There are a multitude of important considerations in
making an appropriate investment decision
A qualified Property Investment Advisor will work to provide advice tailored specifically for you.
Your circumstances needs and preferences should be the basis on which any strategies are formulated, and recommendations presented.
Firstly, to know you and your needs, the Advisor will need to analyse many important considerations and criteria specific to you and your situation – importantly, the information needs to be both qualitative and quantitative.
A FACT FIND should be completed to determine for the investor:
Once the situation, needs and preferences are clear, the Advisor is then able to formulate a strategy and property recommendations that fit the ‘brief’ that has been identified in consultation with the investor.
Some of the critical considerations in selecting properties for review include:
Investment advice is about knowing the client, their needs and taking into account all the critical criteria and parameters to formulate an appropriate strategy and to present a well researched shortlist of property options.
Stamp duties are levied by
Australian State Governments
on the transfer of property
Stamp Duty is a tax levied on legal documents.
Australian State Governments levy stamp duties on the transfer of property from one owner to another. It is payable on land and also on the purchase price of an existing property.
It is levied at different rates by each of the states, and each offers various concessions and incentives.
Stamp Duty is both a taxation revenue measure by government and a means of influencing patterns of demand and expenditure.
It is deemed an acquisitions cost or ‘capital cost’ by the ATO when purchasing a property. It is not tax-deductible immediately or in stages over the first few years of ownership of the property as loan costs are, but can be offset against any capital gains tax payable when the property is eventually sold.
Stamp duty is payable on the full purchase price for a house, townhouse, apartment or any single contract purchase.
Stamp duty is payable only on the land content of a house and land package, which is a 2 part, ‘split’ contract.
There are a large number of online stamp duty calculators available.
Stamp duty on property purchases is a significant tax revenue-raising exercise for state and territory governments.
As the rate of stamp duty increases as the price of the properties increase, it is a progressive tax. If you can afford to purchase a $1million property, it is considered equitable that you pay more stamp duty than someone who can only afford to buy a $350,000 property.
In times of a buoyant property market, state governments fill the coffers with large amounts of revenue. The NSW State Government netted $13.8 billion in 2017-18, due to the lively property market and was the government’s single most lucrative source of revenue.
Stamp Duty is ordinarily due and payable at settlement. It is a cost that you cannot avoid and must be budgeted for in the purchase costs.
Purchase costs of an investment property
In addition to having the required cash deposit or available equity, the following costs are standard for a property investment purchase:
Stamp Duty – levied by each state and territory government, stamp duty is payable on the full purchase price of a one-part contract (apartments, townhouses and houses) and only on the land component for house and land, 2 part, split contracts.
Legal Fees – a solicitor or conveyancer handles the legal review of the contracts and coordination and management of the exchange and settlement process.
Loan Costs – lenders charge application/establishment fees (can be negotiated or) for the loan and for stamp duty on the mortgage, their solicitor’s fees, a valuation fee, search fees and the cost of registering the mortgage.
Loan Mortgage Insurance – If the LVR is more than 80%, the lender will charge LMI. Lender’s Mortgage Insurance may be funded as part of the loan and may not require a cash outlay.
Pro-Rata adjustments– On settlement, you will have to allow for adjustments to the rates pro-rata for the year, (council rates, body corporate fees etc.,) In other words, pay your share of the annual costs.
Independent Building Inspection – it is advisable to engage the services of an independent building inspector to make sure that any defects are rectified before settlement takes place.
Quantity Surveyor’s Report – to claim the maximum deductions allowable for depreciation, it is essential to have a professionally prepared, itemized report that is handed to your accountant once for the life of the property.
Insurances – property investment like any other investment, carries some risk. Insuring your valuable asset will manage the risk via building, contents and landlord’s insurance. Lenders will require the property to be insured, naming the lender as the interested party, before advancing the borrowed funds.
As a guide, it is recommended to allow 4-5% of the purchase price for the costs of purchase in addition to the required deposit.
For example, to purchase a $500,000 property as a cash depositor, avoiding paying LMI, you would require:
DEPOSIT = $100,000
COSTS = $25,000
TOTAL = $125,000
To purchase the same property relying on the adequate available equity in other property, you would require:
DEPOSIT = NIL
COSTS = NIL
TOTAL = NO CASH OUTLAY
If the contract is a 2 part, house and land construction, stamp duty will be levied on the land component only, presenting the opportunity for a significant saving. However, there needs to be an allowance made to service the loan during the construction period.
The land is funded first, and then the house is built and paid for in stages.
One month after settlement of the land, interest will be payable on the outstanding balance.
Once construction starts, the building is paid for in stages, and so the loan balance progressively increases until fully drawn down after the final construction payment.
It’s like making ‘mini mortgage’ payments. The first full mortgage payment will be due one month after the loan is fully drawn down by the borrower.
When the reduced stamp duty applicable on land only is added up with the cost of servicing the loan during construction, it will be very similar to stamp duty payable on a single contract.
Both stamp duty and interest during construction are considered to be sunk costs and can be offset (claimed) against any capital gains tax liability when the property is eventually sold.
One of the considerations for choosing
a particular type of property might be
the stamp duty and servicing costs payable
One of the advantages of buying a house and land package is that the contract is in two parts, and stamp duty is levied on the land component alone.
Once the land is registered and settled, ownership is transferred to the investor. The building plans are then stamped in the new owner’s name, a process that may take up to 6 weeks or longer, depending on the particular council process.
The house is then built in stages generally over about 6-9 months. When you allow for council permits to be issued, the build process and then occupation certificates to be issued at the end of construction, and allowing for delays due to inclement weather, a house and land package can take up to 12 months or more to complete.
Typically, the stages for house construction and the percentage progress payments are:
One month after the land settles, the lender will require interest to be paid on the portion of the loan that has been drawn down to date. As the build progresses through the stages, the lender funds more progress payments, the outstanding balance grows, as do the repayments.
Servicing the debt while a house and land package is built is like making ‘mini mortgage payments’. These payments become progressively larger until the first full mortgage instalment is due one month after the final progress payment has been made.
Assume a house and land purchase in Qld, for $430,000:
1.Land component $200,000
2. Stamp Duty on the land = $5425
3. House contract = $230,000
4. Borrowing 100% of the purchase price (costs covered by buyer)
5. Interest-only loan at 4.5% pa.
*Note: It is assumed for the sake of a working example that the stages of building happen in discrete months – in reality, some steps may happen more quickly or more slowly.
When we consider the difference between purchasing a single or a 2 part contract of the same value:
*using an example of Qld stamp duties
Had the purchase been a single contract at $430,000, the stamp duty would have been levied on the entire purchase price = $13,475
The house and land duty payable on the land is $5,425, but the debt has to be serviced during construction bringing the total outlay to $14,916
It’s worth noting that the interest costs vary for a host of reasons, including monetary policy to smooth the business cycle. Currently, the total interest cost to fund the construction would be significantly lower due to the record low current interest-rates.
In contrast, stamp duty rates are not dialled up and down as conditions in the economy and housing market change. As a result, in a low-cost credit climate, 2 part house and land contracts may be more even more cost-effective and attractive given the relative reduced initial outlay.
The land value and the proportion of the land in the overall package price will also vary from place to place as do stamp duty rates and therefore the comparative affordability of single contract compared to a 2 part, house and land construction will differ.
Stamp duty and interest during construction are offset against capital gains tax obligations when the property is eventually sold.
“They aren’t making any more of it!”
Greenfield sites are undeveloped, typically on the outskirts of the metropolitan area and are being rezoned to serve the growing demand for housing.
‘Urban sprawl’ refers to the growth and enlargement of the boundaries of the metropolitan area.
With a rapidly growing population, the demand for housing is also increasing. So more and more rural and semi-rural areas are being rezoned and developed into housing estates. The type of product on offer is typically house and land packages, and the target market is principally families.
The term ‘urban sprawl’ is often applied as a criticism. While housing is a basic need and the provision of building blocks a priority, it can be counterproductive if the quantity or quality of existing infrastructure makes it impossible to live the life that the residents seek. There must be adequate roads, transport options, schools, childminding facilities, shopping centres, and recreational amenities, to make it desirable and functional.
Land development is a costly exercise and is a contributor to the inelastic nature of land supply that inhibits the market mechanism. There are significant structural impediments that mean the price of land rarely goes down!
The boundaries of the Sydney metropolitan area have changed enormously over the years and will unquestionably do so again in the next decade and beyond.
Source: City of Cities – A Plan for Sydney’s Future, Department of Planning, 2005.
What the map tells us is that what was considered the ‘outskirts’ twenty years ago or less, is now well within the boundaries.
Choosing to invest in a greenfield site will typically mean constructing a house and land package.
Depending on the investor’s age and time frames (the gift of time) an outer metro location that provides space at a lower cost may be a strategic approach.
House and land in greenfield developments have numerous benefits:
Land content – land is at a premium and tends to only appreciate over time. In some states and locations, the land content will be the most substantial portion of the cost of the package. This a function of population-driven demand factors but also because development is an expensive exercise courtesy of the infrastructure requirements ( roads, water sewerage, electricity connections) and the co-contributions and levies applied by local government bodies.
Master-planned estates– most developments are part of a master-planned estate that include the provision of amenities such as schools, childcare, open space, shops and transport hubs. Covenants protect the value of each owner’s property by stipulating design features that maintain the overall aesthetic of the estate.
Stamp duty is levied only on the land content, providing a saving on initial purchase costs.
Appeal to a family demographic- families tend to be stable and reliable long term tenants. Once their children are in schools and sporting clubs and have friends in the area, parents are less likely to move, and this cuts down on vacancy rates and new lease/renewal fees.
Freehold or Torrens Title – the titleholder owns the property to the exclusion of all others. You can make changes to the property as you want (subject to local government authority approval) without consulting or seeking permission from a body corporate.
There are no body corporate fees or by-laws – as above, maintenance of the property is the responsibility of the owner. There are no rules to abide by apart from those imposed generally on the community by government zoning restrictions.
An infill development uses obsolete, under-utilised or undeveloped parcels of land in established, urban areas. It may involve renovating, expanding or re-purposing an existing building, knocking down an old house or two and building medium density or high rise properties. Typically the build type will be townhouses or apartments.
It means building up instead of out!
The advantages of infill development include:
More efficient use of available land – As a medium or high-density measure, it provides more housing in areas of larger population and demand.
Efficient use of infrastructure – as the infrastructure is already in place (roads, schools, hospitals, etc.) more people use them, cutting down the per-person cost.
Gives residents proximity to the things that matter to them, including jobs and reduced travel time and expenses.
Less maintenance, the body corporate is responsible for external maintenance of the property and its amenities.
Preservation of open space, environmentally advantageous, reduces our environmental ‘footprint.’
Strong appeal to young professionals who value proximity over space and increasingly, to empty-nesters looking to downsize.
A note about gentrification:
Primarily, gentrification is the changing character of a neighbourhood through the influx of wealthier residents and businesses into once lower-income areas. Typically an inner-city phenomenon, it is characterised by changes in demographic metrics such as rising income, educational achievement, falling median ages, increasing population density and a preponderance of white-collar workers.
Research by the University of Queensland’s urban planning faculty states that contrary to long-held urban geography theories, the most intense urban renewal is happening in the three eastern seaboard states between 5-15kms of the CBD. In other words, the changes are rippling outwards.
Sydney, Melbourne and Brisbane all have suburbs in ‘middle ring’ areas that are rapidly gentrifying, and the map below shows the effect in Brisbane as an example:
Source: Gentrification no longer an ‘inner-city phenomenon’ in Aussie cities uq.edu.au/news 16 July 2020