Navigating Holding Costs When Building an Investment Property

When calculating the costs involved in property investment, we often focus on the funds required to complete the purchase.

This includes the initial deposit, along with additional expenses such as stamp duty, conveyancing fees, council rates, bank fees, and insurance. However, one crucial aspect that tends to be overlooked is the holding cost.

Holding costs encompass the ongoing expenses associated with the investment, especially before the property is tenanted. This is particularly evident when building a property, as there is typically a delay between acquiring the land and securing tenancy. These costs can fluctuate significantly depending on various factors, including build timeframes, potential delays, and even weather conditions.

It’s worth mentioning construction loan facilities briefly before delving deeper into holding costs. Typically, investors will either utilize available cash or draw from their equity to cover deposits and the funds required to complete the project. Consequently, the holding costs will vary for each investor.

For investors using cash, the holding period incurs an opportunity cost—the potential returns that could have been generated if these funds were invested elsewhere. On the other hand, drawing from equity triggers interest payments during the holding period.

Throughout the construction phase, builders invoice progress payments, gradually increasing the investor’s debt. Construction loans typically operate on an interest-only basis, accentuating the importance of timely completion. Notably, delays at different stages of construction can lead to substantial variations in the amount of interest accrued. For instance, a six-week delay at the slab stage versus the frame stage can significantly impact the total interest payable. Therefore, it’s essential to account for these holding costs when conducting investment calculations. Adopting a conservative approach is advisable, considering potential delays and unexpected expenses. By thoroughly evaluating holding costs, investors can make more informed decisions and mitigate financial risks associated with property investment.

Thanks for reading, Dave G Stewart

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