How to Create Equity With New Homes

Posted on 13/08/2019  
How to Create Equity With New Homes

No longer satisfied with the old method of buying an existing home and waiting for its value to grow, investors are seeking stronger returns building new properties.

Better tax benefits, lower maintenance costs, higher rental returns and the ability to “manufacture equity” make building new properties a growing investment option.

Under the old passive method investors bought a property and waited for the market to rise to create equity. But with new builds investors are able to achieve solid results a lot faster.

Danny Buxton of Triple Zero Property Group said there were many tax benefits in building new properties rather than buying existing ones.

“I do find often in a lot of property circles people don’t like new property and would rather find an old house and do some renovations to manufacture that growth,” he said. “But you actually have more control over the situation with a new property.”

Buxton said, when considering an investment property, he always weighed up the possible tax benefits and new properties had more opportunities for this.

“That is one of the reasons I particularly like new property because of the significant tax benefits you get,” he said.

“You have stamp duty benefits if you are doing a new house-and-land package, because you are only paying stamp duty generally on the land portion of your contract. You are not having to pay stamp duty on the full purchase price.

“Certainly in Queensland, if you are thinking about a property that is worth $550,000 and you’ve got a land contract and a build contract, you can save probably about $10,000 on your stamp duty costs.”

Also, investors were able to claim full depreciation on all fixtures & fittings on new properties, which they could no longer do on existing properties.

“The Federal Government changed the depreciation laws in 2017,” Buxton said. “They took away the depreciation on fixtures & fittings on a second-hand property, but they still allow you to claim the full round of depreciation on a brand-new property. So, you have a significant tax benefit over those first five or six years of holding a property.”

There are also reduced maintenance costs within the first 5-10 years for investors buying or building new properties. Buxton said that could be a significant saving to investors.

“You are not buying something 20 years old that needs a new roof or a big renovation or a new bathroom,” he said. “So, you have more cashflow coming through.”

He said it’s easier to achieve a better rent with a new property than an older one.

But buying or building a new investment property comes with risks. You still need to ensure it is in an area where renters want to live, close to amenities and facilities.

“You are looking for infrastructure and employment hubs that people actually want to live in,” Buxton said. “You want to make sure it’s an area where you are going to get capital growth because that’s where you make your money.”

Buxton said while there was no “get rich quick” with property investment, there were types of property that would deliver better returns and faster wealth creation.

Splitter blocks provided another opportunity to manufacture growth – but caution is needed.

“We do see a lot of people who have paid a lot of money to go to seminars about manufacturing growth through doing splitter blocks,” he said. “You really need to know your numbers and you need to understand the overlays on that particular block.

“A number of people who have come to us have been caught by this. A real estate agent sold them the idea of doing a splitter block, without doing full due diligence.

“They end up having their costs blow out significantly - to the point where it is just not worthwhile doing as a project.”

Buxton said another method of manufacturing growth is building a duplex, which gives investors multiple options and strategies.

The investors can retain the property and enjoy a strong rental yield from two tenancies; tap into the equity created and reinvest; sell the property and utilise the capital gain to pay down debt or to reinvest; or keep one side of the duplex for rental income and sell the other side.

“That is the advantage of the duplex model over the dual occupancy model,” Buxton said. “I don’t mind dual occupancy if you really want that yield, but you can’t sell that second “side” of a dual occupancy whereas with a duplex you can sell one side so it’s  a little more flexible for people.”

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