Pukekohe section plan

Question from Norman updated on 2nd July 2014:

My young daughter and her young husband have a rental property ($525 per week with a mortgage currently at $250,000). They rent a house for $250 per week. Their total income excluding the rent received is $100,000. They would like to buy a section in Pukekohe and build on it to live there. The asking price is $199,000 and they are prepared to offer $180,000. This will be bought on the equity of the rental property. However they want to buy it now as the price is good then hold it for five years before they build, as they would like to pay off the mortgage on the rental property and have only one mortgage in the end. If they start to build now they will have a huge mortgage and may not be able to manage. Is it wise to buy the section now and keep it for such a long time? Wouldn't the price of the end property increase when finally built? Your suggestions would be appreciated. Thanks a lot.

Our expert Ron Hoy Fong responded:

It's great to hear that your daughter and her husband have invested in a rental property. Encourage them to stay with it and to continue increasing their portfolio by purchasing at least one or two "buy and hold" properties per year.
However buying a section in Pukekohe and paying interest, rates and maintenance on it for the next five years is really a plan of stagnation. The cost of the house that they plan to build will by then have risen and any savings they try to make on the empty section will be negated by maintenance cost and inflation.
Without knowing where they both work or live or what changes may happen job wise (incomes may decrease or increase or they may have a child). Also taking into account higher interest rates, building cost rises and probably being back in a recession in five years (where different and better opportunities will arise), I see two preferable options.
The first is to buy the section but to try out their negotiation skills, start the offer from a lot less. No worries if you get the "no" but you will more than likely draw a counter-offer. A tip here is to negotiate with the vendor through the agent and not with the agent before the vendor has even seen the offer. Try to claw back some of the interest payments that they will lose on it while it is an empty piece of land or alternatively have a very lengthy and delayed settlement for a year or two. Place a very low deposit and no further payments should be made until clear title of the section is completed, a lawyer should follow this through and in fact let a lawyer see the contract before signing. I have seen too many people including myself loose their deposits because the developer went broke before settlement or clear title. Then start building the home/house as soon as possible so that building costs are today's price. Negotiate the building price as well. On completion of the building's code compliance certificate they should rent the place out for the following five years to produce income and taxable loses (check first with a property accountant on this). The second option is to use the equity the raise from the existing investment property and purchase two plus investment properties in Auckland's inner central suburbs. The capital gains they can potentially achieve over the next five years whilst we are still in a boom market will far out weigh any gains that they would make on an empty Pukekohe section.

Ron loves to share his passion for property and his coaching course provides one-on-one mentoring and support that will empower you with tools, strategies and valuable insights so you can achieve investment success and become a property master.

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