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Thursday, 19 June 2008

Rental Property Blues Continue

The structural engineer finally sent me a preliminary report regarding the condition of the steel foundations beneath our rental property. It didn't come as a surprise that he recommended some immediate work be done to properly repair the broken brace that the insurance company's builder had welded back together. The initial repair is estimated to cost $1500-$2500, and I suspect that the final report will recommend a whole lot of expensive work is needed to bring the property "up to standard".

Rather than spend tens of thousands of dollars renovating a dilapidated fifty-year-old house, we're thinking of revisiting our original plan when we bought the property almost ten years ago - to have it demolished and build a new home on the site for us to move in to. We won't decide anything until after we get the complete inspection report and get an estimate for the cost of doing all the recommended repair work, but in the meantime I'm having some fun browsing through project home websites. There are a couple of very nice homes, such as this one, available from around $300,000 (it would probably cost a lot more by the time we add in costs for demolishing the existing house, site costs for the steeply sloping site, and including some of the "optional" extras).

I'll take the family out on weekends to inspect a few of the more attractive display homes, and I might even drop in to chat with the architect of the BeyondHomes design I like, in order to find out how much the changes I have in mind would cost. If we went ahead and built this new "dream home" I'd have to liquidate my stock portfolio to pay for the construction, and then sell off our current house after we moved in to the new property to reinvest the proceeds in my superannuation account. Apparently the tax benefits make it more effective to invest any extra money into superannuation than to pay off a home loan early.

While it's fun to research available house plans and think about what my "ideal" house might look like, I'm 80% sure that in the end we'll simply decide to stay in our existing home and either repair the rental property or just sell it off "as is" for it's land value. Although we could afford to build this new house, it would consume a large part of our investible funds and would produce a rather poor IRR compared to other investment options (most of the returns from residential real estate come from increases in the land value, not from the building itself, which actually depreciates over time). Then again, optimising investment returns should only be a means to and end -- eventually you have to decide what to spend your accumulated wealth on. I'm just not sure that buying an up-market house will provide the maximum utility. DW was initially excited when I mentioned it might be better the knock down and rebuild the property rather than pay for renovations, but she's not entirely sure that she wants to have a bigger house to maintain. And I'm not sure I want to go through the hassle of moving house again.

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