Illusion of land size. True drivers of real estate prices📈

Theoretically, land goes up in value while structures go down in value over time. So you would think that the bigger the block of land, the better your capital growth, right? Well, that’s only true in theory.

At the end of the day, apartments have very little land but they still go up in value. The true driving factor determining the price of a particular piece of real estate is simply supply and demand. The ultimate goal with an investment property is to get the tenant and rent return to pay it off for you.

Additionally, nowadays tenants don’t value large backyards like they used to. They would rather have a second living area than a big backyard. Perhaps 30 years ago when kids played outside, big backyards were more highly sought after. Now they are less sought after as kids, unfortunately, spend more time indoors with their mobile phones and PlayStations.

Another way to think about land: if you were a farmer and had a paddock, you would want to get the most productivity from that paddock from whatever you were farming. Perhaps you’re growing wheat, maybe you’re raising cattle. You would want to get the maximum number of kilos from that portion of land in order to get the best cash flow and return. In a way, it makes sense to have small blocks of land with big houses since the tenant is paying more for the house than they are paying for the land.

We have seen this happen very effectively and some of the best rental returns have come from big houses on small blocks of land. Why? Because a smaller block of land costs you less. Instead of a property costing you $700,000, it will only cost you $500,000 for the same size house on a smaller block of land and you’ll get a better rent return.

One of my favourite properties to invest in is a terraced home, where basically there is a house on almost all of the land, built wall-to-wall with the neighbouring properties. The reason for this is that you get maximum productivity for the land itself. Additionally, they stand alone on separate titles and there is no body corporate to which you need to contribute, making them better for your cash flow.

Rental Potential: The power of turn-key investment properties
When buying an investment property, it’s critical that you have everything included in the building contract so that the day the keys are handed over you can rent the property out straight away. This is called a ‘turn-key’ package.

If everything is not included, then you’re going to get a nasty surprise at the end of the process just like I did with one of the first properties I ever bought. The property manager I appointed rang me when she was picking up the keys to tell me that there were no blinds in the house. She couldn’t legally rent it without the blinds. I then rang the builder saying “Hey, where are the blinds?” and they told me that I hadn’t asked for blinds to be included. I was shocked and suddenly had to find an extra, unexpected $5,000 to get a cheap blind solution put in very quickly. Had the blinds been included in the package, I could have got the finance to pay for it. It would have been an extra $5,000 on the loan over 25 years, making it a negligible difference. Thus it’s very important that you ensure all features are included in your build contract.

Here’s another case to prove the importance of ensuring everything is included: I first started working with this particular builder and we had sourced a property for our clients. When I first spoke to the builder I asked if it was turnkey and they confirmed that it was indeed turnkey and continued on with the build. When the property manager turned up to collect the keys, we discovered that only half the backyard was turfed. It was a minor detail in the build contract that stated 400m of turf – the land was 800m with a 200m house on it, leaving 200m without turf.

I rang the builder and told them that if they wanted to continue working with me and my clients, they had better get the yard fully turfed by the end of the next day at their expense. The builder came through and fixed the problem, but that’s a prime example of making sure everything is included in the contract.

Some builders are just trying to make a profit and will try to leave things out wherever they can in order to optimise their profit margin. This is why it is so important that you are diligent with the inclusion list and make sure that it does indeed include everything you’re going to need. It is additionally important to have an advocate (such as one in my team) working with you, to ensure everything is actually being included.

From blueprint to reality: Understanding the build process
If you do choose to build a new property as your investment, be prepared for A LOT of paperwork and about a six-month process, maybe more. The process will start with you getting two loans – one for the land and one for the construction. Once your loans are approved and you settle on the land, then your build will commence.

The Build Process

Houses in Australia are built in six stages. These are:

• Deposit
• Slab
• Frame
• Enclosed (or Lock-up)
• Fixing; and
• Practical completion (PC)

These stages may differ slightly from state to state, but they all follow a similar timeline. After all six stages are complete, all the relevant inspections have been performed and you are 100% happy with the property, and all invoices are paid up, you (or your tenant) can move into the new property.

Check back here for more on land registration and settlement.

~Daimien Patterson

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