Two different contracts means two loans, but is that necessarily a bad thing? Not at all!
Buying a House and Land package can often be an incredibly stressful task for the unseasoned property investor. Many times I’ve seen buyers in the market balk at the idea of a House and Land Package, because of the hidden implications. Rest assured, let us walk you through it.
As mentioned in the previous article, Greenfield areas are being developed on a mass scale in Sydney Metro, and as a result House and Land packages aplenty are being released on mass. It’s important to understand the benefits, cost and otherwise with regards to House and Land Packages, and whether it is the right option for you. Don’t want to be caught out with unnecessary headaches.
Split Contracts don’t mean extra pain.
The biggest difference with a house and land package is more often than not, the main purchase method is a split contract. What this essentially means is, you’ll have a contract for the land component of your package, and a separate build contract with the builder putting together the package.
This, however does mean two different loans. BUT! This does not mean more stress necessarily.
If you have spied a house and land package of interest, consult your broker (I say broker and not bank because you should honestly be using a broker), and find out your full borrowing capacity, if you didn’t already know what it is. Effectively, your dual loans (Construction Loan and Mortgage) make up the total of that, so say $600,000 is your capacity, the mortgage can be $400,000, and the construction loan can be $200,000 essentially. Sometimes this can differ, but that number gives you a base guideline to work with. Seek approval for a split contract loan from your broker, for the house and land separately. This will give you a full understanding of how much you can borrow to purchase.
Good news about Stamp Duty
The good news with a split contract House and Land Package, well, you only pay Stamp Duty on the Land Component, which means less costs out of your own pocket! (this information again is general in nature, refer to state and territory legislation and seek legal advice as well as financial advice).
This can save you, around $10,000 to $20,000 per purchase, so happy days all round!
What to look out for
Look for a package in the same way you’d look for a home, close to amenities, as well as parks, schools, shops, transport etc. Don’t fret too much about block size. The biggest things to make sure is that the space is used efficiently. There is an aspect of backyard, enough for maybe a small family, or enough space for a trampoline etc.
Don’t go crazy with inclusions. Minimise extra costs on landscaping, you can do it yourself for a fraction of the price in most cases, spend money on luxury items such as Caesarstone benchtops and high level inclusions only if the area demands it. If it demands it, you can reflect a small increase in your end rent price, if the area doesn’t, don’t waste your money. Do it later if you really want to. This is the difference with land in Lancaster in the US, for example. Lancaster being home to Los Angeles demands luxury premium inclusions because of the global reputation of the area.
Don’t waste too much money
With house and land packages it is very easy to over capitalise. Very often new homes come to the market and expect top dollar, where it is rare to really achieve high prices unless you’ve got an incredibly unique property. Aim low, don’t spend too much money if it’s unneeded. Buy and order the essentials, anything else can be added later (again, at a lower cost). Budget your numbers lower than the current rental price, and make it work there. In 1 year when you have handover of the keys, the rental value will be so low, any number will make you money.
Remember, you are going to be one of many House and Land Packages that come up in the same vicinity in a short amount of time. Don’t aim for top dollar rental, aim for quicker rental. Get someone in yours ASAP. If everyone’s aiming for $650 per week, rent it out for $620 per week. Why? $30 dollars per week over a year is $1560. Stay on the market for 3 weeks, you’ve lost $1860 in rent not accumulated. Rather have someone in their quick, and increase rent later when demand subsides.
Don’t be greedy, be smart.
Image Credit: Dean Terry (Flickr)