, especially if the build stretches longer than a year. So you usually need to reapply during the build process. This should ideally be done at least 4 months before expected completion date, so that you have plenty of time to work out options if the bank says no e.g. 2nd tier lender, sell back to the developer etc.

If your mortgage advisor is half-decent, they should be on top of this. Check out this excellent article from MortgageLab on the subject

SO… NOW WHAT?

As you can see, there is no right or wrong per se. Whether to buy New Build vs Old vs Land/Build, the choice is yours. But next, make sure you read about rental yield, ring-fencing of residential property losses and best rental property structures

Then give us a call. We’re happy to chat and we are here to help: 099730706 or contact us.

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