Many people think of house and land as only for first home buyers or for those unable to afford an established home in an inner suburb. We talk to lots of investors who come to us with a leaning toward investing in established property.
This overlooks the pivotal strategic place that H&L can play in your investment strategy and ignores the very real benefits that investing in H&L can deliver. More importantly, for unsuspecting new investors it can result in you leaving significant sums of money on the table.
Make no mistake – there are definite benefits to investing in old established properties. But if you are serious about investing, your aim is to invest in a series of investments that all deliver against five key areas:
- Minimal outlay
- Easier finance
- Capital Growth
- Rental income, and
- Indirect income in the form of legitimate income tax benefits.
In a well-balanced portfolio, these all work together to build a scaffold under your investments and enable your next investment. While old property can deliver against points three and four, the benefits from new property far outweigh those of established properties against all five.
This realisation has prompted many investors to fight the supposed wisdom of buying like their parents and move aggressively into the House and land investment sector.
Here’s why…
Lower entry cost – Unlike properties in the inner suburbs in Melbourne, Sydney and Brisbane, house and land packages with quality fittings outside of the city ring are still within reach of buyers looking in the $500 – $750K range. Remember that the entry point numbers for your first investment set the scene for your next one, so the better the buy price, the easier the finance, the better the potential return, and the better you look to the banks for your next investment. It’s important to start off on the right foot.
This doesn’t mean that all H&L projects are equal though. Location is key to extracting the full value from house and land option. We’ll deal with location a bit later.
Land – Capital growth comes primarily from land. This is why houses and townhouses almost always have better capital growth returns than conventional non-luxury apartments. Having land means that you are getting the capital growth benefit from your investment while your tenants pay the mortgage. Sure, established property has land as well but the higher entry cost means that you are essentially paying for someone else’s capital growth when you buy it.
Greater depreciation potential – Key part of investing in property is to maximise your income. Income comes from more than the obvious places. When it comes to income from real estate, most people think of rental income and don’t go much further. But there are other forms of indirect income that comes from buying new that are frequently overlooked.
Tax and depreciation are other ways to generate income by providing legitimate deductions to your income tax – and the amount that you can legitimately claim is vastly more when you buy new rather than existing property.
The end result is that the lower entry cost, attractiveness to tenants and ability to other deductions makes cost neutral or even cash positive position easier to obtain.
For this reason, H&L is often a great first purchase as it sets up your portfolio for growth and a cash position that makes you more attractive to the banks for your subsequent investments. Compare this to investing in an old property with moderate capital growth but where the repayments and rental income paint a cash negative position.
But the selection of location is critical to ensuring that these factors work together the way that they should.
Location – what to look for
As we said earlier, location, quality and price are the things that set one house and land opportunity above the rest. These are things that will draw good tenants to your property, maximise your potential rental income and ensure that you get the best capital growth possible.
With this in mind, here are some of things you should consider;
Local amenities – are there shops, schools, medical, leisure and sporting facilities within a reasonable distance? Are there playgrounds and open natural spaces where kids can get out and safely play?
Project amenities – What makes the development different? Does it have community or social areas within the project itself? Are there natural or man-made features that give the project a special flavour or theme?
Transport – Is there public transport to and from the nearest large urban centre? Are there public transport routes into the CBD? Is the area connected to a freeway entry?
Developer reputation & track record – Does the developer have a track record of creating sites that hold and grow their value? Do these projects have high occupancy rates?
Materials & finishes – Is there access to an investor option? Does the developer offer good quality finishes and materials within the standard packaging or is everything an extra? It is important to remember that the aim is to secure a property that is good quality at the base price and does not require over-capitalisation to get reasonable quality. Fight the temptation to be upsold – many builders and developers rely on this for extra margin. Sadly, it rarely delivers an extra return.
It’s a juggling act to find this balance but the difference could cost or save you tens of thousands.
If researched and bought properly, house and land packages can work for you in ways that established properties simply can’t. form the cornerstone of your property investment plan. We feel that this can make all the difference in the long-term performance of a portfolio and devote considerable time to vetting the property opportunities we endorse for our clients as well as those that we buy ourselves.
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