Homes, Dual-Living & Duplex

Land & Construction Investing For Profit:

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1 How does a Land & Construction Package work?When we offer a Land & Construction Package, it consists of a two part contract between a land owner, which is typically a developer, and a builder, who will be constructing the prospective build. In some cases, we deal with a property manager as well, so there are a number of individuals involved in the transaction.

The key to finding a fantastic Land & Construction Package involves negotiating a good price on both the land and the build to ensure a good return, as well as finding benchmark homes nearby which are priced higher.

7 Things You Need To Know Before You Invest

2 How does the loan work?The loan structure can seem intimidating, especially if you’re unfamiliar with the process, but there are a couple of ways it can work.

Financing a Land & Construction Package is unique, as unlike an existing property, the finance is done in two stages: Land Acquisition and the Construction Loan.

Once you have purchased the land, you will need a Construction Loan. A Construction Loan is the most common means of financing a house and land package, and nearly all banks and lenders offer this kind of loan. A Construction Loan requires funds be drawn down as each stage of construction progresses. Typically, a build will have between three to six stages, each requiring a “draw down” of the loan.

These stages include:1. Upon land settlement – deposit before construction begins.2. After the slab is poured.3. When the walls are established.4. “Lock up” Stage.5. Upon completion.

Each time a stage is complete, you will begin paying interest on that portion. The drawback with Land & Construction is that while you are paying interest on the Construction Loan, you won’t be receiving an income as the property isn’t completed. The plus side is that the interest you pay is tax deductible. If you declare the property is for rental purposes, you can recoup some of the interest costs.

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Financing Your Land & Construction PackageHouse / Dual Living – 90-95% loan to valuation ratio• 1-2 valuations required for a successful outcome• When purchasing in hot spots, valuations can be 6 months behind the current market, with new stage releases setting new bench marks• Not uncommon for valuation firms to undervalue dual living houses by 10%, despite optimal layout and size for the area

Duplex – 80-90% loan to valuation ratio• Some banks require council approved DA plans before providing finance. Approved plans can only be provided once the 5% building deposit has been paid (allow 9 -15 weeks)• Valuation typically done in one-line on completion• Positive Financial Services (PFS) now has a finance product that accepts valuations on completion of each completed duplex half at an 80% loan to valuation ratio

Investor Developer – 70% loan to valuation ratio• Positive Financial Services (PFS) has an Investor Developer finance product which provides 70% LVR for the development• Valuation typically done in one-line on completion• Pre-approval on completion at 90% loan to valuation ratio

3 How do I make money out of a Land & Construction Package?Land & Construction Packages are a great way to make money. You need to buy the land for a good price and to then build a property that is going to cost less than what the major developer in the area is building new house and land packages for.

For example, in Fletcher, Newcastle, we were able purchase land from of a major developer and contract to a smaller builder, who was constructing similar homes to those of the major builder for approx. $55,000 less. As a result, we had a cheaper Land & Construction Package in the same estate as the pricier homes, putting our investors in a strong cash flow situation.

The potential for resale is essential to consider in order to make a profit from your Land & Construction Package. It’s important to understand that in order to make equity out of a Land & Construction Package, you will need to stick to some guidelines:

• Build your house at a cheaper rate than your neighbours.

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• Buy where owner-occupied homes are in a majority.• Understand that if an estate is aesthetically pleasing, you’ve got a great audience for resales.• Make sure there have been established resales within that estate. This is a good sign that you can sell and that there is a market.

When to Buy?• House, Dual Living and Duplex should ideally be bought between 5 and 9 o’clock.• After 9’oclock there is limited registered land.• However still some good buying through to 10-11 o’clock.

4 How does the build approval process work?THE PROCESS EXPLAINED - NSW VS QLD

Each state has a slightly different approval process and time frame when it comes to proceeding with your House & Land or Duplex package. Here are the approval processes for NSW and QLD:

5Land & Construction Investing For Profit: Homes, Dual-Living & Duplex

NSW H&L• Commences with finance letter given to builder• 9-12 weeks in total• Build deposit paid following completion of working drawings• Additional delays with Mine Subsidence Approval in Newcastle

QLD H&L• Commences with payment of 5% build deposit• 7-9 weeks in total

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QLD DUPLEX• Commences with payment of 5% build deposit• 9-15 weeks in total

NSW DUPLEX• Commences with finance letter given to builder• 9-15 weeks in total• Build deposit paid following completion of working drawings• Additional delays with Mine Subsidence Approval in Newcastle

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5 How is Land & Construction different to Off-the-plan?Both a Land & Construction Package and an off-the-plan strategy use the strength of time in the market for an increase in value. It is essential to make sure you are buying into a market which is going to grow. A Land & Construction package differs from off-the-plan because you have an element of control over your growth in value with your input and involvement during the contraction phase. When purchasing off-the-plan you don’t need to be as involved as a buyer during the construction phase as this has already been negotiated and planned by the developer.

It’s important to understand there is a difference, but essentially it is the same idea – buy in a growth market, try and get the best possible property in that growth market, build it and see the value when it settles.

6 How is stamp duty calculated?Stamp duty is calculated on the land component only, so if you’re buying a $400,000 property, but the land is only worth $100,000, you’re only going to pay stamp duty on that proportion of the contract. In some states and territories there are exemptions, due to stamp duty savings and concessions by the government. For example, in New South Wales, it works out that you wouldn’t pay stamp duty at all right now on a Land & Construction package, which is a great saving.

7 What are the benefits of a Land & Construction Package over an existing property?Both strategies focus on creating equity. When purchasing an existing property, the idea is to renovate to increase the value. When purchasing a Land & Construction Package, the idea is to buy the land well, in an area where the value is set to increase from the time of purchase until construction is complete. From there, negotiate with a builder that is going to build a property of equal or greater quality for less cost than other builders in the area. A brand new property will appeal to the owner-occupier market from a resale point of view, which is where you will immediately see your profit. Be sure to look for benchmark sales in the area to gauge the potential value of your property from the start.

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• Define your needs. What size of the land and price range you can spend?

• Fixed Prices. Beware contracts with a long list of ‘estimates’ and ‘TBA’s’. To avoid a blow-out in costs, ask for a fixed price. Leave no stone unturned and ensure you have information about every cost. Keep an eye out for clauses such as ‘pending soil test’.

• Builder promotions. Watch out for builder promotions offering big discounts and bonus inclusions. Remember, if it sounds too good to be true, it often is. Look for real value.

• Display homes. Don’t be distracted by extravagant display homes. Some builders won’t even construct many of the impressive features they have on show within their displays. Ask if they will build the home ‘as displayed’ and provide you with a fully itemised cost.

• Is there a design fit? Does this builder have expertise in the style of home you seek?

• Experience counts. While every builder was once a new builder, experience matters.

• Verify the builder is licensed (where required) and adequately insured.

• Warranty and service. How does this builder stack up for each?

• Resale value. Have past homes from this builder maintained or increased value?

• The Backyard. Some builders will create a level home site on your block for the house, but leave the backyard steep and un-useable. A good builder will consider your needs more carefully – a user friendly backyard is important for lifestyle.

CHOOSING THE RIGHT BUILDER

9Land & Construction Investing For Profit: Homes, Dual-Living & Duplex

REAL EXAMPLES

HOUSE & LAND STRATEGY • Entry point $350,000 to $450,000• Yields 5.5%+• Some equity gain possible (benchmarking)• Low deposit required starting from 5% of package price• Buy in hot spot ideally from 5-8 o’clock• Important to buy in the right estate

• 4 bed, 2 bath, 2 LUG• Builder on site - average 10 weeks from land settlement• Construction timeframe - average 13 weeks• Purchase price from $515,000• Appraised value upon completion $560,000

CAMPBELLTOWN, NSW

DUAL LIVING STRATEGY • Entry point $430,000-$480,000• Build price 10-20% higher than a house due to 2 dwellings• High cashflow with yields 30-40% higher than a house with yields 6.5%+• Some manufactured equity expected• Buy in hot spot ideally from 5-8 o’clock• Also works in 3 star hotspot• Important to buy in the right estate• Great choice for first home buyers and investors• Balance out cashflow with negatively geared property• Resale to owner occupier with extended family or another investor

• 5 bed, 3 bath, 2 LUG• Builder on site - average 8 weeks from land settlement• Construction timeframe - average 20 weeks• Purchase price from $495,000• Combined rent upon completion - $650pw, 6.8% gross return

DAKABIN, QLD

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DUPLEX STRATEGY • Entry point from $500,000• Strong cashflow with yields 6%+• Develop 2 investment properties at the same time• Manufactured equity of 10%+ of package price• Buy in hot spot from 5-11 o’clock• Also works in 3 star hotspot• Important to buy in the right estate

• 5 bed, 2 bath, 2 LUG• Builder on site - average 13 weeks from land settlement• Construction timeframe - average 15 weeks• Purchased for $542,000• Appraised value upon completion $600,000

TOOWOOMBA, QLD

Equity in ($600,000 package)

90% Loan $540,000

10% Deposit $60,000

Stamp duty $10,000

LMI $15,000

Equity in $85,000

Equity out ($680,000 valuation)

90% Loan $612,000

LMI $15,300

Less Loan $540,000

Equity out $56,700

Equity required at commencement - $85,000Equity returned on refinance - $56,700 (67% equity returned)*Without any capital market growth in property

✓ Extensive property due diligence• Review land contract for optimal terms• Town planning advice• Macro and Micro review of each area and property lot

✓ Contract Management overseeing Land & Construction contracts from EOI to Handover stage

✓ Established relationships with builders covering key areas Australia-wide

• Standard pre-negotiated build contract terms• Own construction management system

✓ Building contract standard for H&L, Dual Living and Duplex• 16 week and 20 week build period for house and duplex (Industry standard build time is 26 weeks)• Liquidated damages equal to weekly rent• Fixed price and Turnkey

If you would like to know more about how a Land & Construction package could fit into your portfolio, come along to a free education evening near you.

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