Hi all,
My partner and I are in our late 20's and have recently completed building our PPOR and estimate the value to be around the $600k figure (based on similar sales in the street and suburb) and have a plain jane mortgage remaining of around $200k.
Therefore, I imagine that we have 'equity' of around $400k in our home (correct me if I am wrong – Im still learning
)!Now, I am entertaining the idea of doing the process again, but for an investment!
I have found a block of land (approx. 400sqm & 270k) and an actual house to build (approx. $170k, not a Villa – An actual 4 bedroom house (21sq), which I think is a point of difference for the area and why the value when completed will be higher than a Villa for comparison.
Based on sales information that I simple obtain from OFI and RE.com.au data, I anticipate a sale in excess of $530k in todays market and would settle for a return (yeild) of 10% in my pocket.
The slight hurdle at this stage will be financing the project over the 12-15 months of construction and the related taxes.
I am completely green (
Learners hat again)! and would appreicaite any feedback or suggestions.My understanding of the biggest hit is CGT, but my understanding is that if you hold the property for 12 months from contract to contract, CGT reduces from 50% to 25%. My question is what are the "contracts"? Is it when you purchase land, sign to build, or get hand over?
I would also look at finance options as if I stick to the plain jane mortgage like I am on, repayments are likely to double or triple and this isnt sustainable, but am open to any possible allowable deductions during construction to reduce costs.
So yes, is it all as easy as it sounds in my peachy dreams?!
Nobody?
Stera wrote:The slight hurdle at this stage will be financing the project over the 12-15 months of construction and the related taxes.
I am completely green (
Learners hat again)! and would appreicaite any feedback or suggestions.My understanding of the biggest hit is CGT, but my understanding is that if you hold the property for 12 months from contract to contract, CGT reduces from 50% to 25%. My question is what are the "contracts"? Is it when you purchase land, sign to build, or get hand over?
Hi I can't help you from the investment numbers side since I am quite green too but from the tax/accounting side.
Settlement for the purchase of land is day 1 since the land is the asset and building on it you are not creating a new asset but rather adding to an existing one.
Holding the asset for 12 months or more gives you a 50% CGT discount, that is the max discount you will get, holding it for any longer will not increase this.
Hope that helps.
Scab
Hi Stera,
Sorry for the late reply …. been flat out working all day and till 8.30pm tonight. I had intended replying to you earlier.
I hope I can shed some light on this matter for you.
There are 2 general ways you can sign a contract to build.
1. Find the land and finance it with a land only mortgage. Land only you will generally only get 80% LVR. Meaning, you will have to put in the 20% Deposit plus settlement costs (say 4% depending in which state, I'm in QLD) and commence monthly payments, preferrably Interest Only. You can access this from your equity by extending or refinancing your current mortgage. Whilst you are doing this you should tend to making sure you set up your mortgage correctly keeping your P&I PPOR debt separate from your investment debt for taxation purposes.
When you are ready to build, sign a builders contract, you can then finance 80% of the building contract or upgrade to 90% of the build and also 90% of the land you financed earlier. This is depending on your serviceability …. what you can afford to borrow for investment purposes based on your combined income and rental income from the new property. It is often a good idea to put as much of the debt for investment purposes against the asset in question itself, so most people will go to 90% if possible and appropriate for your investment goals.
Once you start building the loan is drawn down in progress payments after a valuer inspects every step of the construction and signs off on it on behalf of the financier. It is common to have about 5 or 6 progress draw downs meaning you will have a cost of valuations each time although they are usually cheaper than a standard valuation.
With this method you will be incurring loan repayment all the way thru till completion. They will start low and increase until the loan is fully drawn for the construction. Note: Make sure you dont make any changes or variations to the building plans unless your financier knows about it and approves it … otr else you will have to pay the additional cost out of your own pocket, or make sure you have extra funds available in your initial upgrade or refinance.
2. This is not always possible, but negotiate a deal with the builder to do a house and land package and that you request the purchase contract to be actioned on completion/ final lock-up. Usually you will have a better chance of doing this with a house and land package rather than a standard build for a number of reasons.
a. The builder will be building on your land. I wont go into detail but you probably already get the idea this can get really messy and the builder has many risks to consider.
b. With a house and land package, the builder usually owns the land and prfits from both land and the build so they may be more inclined to buiold it for you and settle on completion. They also have the option of selling it to someone else at a higher price if values increase whilst they are building. In some instances, you can benefit this way too by signing a fixed price contract, if the value increases by the time it is complete.Note: You mentioned you thought you have $400K equity. That's true however, you want to be looking at accessible equity. The equity you can actually take out to spend. Commonly you can access 80% of your PPOR value and avoid mortgage insurance costs, or extend to 90%. It could be of benefit to start with 80% then when you need to access the extra 10% you can upgrade again and only pay the mortgage insurance on the 10% rfrom 80% to 90% instead of the whole loan amount if you exceed 80% from the beginning.
In relation to yur CGT, I believe you are correct that it reduces after 12 months, however, I'm not an accountant and can't advise you on that.
I hope this helps …. you also might like to come to one of our next seminars led by Alistair Bell to learn how to buy right and make money investing in property. Alistair is a very accomplished property developer over the past 10yrs… you can google him and see what he's up to at the moment. All of our seminars are totally free, very educational and informative!
)!
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