Success stories

By Your Mortgage

Lindy Lear is a big fan of new properties as investment and has already accumulated nine properties in her portfolio. Here, she takes you step-by-step through her experiences buying a house and land package to build a brand new investment property

I had certainly built property to live in before and was aware of the general construction process. I had memories of weekly visits to see the building progress, endless decisions to be made at each stage in choosing plans, designs, colours, materials, fittings, appliances, etc, etc. It was very personal and emotional and did come with a lot of stress. So why would I go through that for a house that I was not even going to live in? Wouldn’t it be easier to just buy a completed and established house?

This is something I knew nothing about until I took the plunge and built an investment property. Having now done it I would recommend it to all investors and I want to show how easy and rewarding it can be.

Why I chose a package

Unlike building a house as an owner-occupier as described above, the aim is to buy a ‘package’ that includes everything ready for a tenant to move in at completion.

And I do mean everything: from the blinds, curtains, floor coverings, packages, driveway, fencing, landscaping, air-conditioning, clothesline, right down to the letterbox and TV antenna.

It is called a ‘turnkey’ package; once it is built, the tenant just has to turn the key and move in.

One of the main benefits is that you end up with a brand new property in a great location (if you do your research) with all the features that make it attractive to potential tenants, who will be prepared to pay a premium rent.

You also make big savings on the stamp duty payable at purchase. As the property is not yet built, you only pay stamp duty on the land component. You’ll still need a construction loan as the house is being built, but as the interest is all tax deductible, you’ll be out in front.

Being a new house, you can take advantage of higher depreciation rates which helps enormously with the holding costs and can turn a negatively geared property into a cash-flow positive property after the tax refund.

For investors looking to build in Queensland, what is really important in light of the recent floods in parts of the state, is the Q100 guideline for new developments. This is where approval to build new houses in certain areas is not given unless the land is above the worst flood level in the last 100 years. This gives assurance to both investors and tenants that their house will be protected, as they are not building in low-lying or flood-prone areas.

My checklist for a good package

When I start looking to buy a house and land package, I look for areas:

  • within my budget (under $400,000)
  • where there has been historical growth in the last five years
  • where there are strong drivers for future growth in the next five years
  • where the rental yields are at least 5% and growing, but are still affordable in the current market
  • where the vacancy rates are low (under 2%)
  • where valuations would support purchase price
  • which are near services and new planned infrastructure
  • where there is strong population growth and a diverse economy
  • where there are strong economic or resource drivers

Quite a big wish list you might say. Where could such a place exist?

  • affordable and close to the CBD in a capital city? Not likely!
  • a mining town in a remote area? Too risky for me.
  • an outer suburb of a large capital city? Likely to be a transport black hole!

Which state or territory will I choose? Before I pick the area, first I need to know how much I can afford.

Crunching the numbers

When I invest, I like to know what my savings and my borrowing capacity will allow me to buy.

Using a recent purchase as a working example, I had $47,000 cash to use as a 10% deposit, plus I had stamp duty and legal costs as well as wanting a buffer during construction. I asked my broker, Philippe Brach, what my limit was and he recommended that a purchase price of approximately $370,000 was about it. So the numbers looked like this:

Holding costs during construction and at completion I had a buffer of $5,000 to cover the interest payments during the six months’ construction timeframe and these interest payments were also tax deductible.

Next, I wanted to work out my approximate holding costs of the property at completion once a tenant was found. This would tell me if I could not only afford to ‘buy’ the  property, but whether I could afford to ‘hold’ the property on a weekly basis. I look for at least a 5% rental yield, and at the time interest rates were at 6.5% so I factored in two interest rate rises as a buffer. My out-of-pocket expenses were approximately $160 a week (before tax offsets).

As brand new property is subject to high depreciation tax benefits, the aftertax refund was more than my costs and I was in cash-flow positive territory at $5 a week.

How to find an area with this property profile I am not a detail person, so I take a practical yet thorough approach to the process of selecting my next investment. I seek expert help and follow successful investors rather than try and re-invent the wheel by starting from scratch and doing all the research myself.

My first expert was my mentor Ian Hosking-Richards, who has successfully built up a large diverse portfolio in Queensland, and was reviewing the Central Queensland (CQ) region. We looked at the towns of Mackay, Emerald, Gladstone and Gracemere in Rockhampton – all large regional cities with good population sizes and diverse economies.

I was disappointed to learn that most of these towns were out of my price range, with prices for new house and land packages being well over $400,000. However, Gracemere in Rockhampton started to tick all the boxes and the research confirmed I was getting closer to my goal.

I found that Rockhampton:

  • is the most affordable major centre to live in Queensland. The Rockhampton district has the lowest house price-to-household income ratio of any of the 15 major population centres in the state
  • has solid ongoing population growth
  • has a robust local economy.

I conducted my research and visited Gracemere and the Rockhampton area between December 2009 and July 2010. 

At the time of writing, Queensland in general and Rockhampton in particular had just had the worst floods in 30 years. So how did my house fare in the floods? I am very happy to say that (due to the research and due diligence I had conducted) Gracemere is not in a flood-prone area: my house and all of Gracemere was high and dry.

In hindsight, would I have still bought in the area had I known there was to be a flood in Rockhampton? My answer is a big YES.

Finding the builder and choosing

the design I was offered a number of packages in a newly-released estate in Gracemere.I looked at the site plans for the estate and the house designs that were available and chose Lot 67 Koolamarra Drive at a purchase price of $369,000, fixed price contract. The house was to be built by Chris Warren Homes, who had successfully completed many homes to a high standard.

The size of the lot was 717m2, allowing for a shed to be included at the back, and double gate access to the huge backyard. It had stunning views of the surrounding mountains around Rockhampton. The house plan had been designed to maximise the northerly aspect, with four bedrooms, two bathrooms, a double garage, two living areas, and all the inclusions for a ‘turnkey’ package.

Finding finance

The next step was to place an expression of interest with a $1,000 deposit to ‘hold’ Lot 67 while I sought finance approval.

My finance broker made the application for a construction loan which came through within a few weeks and settlement on the land occurred at the end of June 2010.

I now ‘owned’ the land and my plans could now go to council for approval so construction could start. All this was done by the builder who forwarded all necessary approvals to my bank on my behalf.

The construction phase

Construction started in early August 2010 with a six-month timeframe from start to completion.The builder kept me informed with update photos, phone calls and paperwork to sign for each phase of the construction loan drawdown.

There are five stages when the builder requires a progress payment: at slab stage; frame stage; lock-up stage; fixing stage; and at completion. That is why I had a buffer of $5,000 in case something came up during these different stages.

I was notified by the builders in mid-December 2010 that completion was close and the house would be ready mid-January 2011. I saw the latest photos of the house completely built, but as yet no external work had been done on the driveways, fencing or landscaping.

Dramas along the way – flooding in Queensland

After such a smooth build, Mother Nature stepped into the picture when, in early January 2011, Queensland in general and Rockhampton in particular had the worst flood in 30 years. What a tragedy for the people affected by the flooding, and my thoughts go out to them.

Gracemere, being 10km from Rockhampton, was not in a flood-prone area and my house and all of Gracemere was spared of the disastrous flooding. The few older houses affected in Rockhampton were close to the river and the flood plain. The airport and road access into and out of Rockhampton were closed for a few days, but Rockhampton returned to normal soon after.

The flooding did affect the completion of the house by a few weeks. The turf farm nearby was flooded, holding up the landscaping, and the torrential rain held up the pouring of concrete for the driveway during this time.

When I visited the house for an inspection on 15 February, everything looked better than I had imagined from the plans. The rooms were all bigger, and the tiling in the family rooms and hallways looked so good.

Finding a tenant

In December 2010, I had contacted Harcourts in Rockhampton to sign an agreement so they could find a tenant for me as quickly as possible. They came highly recommended by my experts. I was told that rents had increased and that I could expect $400 a week, not $370 as per six months ago. The house keys were officially handed over on 22 February, and a tenant application was received three days later, at the higher rent of $400 a week, which is 5.6% yield. This helped my cash flow position even more.

So now I have added a brand new house to my portfolio, in an area where rents have gone up by $30 a week in just six months, where it was easy to find a tenant straight away, and with the help of the taxman, cash flow was positive from day one.