Building an Investment Property in Australia: Top Tips for Investors

9th October 2023

Finance & Budgeting Pre-Construction First Home Buyer Investor Legal & Contracts Post-Construction

Planning to build an investment property in Australia? Explore practical tips on finance, location, rental demand, builder quotes and avoiding costly upgrades.

Building an Investment Property in Australia: Top Tips for Investors

Building an investment property involves plenty of decisions. Where should you buy land? What kind of home will tenants want? And which upgrades are actually worth paying for?

Before you start comparing display homes, there is a bigger question to answer: does the investment fit your finances and long-term goals?

In the Home Building Hub episode Top tips for Investors, hosts Colin Bischof and Darren Brennan discuss how to approach a new investment property build with a clear budget and a practical mindset. Their central message is straightforward: understand the numbers, research your market and avoid making every decision around your personal taste.

Here are the key points to consider before you commit to building a rental property.

1. Start with your finances and long-term goals

Darren’s first tip is to speak with your mortgage broker or lender before you start shopping for land and house designs.

You need to understand your borrowing position, deposit requirements and how the investment would affect your household budget. If you already own property, ask your broker whether accessing equity is an option and what the additional borrowing would mean for your repayments.

Just as importantly, work out what you want the investment to achieve. In the episode, Darren discusses goals such as preparing for retirement, supporting future family expenses or building another income source.

Questions to work through include:

• What is my reason for investing in property?
• How long do I expect to hold the property?
• How much can I comfortably contribute if the rent does not cover the costs?
• What would happen if my income changed?
• How does this purchase fit into my broader financial plans?

Having a clear purpose gives you something to measure decisions against, particularly when tempting upgrades or a familiar suburb start pulling you away from your budget.

2. Know your numbers beyond the day you buy

Colin highlights a common problem: an investment can appear affordable today without being sustainable later.

Your budget needs to allow for more than the expected rent and loan repayment. ASIC’s Moneysmart identifies ongoing costs including rates, insurance, property management, maintenance and applicable land tax. It also highlights the risk of vacancies and higher interest rates. Read Moneysmart’s investment property guide.

For a new build, discuss the period before the home is completed and available to rent with your broker and builder. Understand what you will need to pay while construction is underway.

Ask your advisers to help you assess:

• Upfront purchase and finance costs.
• Land and construction payments.
• Completion items excluded from the building quote.
• Expected rental income and ongoing ownership expenses.
• A cash buffer for vacancies, repairs and unexpected costs.
• Whether you could manage higher repayments or lower rental income.

The aim is to understand the likely cash commitment before you sign, rather than discovering it once the property is underway.

3. Choose an investment mindset when selecting your home

It is easy to walk through a display home and imagine what you would change if you lived there. Colin’s advice is to bring the focus back to the people who will actually rent the property.

In the episode, he describes investors making unnecessary structural changes, upgrading finishes beyond what the rental market needs and spending extra time on personal colour selections.

Before approving a change, ask:

• Will this improve the home’s everyday function?
• Is it something tenants in this market value?
• Could it improve rental appeal or reduce maintenance?
• What will it add to the price and timeline?
• Would I still choose it if I were never going to live here?

The hosts suggest using a builder’s coordinated colour boards where available. A suitable neutral scheme can simplify selections without requiring you to choose every finish individually.

4. Research locations beyond the suburbs you know

Wanting an investment property close to home is understandable. However, Colin and Darren encourage listeners to compare areas based on evidence rather than familiarity alone.

A suburb you have not considered may deserve a closer look if the price, local rental demand and property type fit your plans.

The hosts recommend narrowing your research to two or three areas and exploring:

• Comparable property prices and advertised rents.
• The types of homes available for rent.
• Access to schools, shops, transport and employment.
• Planned infrastructure and development.
• Local agents’ experience of tenant demand.

They mention realestate.com.au, Domain and OpenLot as research starting points. Pair online research with conversations with local property managers who regularly lease comparable homes.

Treat proposed infrastructure as something to investigate. Confirm its status and avoid assuming that a future project will automatically increase your property’s value.

5. Match the floor plan to local rental demand

Should you build a three-bedroom or four-bedroom investment property? The episode makes the case for checking the local market before deciding.

Darren describes looking at rental listings in Lucas, near Ballarat, and noticing few three-bedroom homes advertised at that time. It prompted him to question whether a smaller home could suit that market.

That example is a research prompt, rather than a current recommendation for Lucas. A small number of listings alone does not establish a shortage or prove demand.

Ask local property managers:

• Which bedroom counts and layouts attract enquiries?
• What rents are comparable homes actually achieving?
• How long do they typically take to lease?
• Are tenants asking for particular features?
• Is there significant competing rental supply coming?

Use those answers to help select the home. An extra bedroom or living area should have a clear purpose for your intended market and budget.

6. Keep upgrades practical and consider maintenance

The hosts repeatedly return to the cost of unnecessary upgrades. Spending more on the build does not automatically mean tenants will pay more rent.

Darren uses upgrade costs to illustrate how extra borrowing can affect the amount an investor needs to contribute. The exact repayment impact depends on the loan amount, interest rate, term and repayment structure, so have your own figures calculated.

Colin suggests looking for practical improvements, such as a larger shower where the layout allows, rather than redesigning an otherwise functional home.

Darren also encourages investors to think about ongoing maintenance when choosing fixtures and finishes.

Compare options by asking:

• How durable is the product?
• How easy is it to clean, repair or replace?
• Is the benefit meaningful to prospective tenants?
• Does the extra cost fit the investment budget?

A straightforward, functional home can still be welcoming and attractive. The objective is to spend deliberately.

7. Check exactly what a turnkey package includes

Colin discusses full turnkey packages as a way to reduce the number of completion tasks an investor needs to organise. He also acknowledges that this is an area in which the hosts work.

The practical point is to understand the complete scope, whichever builder you choose. A house quote may leave you arranging additional work before the property is ready to rent.

Ask for written confirmation of items such as:

• Driveways and paths.
• Fencing and gates.
• Landscaping.
• Floor coverings and window furnishings.
• Heating and cooling.
• Clotheslines and letterboxes.
• Site costs, allowances and exclusions.

Treat “turnkey” as a description to check against the contract and inclusions schedule. Establish who supplies each item, what it costs and when it will be finished.

8. Compare builder value beyond the headline price

Colin cautions against choosing a builder solely because their quote is the cheapest.

A lower price does not automatically establish poor quality, just as a higher price does not guarantee a better outcome. The useful lesson is to investigate what each quote delivers.

Compare builders using the same design requirements and completion scope. Review:

• Inclusions, exclusions and allowances.
• Relevant experience and completed homes.
• Communication and how questions are answered.
• Contract terms and variation processes.
• Defect handling and aftercare.
• The total expected cost to reach a rentable finish.

Get independent advice on the contract before committing. Your comparison should leave you confident about both the price and the work being supplied.

9. Check timing and tax assumptions separately

The episode discusses titled land as a way to avoid waiting for a future land title. However, titled land does not mean construction can begin immediately. Confirm the remaining finance, approval and builder requirements for your project.

The hosts also discuss possible completion timeframes and tax considerations. Those comments reflect the recording context and should not be used as a promise that your property will be ready by a particular financial year.

Before making a decision around timing or tax:

• Obtain a project-specific construction estimate.
• Allow for the steps between handover and leasing.
• Ask your accountant about current rules and your circumstances.
• Have any depreciation assumptions checked professionally.

Frequently Asked Questions

What should I do first when building an investment property?

Start by clarifying your goals and speaking with your mortgage broker or lender. Establish your budget, borrowing position and ability to cover the costs before committing to land or a building contract.

Should I build an investment property near where I live?

Proximity can be convenient, but the hosts encourage looking beyond familiar suburbs. Compare affordability, rental demand and local evidence before choosing a location.

Is a three-bedroom or four-bedroom home better for investment?

It depends on the local market and your budget. Ask property managers about tenant enquiries, achieved rents and leasing times for both types of home.

Are investment property upgrades worth the money?

Some may improve function, durability or tenant appeal. Assess each upgrade against its cost and likely benefit, rather than assuming it will generate higher rent.

Does a turnkey package include everything needed to rent the home?

Check the written inclusions and exclusions. Confirm all completion work and any other requirements before assuming the property will be ready to lease at handover.

Glossary of Terms

• Equity:

  The difference between a property’s value and the amount owed against it. How much can be accessed through borrowing depends on lender assessment.

• Capital growth:

  An increase in a property’s value over time. Growth is not guaranteed.

• Rental yield:

  Rental income expressed as a percentage of a property’s value or purchase price. Check whether a quoted yield includes expenses.

• Cash flow:

  Money received and paid out over a period, including rent, loan repayments and ownership costs.

• Depreciation:

  A tax concept concerning the decline in value of eligible assets. Ask a qualified adviser how applicable deductions are assessed.

• Titled land:

  Land with a registered title, distinct from a lot awaiting registration in a future subdivision.

• Turnkey package:

  A package described as including completion items. The contract determines the actual scope.

Key Takeaways

• Start with your finances and a clear long-term goal.
• Budget for the build, ongoing costs and periods without rent.
• Research several locations and seek local rental evidence.
• Choose a floor plan that suits prospective tenants.
• Keep upgrades practical and consider maintenance.
• Check turnkey inclusions and compare complete builder quotes.
• Confirm current project timeframes and obtain independent financial and tax advice.

Watch or Listen to the Full Episode

For more practical discussion with Colin Bischof and Darren Brennan, watch or listen to Top tips for Investors on YouTube.

About the Home Building Hub Podcast: The Home Building Hub podcast, hosted by industry experts Colin Bischof and Darren Brennan, is Australia’s premier resource for new home buyers. With weekly episodes featuring special guests, the podcast provides objective, high-quality insights into the home building process - completely free and without sales pitches. From understanding financing options to navigating the complexities of building a new home, each episode is packed with actionable advice and tips. Explore more episodes at http://www.homebuildinghub.com.au and join our growing community of informed home buyers.

Disclaimer: This article was generated by AI based on a transcript of our podcast episode and may contain inaccuracies or omissions. Whilst we’re all about providing value to you, this article should not be considered as legal or financial advice. It contains general information only and is based on the content discussed during the podcast episode. This information is relevant to the episode’s release date and may not be applicable at the time of reading. Always seek independent professional advice tailored to your personal situation before making any legal or financial decisions.