When Is A New Build A Worthwhile Strategy?
New build properties can have risks like over-capitalisation or over-supply. How can you avoid these risks and successfully invest in new build property?
Ryan: When do you determine a new build being a worthwhile strategy and have you successfully avoided the common perceived risk associated with them, i.e., oversupply, over-capitalization, etc?
Ben: It’s a really good question. Probably 19 out of every 20 properties that Ryan and I help people buy are existing. Every now and then a good opportunity comes up in the land market. For me, when you’re looking at brand new property it really has to be in a high quality existing suburb, either very close to the beach or very close to the city.
It’s generally an infield piece of land as opposed to a grand field site, although I have bought pieces of land in Stockland’s Estates in the past and done well from those because sometimes Stockland’s a relentless lead, driving up prices in certain parts of Australia at the moment.
I think you’ve got to be very careful about over-capitalizing. A lot of people buy the land at the wrong price and then over-capitalize on the build side of things and pay significantly more than they should for the product. There was a guy I spoke to from Melbourne that was looking at Logan on the south side of Brisbane recently.
He showed me the cost of the build and I told him that the property marketer who’d sold it to him is making $100,000 on the build in undisclosed commissions and he still went ahead with it even though I told him that he was getting absolutely stitched up.
You’ve just got to be very, very careful with building. I highly recommend if you are going to build that you do your due diligence, you make sure you get a number of quotes from a number of reputable builders and you make sure you buy the land at the right price.
It’s definitely not something to attempt without the support of someone else or I suppose as a first step into the market because you can really over-capitalize and then destroy three to five years worth of future capital grow, which a lot of people have done on the outskirts of Sydney and Melbourne in sort of recent times by over paying for those properties.
Ryan: Yeah, and be really careful when you see house and land packages and things like that, that are marketed to you as a whole package, because generally there are commissions added into that for the sales people that can really jack up the price of that, vs if you were to source a land and source your own builder yourself and get it done yourself. Yeah, just be really careful. There’s a lot of pitfalls.
It can obviously be done, I know Ben’s done it successfully, as have many other people but yeah, just be very careful.
Ben: 100 percent of what Ryan has said is true, like in the sense that you wouldn’t look at an existing property without doing your due diligence on the suburb, but for some reason when people buy land they forget to do the same fundamental statistics and research that they would do for an existing home.
It’s no different with building brand new, it’s just about understanding the market value, understanding the future potential in that area, getting comfortable with the rental vacancy rates and the DSR scores and the data that you need to understand and then making an educated decision.
Making sure that as we talked about before, you’re not over-capitalizing and you’re not sitting in that top five percent of the suburb band in terms of the property price that you paid at that time.
If it’s a long term, 15 to 20 years buy and hold strategy then the market will be forgiving but you should still be looking at short term growth on the weigh in on everything you buy.
Ryan: Well I hope you enjoyed the answer to this question with Ben [Arringham 00:02:29] from Pumped on Property. We’re really having a blast doing these Q and A sessions with you guys, so keep the questions coming. If you’re at the point now where you’re ready to purchase an investment property but you think you might need some help, then Ben is offering free strategy sessions to On Property listeners.
Simply go to OnProperty.com.au/session and you can book a time with Ben and you can go through where you’re at, where you want to be and what your next steps are to get there. Again, that’s OnProperty.com.au/session. Thanks so much for watching and until next time, stay positive.