Are you considering knocking down an existing property to build an investment property? Things to consider

Tuan Duong

Although depreciation is never the primary reason why you build a new investment property, it certainly has quite a bearing on the cash flow of your property that you cannot overlook. A qualified Quantity Surveyor will help assist with all the necessary reports that are involved in the building of an investment property.

The most common form of this is knocking down the family home to build a duplex, live in one side and rent out the other. While it does cost slightly more to build a duplex than a single freestanding home, it is cheaper than building two single freestanding homes and offers the potential of much greater equity and cash flow. Not to mention the typical limitations of block size and the council’s flexibility with building duplex properties on a single block (that potentially could be subdivided).

A duplex is a residential building that has two units under a single roof. The two units share a common party wall that splits the structure into two separate dwellings, with each unit acts as a totally separate home with its own amenities, entrance and yard. The duplex is subdivided into two different titles, allowing for a much greater asset portfolio and larger equity, thus helping you fund future projects more easily and allowing you to achieve your property goals sooner.

There are many steps involved in building an investment property that must be considered when walking through the building process. As outlined below, you would want to weigh up all options and ensure you have adequate professionals working alongside you to ensure the best quality product that is delivered in the most efficient manner.

Usually, the house being knocked down was a prior primary place of residence and not a family home. This will just need to be knocked down and cleared, ready to be built on as vacant land. In the event that it was not, however, and it was previously an investment property, a scrapping report will allow the investor to claim the residual amount of depreciation remaining as a deduction, thus potentially saving them tens of thousands of dollars by way of claiming an immediate tax deduction for the scrap value that is determined by the quantity surveyor. This is done by way of photographic evidence, council search (for reports prepared post-demolition) or a site inspection (if completed prior to demolition taking place).

Once the land is clear, a qualified architect will design the home for the investor and assist them through the DA (Development Application) process with the council. If the investor decided to build an off the plan home from a template that fits their land requirements, a CDC (Complying Development Certificate) can be used in lieu of a DA to streamline the process and reduce lag time.

When building a duplex or multi-use development, the council requires you to pay a council contribution for the increased stress on public amenities, due to the higher density in population. This is also known as ‘Section 7.11’, formerly known as ‘Section 94’. You should engage a qualified Quantity Surveyor to organise the relevant report for you, which provides an accurate reflection of the necessary constructions. You can order a Section 7.11/94 report here.

A lending institution such as a bank will need to be liaised with and finances organized. A construction loan will be needed to realise the project from plans to a physical construct as the bank provides the necessary funding to the builder/developer to keep the project liquid. The money is handed out in installments at several pre-determined stages, which usually are:

  • The deposit: 5%
  • The slab or base stage: 15%
  • Frame stage: 20%
  • Lockup stage: 20%
  • Fit-out or fixing stage: 30%
  • Practical completion stage: 10%

During the construction phase, you should be in weekly contact with the builder to keep updated on the progress and have photos sent to verify the construction. The trades used should be qualified and licensed and have previous experience to ensure a quality final product. Upon the completion of the construction, an Occupation Certificate is handed over. The Occupation Certificate (OC) authorises the occupation and use of a new building, which is necessary for the property to become habitable.

In some cases, the financial institution or bank may require a quantity surveyor to prepare an initial cost report to determine the construction cost. This allows the bank to have a non-biased, third-party estimate of construction costs. The report is required by banks so that they can understand the cost of development, the likelihood of positive return on investment, and your ability to repay the loan.

The final stage is furnishing the residence and tenanting out the property, which is usually completed through a local Real Estate agency or can be self-managed if the investor would like to find their own tenant.

Once the duplex is complete, the investor then usually moves into one side, and rents out the other. While owning an investment property, the owner can also utilise the use of a Quantity Surveyor to complete a Tax Depreciation Schedule, which allows them to claim back deductions for Division 40 & 43.

It is important that you contact a Quantity Surveyor for a Section 7.11 report and the Tax Depreciation Schedule for your brand-new investment property, as this will assist you in maximising your wealth in the long run. Consulting a qualified Quantity Surveyor is always worth it to maximise cash flow as an investor and receive a maximum return.

If this article helps you or anyone you know, please do not hesitate to contact the Duo Tax office on 1300 185 498 to talk to one of our consultants to assist you further.

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Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs.

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Tuan Duong

Tuan is an award winning Quantity Surveyor and leads Duo Tax Quantity Surveyors – Australia’s fastest growing provider of Tax Depreciation.

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