Josie and her husband are facing a crossroads in their investment journey. With a sizeable amount of cash from recent property sales, they’re unsure of their next move.

As the market heats up, spec builds are becoming more popular. But it’s crucial to stay grounded with today’s sale prices and today’s numbers. Here are the options Josie is considering in this challenging market. Currently, Josie and her husband own 2.5 properties:

• Their home in Queenstown
• A townhouse in Auckland
• A share in another townhouse with business partners.

Just a couple of years ago they owned several high-yielding properties in Queenstown, co-owned with friends, but they sold them last year. They have the proceeds from that sale and are eager to put them to good use. Josie admits they didn’t want to sell those properties because they were so profitable as Airbnb, but she acknowledges they weren’t the right fit for their long-term portfolio.

Selling some properties earlier than planned could be seen as a downside of investing with friends. However, Josie sees the pros and cons of this strategy.

On the plus side, sharing the investment process with friends was fun, and it allowed them to acquire two properties quickly. They gained more assets than they would have on their own. But on the downside, it’s now harder for them to secure lending from banks.

“When you share ownership with people who aren’t your spouse, the bank treats you as if you have the entire mortgage yourself, even though you’re sharing the payments with friends,” Josie says. “And they only consider half of the equity as ours.”

So, really it’s the short end of both sticks – full responsibility for the debt and only half the profit, in the bank’s eyes.

What’s The Goal?

Now, the couple want to replace some of the asset value they lost by selling the Queenstown properties.

They’re considering a spec build: a project where you build a house with the sole purpose of selling it for profit. The proceeds could then be reinvested in another growth property.

Spec builds are becoming more popular, but they aren’t as easy as they sound. For starters, the success of a spec build depends heavily on location.

But even then, the margins are tight. Josie is eyeing a section in Lake Hawea, near Wanaka. The land is priced at around $340,000, significantly cheaper than in Queenstown, where it’s easily $100,000 more.

What Is A Spec Build?

A spec home is a new property that’s completed or nearly completed before it’s sold. The builder, not the buyer, decides on the home’s layout, flooring, appliances and features.

Josie’s initial numbers suggest she could sell the property for $925,000, but it would cost $840,000 to build. On the surface, that’s a solid profit. But after accounting for GST and income tax, and because Josie’s building with the intent to sell, she’ll be caught by the bright-line test, the profit margin shrinks quickly.

Additionally, a build like this involves progressive payments, meaning debt is drawn down in stages, with interest paid as you go.

For a three-bedroom house, the profit margin is minimal (just $1,600, less than 1 per cent) if everything goes smoothly.

However, a four-bedroom house could net a 25 per cent profit of $67,000. But that’s a big “if.” If anything goes wrong, like the sale taking longer than expected, that profit could shrink to $40,000.

The Options

Josie sees two options:

Go ahead with the four-bedroom build or wait.

The safer choice is to wait. But for Josie, it feels like they’ve been waiting forever. The proceeds from the sale haven’t been put to their best use.

Currently, the money is sitting in a revolving credit facility, helping them pay down debt and available for use.

It’s getting a decent return (probably saving them 7 per cent on mortgage costs).

But they’ve lost the leverage and the asset that was appreciating in value. While the spec build is tempting, the margins don’t look robust enough to make it a viable project.

Next Steps

Some property investors reach a crossroads where they’re unsure of the next step.

Josie’s experience might resonate with many investors.

If you’re at a similar crossroads and unsure of what to do next, consider booking a Portfolio Planning Session with us at Opes Partners.

Disclaimer: Just remember this is a column in a magazine, going out to thousands of people. It’s not personal financial advice. But, it is an example of what can be achieved with personalised financial advice. If you are wanting to book a consultation, email us through the website at https://www.opespartners.co.nz