4 ways rising construction costs impact investors
Construction costs have risen substantially over the past three years – indeed the builders’ index recorded a staggering 12 percent inflation rate. Previous to this construction costs typically rise at an approximate rate of 5% per year.
One of the major cost culprits is the price of timber; this has increased by as much as 30% over the past year. Other factors include, disruptions in supply chains, transportation costs, labour costs.
Regardless of the reason of this significant rise, an increase in construction costs does impact investors in the following ways.
- Running costs
All properties need maintenance from time to time and maintenance goes part and parcel with owning an investment property.
Good maintenance goes beyond providing a good, quality home for tenants, a well-maintained property prevents more expense in putting things right later down the track.
While rental rates have increased, so too has the cost of making repairs and maintaining the property. It stands to reason that if the cost of carrying out essential maintenance has increased, it will affect your bottom line.
- Improving the property
Whether it is for capital gains, or enhancing rental income, any renovations must be for profit.
Property investors need to be realistic with renovations, and ensure they don’t over capitalise.
Investors need to ensure that a major renovation, such as fitting a kitchen, will to bring about a significant rise in rent to cover these costs in the long run, and/or add value in terms of capital gains.
The plus to major renovations is, there may be some tax breaks associated with depreciation. If you do improve your property in any way, arrange for a qualified quantity surveyor to inspect your property and prepare a depreciation report for your accountant.
- Redevelopment
Redeveloping a property can be economically beneficial in some circumstances, such as long-term holding or to maximise investment returns before selling.
However, property investors will need to take advice as substantial improvements may alter the property’s nature and potentially disqualify it from being an investment-grade asset. This is due to the building value portion being more than 50% of the property’s overall value.
- Building an investment property
While the cost to build a property from scratch will obviously depend on the size, design and quality of materials, the Australian Bureau of Statistics (ABS) put the cost of building a house in February this year at $449,436. This is a significant increase on February 2022, when it cost $391,937 to build from new, and in February 2021 it stood at $319,261.
Furthermore, the time to build the property will need to be factored in; in previous years,
But like a renovation, building a new property from scratch will probably attract tax breaks in the long term associated with depreciation.
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