I was speaking with a couple on the weekend down at the local coffee shop, they have purchased a fair amount of real estate in their time and they were telling me about an experience that didn’t quite work for them with their property investment.
They purchased a vacant block of land in Fitzroy back in 2004 with the intention of getting some plans and permits arranged for the construction of a new home to live in and build.
The block was about 120sqm which is about the size of a normal single fronted terrace in the inner city.
After working through the planning stage and getting the permits organized which took some time they realized the cost of construction would be too high and they didn’t want to overcapitalize on the property. They had made the original purchase to live in however at the same time they wanted to be comfortable that if they did sell the property they would achieve at least the money it would have cost to construct plus the land costs as well as all the extra’s that come with a purchase.
The construction was going to be roughly around the $400,000 – $450,000 mark which meant they needed in excess of $950,000 and more to break even.
They sold the block of land without going through with the construction for the same price they paid for it in 2004 which was $400,000 with the addition of approved plans and permits which was not included in their original purchase.
This represented a loss of $90,000 when holding costs, architecture drawings, application fees etc were all totalled up.
So not all types of property go up even in inner city areas as good as Fitzroy.
A couple of things made the resale of the land tough:
1. In inner city areas most vacant land is snapped up by developers looking to build and then on sale for a profit. The problem here was it hard to be profitable on only constructing one dwelling and the site size did not make it possible to have any more than that one. Developers tend to work off a profit margin of 15% and normally like to construct a minimum of 2 dwelling on a site with a preference of 3 or more.
2. Home buyers generally want something to move straight into, not many people have the time or patience in going through the whole construction phase of a property and with the costs of building materials and labour soaring in recent years they did not want to over capitalize to on the construction.
This means to on sell the land the vendors really need someone who has the time and just wants to build the ‘perfect home’ for them to live were the prospect of over capitalizing on the property is not as much as a concern.
Unfortunately these buyers are generally not as common and in the case of the vacant land in Fitzroy this was the case.
With such a small selection of buyers to pick from or to compete for the property this helped create a loss when selling.
I have seen people in the last 5 years triple their investment by buying the right property such as a single fronted terrace in the city or a quality townhouse and I have seen people buy property at similar price ranges and be at a loss after 5 years.
When making a property investment remember to take all things into consideration, often what you buy today which is highly sought after will be the same when you decide to sell but not in all cases.
So yes, not all property is equal.
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