Previously known as “The Property Planner, Buyer and Professor”
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Show Notes – the Vacant Land conundrum
In this week’s episode of The Property Trio, we help Lauren, a listener at a crossroads with her property journey. Living in inner-Geelong but priced out of buying locally, Lauren owns a block of land in Tasmania and is unsure whether to build, hold or sell.
Lauren’s Dilemma
Hi Property Trio- I love your podcast and am learning lots.
I would be extremely grateful for some advice on the following question.
I am currently renting a townhouse in central Geelong and enjoy the lifestyle, but I’m priced out of the local property market for a home of my own.
In 2022, I purchased a block of land in Tasmania for $180,000 (now owing $150,000), and I’m considering building an investment property on it. Due to oversupply of vacant blocks still available, I am not sure that continuing to sit on the land alone is a good option.
The build cost is estimated at $330,000 and I’ve been in contact with local real estate agents who advised that rental demand in the area is strong (under supply of built homes), with an expected rental income of $550–$595 per week. I have a 5% cash deposit saved, and my sister has offered to act as guarantor for the remaining 15% to help me secure an 80% loan and access a lower interest rate.
For context, I am 30, earn just over $100,000 per year and currently pay $1,000 a month in rent (share house). I’m comfortable continuing to rent for now if I have an investment property working for me in the background.
My main question is: if I go ahead with this investment, how might it affect my future borrowing capacity to buy a home to live in? Would lenders view any equity and rental income positively, or primarily focus on the added debt and reduce what I can borrow in future?
Thank you so much!
The Big Questions
- Is sitting on vacant land in a market with oversupply a sound move, or is it better to build?
- How should she assess the Tasmanian growth drivers, and are there risks she hasn’t yet considered?
- What does the land-to-asset ratio tell us about this strategy?
- Most importantly, how will taking on this investment impact her ability to borrow for her own future home?
Borrowing Capacity
Dave’s modelling shows how different paths impact her ability to buy her own home in the future.
Borrowing capacity for home purchase:
- Current position: Existing $150,000 loan (for land) and $6,000 Credit card = borrowing capacity of $316,000 for home purchase
- Closing the credit card: Existing $150,000 loan (for land) = borrowing capacity of $345,000 for home purchase
- Proceeding with the construction and closes the credit card: Existing loan increased to $478,000 (land and construction) = borrowing capacity of $240,000 for home purchase
- Selling the land and closes credit card: borrowing capacity of $492,000 for home purchase
Family Factor
What should Lauren and her sister weigh up when it comes to the guarantor offer, and what protections would help safeguard them both?
The Trio Weigh In
Cate, Dave, and Mike break down the scenario from every angle: lifestyle, financial risk and long-term strategy.
They dive into the realities of construction risk, the drivers of growth, and how lending rules can impact borrowing power.
The Takeaway
The decisions made today about finance and risk will directly influence Lauren’s ability to achieve her future home ownership goals.
Gold Nuggets
Cate Bakos’s gold nugget: It’s important to ask yourself the question, “what’s the end goal?”
David Johnston’s gold nugget: Getting good strategic mortgage broking advice can make the difference between sitting in limbo, and making an educated decision with the options on hand.
Mike Mortlock’s gold nugget: Mike talks about the importance of having experts who are able to help guide clients through journeys such as this. “There is so much to it. It’s not really a zero/one binary situation.”
Resources:
- Ep. 11 – Small time development – How it can work for you, but is it a risk worth taking?
- Ep. 16 – Unpacking land to asset ratio
- Ep. 19 – TIME IN the market v TIMING the market
- Ep. 36 – Buying the wrong property and/or the wrong location – No. 6 of the top 7 Critical Mistakes
- Ep. 243 – Building Long-Term Wealth: Mastering Land to Asset Ratio & Paying Down Your Home Loan Vs Investing Surplus Cash Flow
