Managing The Construction Phase [The Activate Way, Part 5]

Thursday, May 5, 2016 / Services

The construction phase of the investment process can be a very exciting time. You have just secured your piece of the greater Australian dream, and the building is going up.

Not only that, you know that you are contributing to the Australian economy and helping to provide potentially hundreds of jobs!

Whilst you wait for the construction to go through there are quite a few options for helping your portfolio along the way.

For example, if you were hoping to not need lender’s mortgage insurance on the investment loan, but only had a 10% deposit, you generally will have the construction phase as a window of opportunity to get that 10% up to a 20% deposit.

Towards the end of the construction you can start to advertise the property for rent, meaning that there will be a shorter period between having the keys handed over and having a tenant move in!

Depending on which investment property you decided to go with, there may be a construction period in which the building will be built.

Often when we are having our strategy meetings with potential investors, the duration of the construction period plays a major role in the decision making process.

Again, every strategy is different and there are merits in opting for a long construction period, just as there are merits to purchasing property that will be completed imminently.

The Main Benefits of Buying Off the Plan With a Long Construction Period

Probably the biggest benefit revolves around the capacity for growth before settlement.

When you lock in the purchase it comes as a set price, and that is how much the property will be regardless of any growth that the region experiences during construction.

For example, if you purchased an off the plan apartment in Melbourne in March 2015 with a 1 year build time, you would have locked it in for the March 2015 price.

The Median price for an apartment in Melbourne during March 2015 was $448,000.

If the construction then took one year, then by the time the property settled, it would have been valued at the median price of $454,000

This is a 1% growth in the value of the property from the time it was reserved to the time it was settled, equating to a value growth of $6000.

This is a great opportunity to gain the benefits of holding a property, with out having the full mortgage even being drawn yet!

To put this in perspective:

the 10% deposit required in the Melbourne scenario, would have been $45,400

Generally this is redrawn from an existing mortgage (as we mention in our guide to investment lending ) so it is taken at a investment mortgage rate very much similar to a home loan rate.

Lets call it 4.5% which is not a very competitive figure in the 2016 investment loan market.

In this first year you would have repayments for this $45,400 (these payments would also be tax deductible by the way) which would equate to $2,043 for the first year.

This may seem like wasted money, as there is no tenant yet, not even a property yet; however this reduced holding fee coincides with a 1% lift in the value of the property in this scenario.

The $6,000 value growth far outstrips the $2,043 required to hold it for this period. Not to even mention the tax savings!

 

Check out the next article outlining the activate way, and learn what the next step is in our process of helping our clients build wealth through property investment. See part 6 of the activate way here.