Key Takeaways
- House and land packages for investors may involve separate land and building contracts, with different payment and finance requirements.
- Lenders may assess borrowing capacity, land and construction costs, completed value and anticipated rental income.
- The advertised package price may not include every project cost, so additional site works, variations and holding costs may need to be considered.
- New-build tax rules may be relevant to some house and land investments, but eligibility and outcomes depend on applicable legislation and individual circumstances.
House and land packages can provide one pathway to acquiring a newly constructed investment property, but the transaction can work differently from buying an established dwelling. The land may settle before construction begins, building funds can be released progressively, and rental income may not start until the property is completed and available to lease.
These timing differences can affect borrowing capacity and cash flow. Investors considering a package may wish to speak with experienced mortgage brokers in Sydney to understand how lenders could assess the land purchase, proposed build, expected rent and their broader financial position.
This guide looks at how house and land packages for investors can be structured, how finance may work and which costs, valuation and tax considerations could be relevant.
How Do House and Land Packages for Investors Work?
A house and land package typically combines a block of land with a proposed new home, although the legal and financial structure can vary. An investor may enter into one contract for the land and a separate building contract, so the particular arrangements should be checked before committing.
The land and building contracts
The land may need to settle before construction begins. This could mean making loan repayments and paying applicable holding costs while waiting for approvals, site preparation or construction. Investors purchasing a block independently may also wish to understand how financing vacant land can differ from borrowing for a completed property.
The building contract typically sets out matters such as the construction price, plans, specifications and payment schedule. Depending on the package, expenses such as site works, landscaping, fencing, upgrades or utility connections may sit outside the advertised price or standard inclusions.
Construction and progress payments
Construction funding is often released progressively rather than as one upfront amount. Progress payments may be linked to specified stages of work or another payment structure permitted under the building contract and applicable requirements.
For some projects, stages may include slab or base, frame, lock-up, fixing and completion, although terminology and schedules can differ between contracts and lenders.
Interest during construction is often calculated on funds already drawn. As further payments are released, the outstanding balance and associated interest cost may increase.
Investors comparing construction finance may wish to check how a lender handles progress payments, valuations, borrower contributions and contract variations.
How Is a House and Land Investment Financed?
Finance may involve an initial land loan followed by a construction facility. The way the transaction is assessed can depend on the contracts, property, borrower and lender policies.
Borrowing capacity and expected rent
A lender may consider income, existing debts, living expenses, credit commitments and proposed repayments. Expected rent from the completed property may also be considered, although the amount recognised and supporting evidence required can differ between lenders.
Because rent may not be available during construction, investors may need to account for repayments and other holding costs until the property is completed and leased. When comparing investment property finance, it may therefore be useful to consider both the construction phase and the longer-term loan structure.
Completed valuation and LVR
Lenders may consider the land value, construction costs and estimated completed value. The Loan-to-Value Ratio (LVR) compares the amount borrowed with the property value accepted by the lender.
If the completed valuation is lower than expected, the available finance could be affected or the investor may need to contribute more funds. The combined land and construction cost should therefore not be assumed to equal the property’s eventual market value.
What Should Investors Assess Before Buying?
The advertised package price is only one consideration. Investors may also wish to assess the total project cost, construction timeframe, expected rental demand and expenses that could arise before the property is ready to lease.
Project costs and construction delays
Site conditions, upgrades, landscaping, fencing, utility connections, government charges, legal costs and applicable insurance could add to the overall cost. Contract variations may also require additional borrower funds or further lender approval.
Construction delays caused by weather, approvals, labour availability, materials or site conditions could extend the period before rent begins. During this time, the investor may continue to incur interest, rates, insurance and other applicable holding costs.
Rental demand
Rental estimates should not be treated as guaranteed income. Actual rent can depend on local demand, competing properties and market conditions when leasing begins.
For new build properties for investors, local housing supply may also be relevant. Areas with substantial development could have several similar properties seeking tenants around the same time.
Using Savings or Existing Property Equity
An investor’s contribution may come from savings, equity in the land or, in some circumstances, another property. For example, an investor may consider using existing property equity to help meet eligible project costs.
The amount accessible depends on factors such as the lender-accepted property value, existing debt, borrowing capacity and credit policy. Using equity also involves additional borrowing and may increase overall debt and repayments.
Tax Considerations for a New House and Land Investment
Tax treatment is separate from lending approval. A newly constructed dwelling should not automatically be assumed to qualify for a particular tax treatment.
From 1 July 2027, Australia’s revised negative gearing rules will limit negative gearing of residential property to eligible new builds, with transitional treatment applying to certain properties held before the reforms were announced. A qualifying house and land investment could therefore fall within the new build negative gearing framework where the applicable requirements are satisfied.
Capital Gains Tax (CGT) may also be relevant when an investment property is sold. From 1 July 2027, investors who buy qualifying new builds may be able to choose between the existing 50% CGT discount and the new inflation-based arrangements and minimum tax, subject to the applicable requirements.
The eventual new build CGT outcome can depend on factors such as acquisition and sale dates, cost base, ownership structure, property use and individual circumstances. Registered tax advice may be appropriate before relying on an expected tax outcome.
House and Land Packages vs Off-the-Plan Properties
Both approaches can involve newly constructed property, but their transaction and finance structures can differ.
With a house and land package, an investor may acquire the land and enter a separate building contract, with construction funds released progressively. When buying off the plan, the purchaser typically contracts to acquire a property that the developer will complete before settlement, although arrangements can vary.
Off the plan properties for investors can still involve finance and valuation risk. Where settlement occurs well after contracts are exchanged, a lender may reassess the borrower’s circumstances and obtain a valuation closer to completion.
Questions to Ask Before Committing
Before committing to a package, investors may wish to consider:
- Are the land and building contracts separate?
- What is included and excluded from the advertised price?
- How much could be required before and during construction?
- How will the lender assess the completed property value?
- Could cash flow accommodate delays or unexpected costs?
- What evidence supports the expected rental income?
Builder selection and contract terms may also warrant careful consideration. Investors may wish to check that the builder holds the relevant licence for the proposed work and review contract inclusions, exclusions, construction timeframes and variation provisions. Licensing and building-contract requirements can vary by state or territory, so the requirements applying to the particular project should be checked. Legal advice may be appropriate before entering contracts.
Conclusion
House and land packages for investors can involve several stages, from acquiring land and arranging construction finance to managing progress payments, holding costs and the transition to a completed rental property.
Borrowing capacity, completed valuation, construction costs, variations, rental demand and the time before rental income begins could all affect the project. New build negative gearing and new build CGT rules may also be relevant to qualifying properties, but tax treatment should be considered separately from finance and investment suitability.
This article provides general information only and does not constitute financial, tax, legal or credit advice. Australian laws, tax rules, property requirements and lending policies may change, and individual circumstances vary. Consider obtaining advice from appropriately qualified professionals before making property, borrowing or taxation decisions.
Frequently Asked Questions (FAQs)
1. Are house and land packages suitable for investment properties?
A house and land package can be used for an investment property, but suitability depends on factors such as total costs, borrowing requirements, construction risk, expected rent and individual circumstances.
2. How are house and land packages financed?
Finance may involve a land loan followed by construction funding released progressively under the applicable contract and lender requirements. The precise structure can depend on the contracts, lender and borrower.
3. Do you pay interest during construction?
Interest on construction finance is often calculated on funds already drawn. As progress payments are released, the outstanding balance and associated interest cost may increase.
4. Can lenders use expected rental income?
A lender may consider expected rent from the completed property, subject to its credit policy and acceptable supporting evidence. The amount recognised can differ between lenders.
5. Does the advertised package price include everything?
Not necessarily. Site works, upgrades, landscaping, fencing, utility connections or other items may sit outside the advertised price, depending on the package and contract.
6. Is a house and land package the same as buying off the plan?
Not necessarily. A house and land package may involve separate land and building contracts, while an off-the-plan purchaser typically contracts to acquire a property the developer intends to complete before settlement.
7. Can a house and land package qualify as a new build for tax purposes?
It may qualify where the applicable new-build requirements are satisfied. New construction alone should not be assumed to establish eligibility, and the applicable rules and individual circumstances may need to be considered.