When it comes to property investment, most people focus on the price or the location, but there’s a smarter way to approach it — buying property at or near construction cost. This strategy can help you avoid big risks and unlock some serious benefits.
It’s a simple approach that any savvy investor can use, and it’s inspired by the principles of investing that Warren Buffett follows.
Overview: Invest in Australian Property the Warren Buffett Way
- Invest close to construction cost.
- Depreciation offers significant tax advantages.
- Various strategies can help you locate these hidden investment opportunities.
The 50% Rule: A Simple Trick
Here’s the basic idea. The cost to build a property is often about half of its purchase price. So, if you buy a home for $500,000, the construction cost is roughly $250,000. This means that no matter what the market is doing, you’ve still got a solid investment.
Now, what happens when property prices drop after you buy? It’s a common scenario, especially after big economic shifts like the GFC (Global Financial Crisis).
Let’s say the property you bought for $500,000 now sells for $400,000 or even $350,000. The good news is, the construction cost doesn’t change. You’re still holding onto an asset that’s worth what you paid to build, no matter how low the market goes.
Depreciation: An Extra Benefit
Here’s where it gets interesting.
When you buy a property at a lower price, your depreciation benefits increase. Depreciation is a key tax advantage for property investors, and if you buy at a lower price, you can claim more of it. This means more savings in the first year.
For example, on a $200,000 property, you might claim $5,000 in depreciation in the first year alone.
When you buy a property close to the construction cost, you’re basically getting the land for free. That’s a pretty big win.
Real Examples of Bargain Buys
To make it clearer, let’s look at a few examples. Take a house in Orange, NSW:
- It was first sold for $95,000 back in 2003.
- Now, it’s on the market for just $46,000.
- The construction cost is estimated to be around $52,000.
Although it’s selling for a much lower price, you’re still getting a property that was worth more when it was built, which means you’re getting a good deal.
Another example is a property in Noosa. This one originally sold for $1.15 million but was recently bought for just $450,000. The original construction cost? $546,000. Again, you’re getting a property worth more than what you’re paying for it.
How to Find These Deals
Finding properties that are priced close to their construction cost isn’t always easy, but it’s definitely possible if you know where to look. Check out these strategies you can use to identify these opportunities.
Use Property Data Research Companies
- Look at platforms like CoreLogic.
- Check past sale prices to estimate the construction cost (use the 50% rule).
- These platforms also provide data on market trends and property histories.
For example, if a house was originally sold for $500,000 but is now listed for $350,000, there’s a good chance it’s now priced closer to the construction cost. This could be an opportunity for you to pick it up at a discount.
You can also track down information on the property’s age, the builder, and even the materials used. This will help you estimate how much it would cost to build the property today, giving you a better understanding of its actual value.
Look for Properties with Long Holding Periods
- Focus on properties that have been owned for many years.
- Older homes may be priced lower due to shifts in the market.
- Sellers might be motivated to sell quickly, so prices can be reduced.
These properties may not look glamorous, but if they were built at a time when construction costs were lower, there’s a good chance they could be priced below their true value.
Work with a Quantity Surveyor
- A quantity surveyor estimates the cost of building the property.
- They can provide a detailed report on construction costs and depreciation.
- This expert opinion helps you compare the property price with its true value.
Consider Post-GFC Properties
- Many properties after the Global Financial Crisis (GFC) were sold at lower prices.
- These properties might still be undervalued compared to their construction cost.
- Look for properties in markets that took longer to recover from the GFC.
If you’re looking at properties that have been on the market for years or have changed ownership multiple times, there’s a chance you’re looking at something that could still be underpriced compared to its construction cost.
These homes can be great bargains for investors who know what they’re looking for.
Check for Foreclosures or Auctions
- Foreclosed properties or auction homes are often sold at a discount.
- These properties can be a great opportunity to buy below market value.
- Check local auctions or foreclosures for potential deals.
These properties often don’t get as much attention as those listed on the traditional market, but they can offer significant savings. By estimating the construction cost using the 50% rule, you can quickly assess if it’s a good deal.
Follow Local Market Trends
- Stay updated on property trends in your area.
- Local agents, property portals, and community groups provide useful information.
- Watch for properties that are priced lower due to market conditions or urgent sales.
Knowing the trends can help you spot when a property is listed below market value and, therefore, may be closer to the construction cost.
Use the 50% Rule on Any Property
- Estimate the construction cost using the 50% rule — half of the purchase price is typically the building cost.
- If the asking price is close to the construction cost, it’s likely a good deal.
- Compare properties and check for significant price reductions.
Whether you’re a seasoned property investor or just starting, it pays to think like a savvy investor — looking beyond just the location or current market trends to focus on the underlying value of the property itself.
Get Help for Investing in Australian Property from Overseas
The key takeaway here is simple: buying property near its construction cost is a smart strategy. You’re not just betting on the land or the location — you’re investing in something that has a strong foundation.
Whether you’re new to property investment or you’ve been around for a while, consider looking for properties where the purchase price is close to the construction cost. This method reduces risk and helps you get more out of your investment.
So, next time you’re thinking about investing in property, remember the 50% rule and look for those hidden gems. You’ll be following the Warren Buffett method, and that’s a great place to start.
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Frequently Asked Questions
Do I need FIRB approval to buy property in Australia as an overseas investor?
Yes, if you are a non-resident or a temporary visa holder, you must apply for approval from the Foreign Investment Review Board (FIRB) before purchasing an investment property in Australia. Fees vary depending on the property’s value, starting from around $2,000 for properties under $75,000.
What are the tax implications of owning property in Australia as an overseas investor?
As a non-resident investor, you are subject to capital gains tax (CGT) and rental income tax in Australia. The tax residency status of an investor will affect their tax obligations. For example, if you earn rental income, it must be declared on an Australian tax return. Also, negative gearing could be an option to offset losses against other income.
Can I get financing for property in Australia as an overseas investor?
It is possible to get financing, but lenders may have stricter requirements and limit the loan-to-value ratio based on the type of foreign currency you earn. Investors with incomes from stronger currencies (e.g., US Dollar, Euro) may borrow more compared to those using weaker currencies.
What are the steps involved in buying property in Australia as an overseas investor?
The process includes confirming eligibility with the FIRB, applying for necessary loans, and arranging for property insurance. Following approval from the Australian Taxation Office (ATO) and FIRB, you can proceed to settle the property. Once purchased, you will need to engage a property management service to handle rental or maintenance tasks.
What are the costs associated with purchasing property in Australia?
Besides the property price, there are stamp duty fees (which differ by state), legal fees, FIRB application fees, and possible foreign investment surcharges for property purchases involving non-citizens or non-residents.
Why should I invest in Australian property from overseas?
Australia’s property market is attractive due to its stable prices, consistent growth, and reliable economic management. The market has seen steady growth, largely driven by immigration and housing demand, making it a relatively safe investment compared to markets prone to more volatility.
What is negative gearing, and how does it benefit me?
Negative gearing allows investors to offset the costs of owning an investment property, where the expenses (loan interest, property maintenance) exceed the rental income. This can be beneficial for tax purposes, especially for expats looking to minimise taxable income.