The Great Debate: Building or Buying an Investment Property

At the start of any property investment endeavour, aspiring investors ask the age-old question—is it better to build or buy? It’s true that there are advantages and disadvantages to both, however, the secret to a successful real estate investment is finding the option that works with your financial situation and investment goals. 

If you’re unsure of what each option entails, we’re here to set a few things straight. Read on to learn about the basics of building and buying an investment property and what you can get from either option. 

Building an investment property 

There is a certain allure to building an investment property from the ground up. You can tailor it to meet the exact needs of your target demographic. Or create a high-value property in a hot market so you can sell quickly and at an even better price. But there are also drawbacks like higher costs and long turnover times.

How to build an investment property

The project can be divided into three phases: pre-construction, construction, and post-construction. The whole construction process can take months (or even longer) depending on the type of investment property and availability of building materials. 

During the pre-construction, you decide on a design for your investment property and look for a reputable builder to make it a reality. At this phase of the building process, you’ll look at builder quotes, contractors, and financing options, and decide on all the finer details of the project. 

The second phase is the construction process where most of the work will be done. This whole stage in the construction involves putting down the base and the frame of the property, installing the plumbing and heating systems as well as the fittings, and finally, the practical completion where you make your final checks. If you find anything amiss about the build, this is the time to raise concerns. 

Last comes the post-construction or the handover. At this stage, you’ll get the keys to your investment property and can start renting it out or put it up for sale. 

How investment property construction loans work 

Construction loans work a little differently compared to typical investment loans. With an investment construction loan, the loan payout follows the construction process. The builder will receive the funds for the construction in stages throughout the project.  The six-stage process, also known as progress payments, involves: 

1. Deposit – this is the amount paid to the builder so the construction may begin. 
2. Base – the foundation of the house has been put down. 
3. Frame – the next fund transfer will come when the frame of the property is built and approved by an inspector. 
4. Lockup – when the windows, doors, roofing, and insulation have been installed, you will receive the next payment. 
5. Fixing – this involves installing the plumbing and heating systems, tiling, cabinetry, and the like. 
6. Practical completion – the builder will receive the final payment when the fencing and site clean-up has finished. 

As the funds of your loan are released in progress stages, interest will only be calculated based on the funds as they are released. This means you will not be charged interest on funds that have not yet been used.

If you want to learn more about construction loans, you can discuss with the friendly lending specialists at loans.com.au! You can also apply online for a low rate loan, we have a range of investment property construction loans for you to choose from.  

Advantages of building an investment property 

Here are a few benefits of building an investment property: 

• Cater specifically to market needs. Building an investment property allows you to add amenities and features that renters or buyers in the area are looking for. Not only does this increase your property’s desirability, but it can also boost the potential sale or rental value. 
• Tax incentives. When building a property, you may be eligible for certain tax incentives. You could save on stamp duty as it’s only payable on land value. In some cases, you could also claim depreciation on internal fixtures and capital works. 
• Can be sure about the quality of the property. Since you’re building from scratch, you can make sure everything with the property is in working order. And you’ll be able to monitor the progress of the construction to ensure the property is up to your standards.
• Possibility to build equity much quicker. After your investment property is finished, you can get it revalued. If the property is valued higher than its initial price, your equity will increase as a result. 

Disadvantages of building an investment property 

The disadvantages of building an investment property include: 

• Not as many options for vacant land. Finding a good lot of land in established suburbs may be difficult. If you decide to knock down an existing property to build a new one, it could be quite costly and time-consuming.  
• Construction costs can go beyond your budget. It’s common for construction costs to go over the initial budget. A lot of unprecedented things could happen during the build, from the price of materials getting more expensive to construction taking longer than originally planned—these delays could cost you a lot. 
• Construction could take a while. Building a property from scratch takes time. You’re unlikely to get returns on your investment immediately. As the property is being built, you’ll be paying off your loan and other building expenses without seeing any profit.  

Buying an investment property 

Buying an established property is often simpler compared to building one. You don’t have to go through construction, unless you’re renovating, and the investment home loan process is much more straightforward. The great thing about buying instead of building is that you can start your rental property as soon as you close on the house which could only take a few weeks.  

There are plenty of benefits to buying an investment property, but there are also some downsides. Understanding both and knowing the basics of buying a property is essential.

How to buy an investment property 

Buying an investment property follows the standard procedure for property purchases. First and foremost, you have to figure out how you’re going to finance your investment property purchase and what your ideal budget is going to be. You can use an online borrowing power calculator to see how much you could potentially borrow from a lender. 

Once you have your finances sorted, it’s time to search for the perfect investment property. This can take a long time as established properties aren’t tailored to fit specific needs. You may have to compromise on certain features, amenities, or locations to get the investment property you really want. 

When you’ve found the right property, you’ll have to make an offer and negotiate with the seller. If the offer goes through, you can finalise the last steps of the settlement. Buying is much simpler compared to building, however, there are cases when the settlement takes a while to go through. 

How investment property loans work 

Investment home loans work like a standard mortgage. After you’re approved for a loan, the lender gives you the funds you need to buy an investment property, and you pay it back plus interest over time.  

There are plenty of investment home loans out there with varying interest rates and loan features. To find the best one for you, it’s best to do your research and look closely at the comparison rates to figure out the true cost of the investment home loan.  

For more information about investment home loans, you can talk to our friendly lending specialists! You can discuss your investment goals and see what type of investment loan is ideal for your situation. Check out the investment property loans we have to offer and see if they match your needs.  

Advantages of buying an investment property

Benefits of buying an investment property instead of building include: 

• Move-in ready. Some established homes are turnover-ready after purchase; you don’t have to do much when preparing it for rent or sale. This can save you a lot of time and effort. 
• More cost-effective. In terms of pricing, you already know what you’re getting into when you buy an established home. You can look at local real estate market trends to get a clear estimate of house prices.
• Get a return on investment sooner. Generally, buying an established home is much faster than building one. If you want to get your rental property up and running quickly or ready the property for resale, then buying a home can be more beneficial for your end goal. 
• More properties to choose from. There are more available established properties up for sale compared to vacant land, especially in more popular suburbs and major cities. You may have an easier time finding properties since you have more to choose from. 

Disadvantages of buying an investment property 

A few drawbacks to buying instead of building an investment property include: 

• Existing issues with the property. Often, established properties have gone through a lot of wear and tear. Some properties may even have major underlying issues like problems with the foundation or roofing. An easy way to find out what defects a property may have is by having an extensive home inspection before buying. 
• Need for further renovation. Established properties may have outdated appliances and features or lack the amenities you need to make your investment property worthwhile. Renovations could be costly and delay your investment timeline. 

Finding the perfect loan for your investment property 

Whether you’re buying or building an investment property, it all starts with the right financing. For a low rate loan with great features and flexible terms, get in touch with loans.com.au. We’re here to help you achieve your investment goals with the best investment loan for you!

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