A client is considering buying a block of land in Geelong to build her dream home. She currently owns a rental property, and she has about $80,000 equity in it. It’s rented for $525 per week, and is cash-flow positive. She’s renting her current residence in Melbourne. She has spotted a block of land in Geelong near the city. The current advertised price is $180,000, but it’s been on the market for a while and she’d like to offer $165,000. She’s fallen in love with the spot and thinks it would be the perfect spot for her first home. The problem is that she doesn’t think she can manage to service the debt on her current rental mortgage and the mortgage for the build straight away. She’s wondering whether she should buy the block now and leave it vacant for 5 years while she saves up money for the build.
We suggested that if she does this, she is in danger of exposing herself to higher interest rates and increased building costs. This is in addition to rates and mortgage and maintenance costs. She may be able to ride these out if she buys the block at a heavily discounted price, thereby providing a buffer. It would also be helpful to have a long settlement period.
A better option, we feel, would be for her to invest that equity into one or two more investment properties close to Melbourne. Over five years, this could provide her with substantial equity gains that could far outweigh the benefits of sitting on an empty Geelong block.