Eight reasons why you should build a rental property.
So you’re keen to jump into the rental property market, but unsure where to start. Building a rental property will consume your life for 12 months and possibly cause some sleepless nights, but there are definitely some rewards at the end that can make it all worthwhile.
1. The first and most obvious reason for building a rental property is the fact that once the property is built, major repairs will virtually be non-existent for the next several years. This means you won’t have to deal with unhappy tenants and you won’t be spending your time chasing plumbers, electricians and repair men. If you’re still not convinced, then consider the loss of rent if you have to move your tenants out while you do renovations to an older home. Someone will still need to meet the mortgage repayments.
2. New homes come with a builder’s structural warranty that lasts anywhere up to 50 years. Need I say no more!
3. A new house is clearly going to be attractive to tenants and a lot easier to rent. Advertising for new tenants costs money, and in the mean time you are left to cover the mortgage payments while waiting for the new tenant to move in.
4. New homes can end up costing you a lot less in the long run. This advice might contradict everything you have been told in the past. But when you hear a real estate agent say that it’s cheaper to buy an existing home, they are not taking into account the years of repairs and renovations that often need to be done to existing homes. How many times have you seen friends rave about buying a house for a bargain, only to watch them start extending and renovating 10 years later at astronomical prices? If any of you have ever compared the cost per square metre to build compared with the cost per square metre to do a renovation on an existing house, you would know that the cost to renovate is almost double.
5. When you build a new house you will only pay stamp duty on the cost of the land. This can amount to considerable savings.
6. By building you get to personalise the house exactly how you want it. Many people buy a rental property with plans to move into it later down the track when they retire. But when the time finally comes, they end up spending an obscene amount of money to renovate the house back to a standard they are comfortable living in. Build that perfect house now, rent it out, and when you are ready to downsize and move into it, besides a lick of paint, you won’t need to lift a finger.
7. If you purchase a block of land with the intention of building a rental property, then interest on loans, council rates, water, land tax and emergency services levy will all be tax deductible from the moment the land contract settles! This means negatively geared losses to offset against your taxable income resulting in a higher tax refund which can be used to help with the building process.
8. Brand new properties are much more tax effective than older established homes, and it’s much easier to end up with a positively geared property. A positively geared property is one where your income (including your tax refund) exceeds your out-of-pocket expenses. This is because properties built after 1987 receive what is called a Capital Works Deduction. This means you get to depreciate the cost of building the house at a rate of 2.5 percent over 40 years. That can amount to a very large tax deduction you won’t get with an older home. On top of that, your house is full of brand new plant & equipment that can be depreciated at rates of up to 40 percent, resulting in even more tax savings.
My final Word
There are definitely disadvantages when it comes to building that haven’t been covered in this article. If you’re embarking on a rental property journey, building is by far the hardest road to take. The hardest road, however, tends to reap the biggest rewards, and once you have built and the tenant is inside, things will settle down.
For many people, the time involved in building a rental property means it won’t be an option. If the time and effort are something that you don’t have to give, I would consider looking at house and land packages instead. Buying a brand new house that someone has already built will give the same tax savings as building your own.
At the end of the day, unless you’re a property guru, don’t try and walk the rental property road alone. Finding an experienced accountant that can hold your hand will be worth its weight in gold.
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