There are numerous reasons to invest in a property, whether you want to build or buy an existing home. But there are pros and cons to each. To help you navigate this complex decision, we’ve broken down whether it is better to develop or invest in property.
The first thing you’ll need if you are building an investment property will likely be to secure a construction loan. Used to pay for the cost of building a property, a construction loan is a kind of short-term home loan that generally lasts for roughly the time it takes for the house to be completely constructed. After that point, you will have to convert to a standard mortgage product from your lender.
The six steps of the construction process that you will need a construction loan to finance include deposit, slab down, frame up complete, lock-up, fixing, and practical completion.
If you have the equity in an existing property to start construction, it is possible to use a home loan to build your property. That option, however, will generally require a large lump sum. To apply for a construction loan, on the other hand, requires what any home loan application would, such as: ID; employment information; pay summaries and payslips; lists of liabilities and assets; and a savings history. Additionally, however, you will need to provide professional plans for the home, which includes an expected valuation.
The major pro of developing a property is that the process has been simplified to aid younger, less experienced buyers build their first home. The following are a few reasons why developing a property could benefit you:
Build to meet market demand. Prior to developing your property, you can speak with a real estate agent or architect to understand what type of property is currently in demand—which can increase your property’s value, both when selling or renting.
Tax minimisation. Developing a property allows you to claim, among other areas, the depreciation on fittings (think: blinds) and internal fixtures, which can also help you reduce your taxable income.
Instant equity. If you have bought the right land and built the right property, you can return to your lender when the project is completed to get your property re-valued. If the initial value during your application is lower than the re-valued price, you instantly add equity to the property.
Developing a property does come with a few cons, however. These may include:
Limited locations. Since land is fairly limited in most established areas, such as cities, your options will also likely be limited. This disadvantage, of course, applies less in rural areas.
Other developments can impact your home’s value. This applies especially to those areas that are newly established. A new apartment could be built in front of your view (lowering the value) or an undesirable business could open near you.
May not be cheaper. Aside from the cost of building the home, added expenses include council building permits, rates, and other unforeseen expenses—plus, you will not earn rental income until the project is complete.
A big plus when investing in an established property is that you know what you are getting; it is right in front of you. The property has already been established and the features and layout are clearly defined. Another bonus is that you can attract tenants by working with local real estate agents. Other pros of investing in an established property include:
Convenience. One major convenience is that you can start generating rental income much faster—and the sooner you can get that added income, the better.
Less stress. Developing a property rather than investing in an established one can be a stressful experience even for the most experienced developers.
Price negotiations. When you purchase a property from an individual private vendor, there is more room to negotiate. Sellers that are more eager to close the sale are typically more flexible when negotiating.
As with developing a property, investing in an established property can come with its disadvantages. A few cons to investing in an established property include:
Cost of upkeep. Running the property could cost you more money. Since more established properties may be more likely to have wiring and plumbing issues, for instance, the running costs could prompt renters to keep searching.
Cost of renovation. Because materials and design elements could require costly specialist trade services, aging homes may be more costly to renovate. Heritage overlays, for example, usually add expenses to renovation work.
If you invest in a property that you want to build on, you can: have creative freedom to build a house that suits the market preference; if you know where to look, building can be inexpensive compared to purchasing an established property; claim tax deductions on depreciation; and get your home re-evaluated, potentially turning it into instant equity.
If, on the other hand, you invest in a property that is already established, you can: select a great location; make renovations, which then easily bump up the cost; and, similar to building, claim tax deductions on depreciation.
