Should we build a small house

Question

We are pensioners in the late 60's and have no savings. We have sub divided our section which should be worth around $260,000 and our house which is mortgage free around $500,000.

Should we:

Build a small house on the section by selling our house (What returns would we get for an investment of say $200,000 if we built a house on the section for around $200,000) It would leave an approx 100,000 for all the extras involved in building a house.

Sell the section and the house and move to a town house or apartment with less maintenance (we are worried about corporate fees though).

Sell the section and invest the money to help boost the pension and live in our house until we eventually have to move to a smaller place.

We would be grateful for any advice!

Regards

Sue

Answer

Typical of many pensioners you are unfortunately asset rich and cashflow poor. I really should not say ‘unfortunately’ because at least you do have a saleable asset thanks to infill housing and pocket hanker-chief sections!  That said, it still doesn’t make it any easier to decide on your next step.

Putting aside returns for a moment there are more important considerations in my view. If you take the option of building, who is going to oversee this project and how is it going to be funded?

You suggest you are both late 60’s which is fine but a building project is a significant and stressful commitment. Also funding is needed for construction, you could borrow until you shift or if you sell the ‘big’ house early where do you reside until the ‘new’ house is completed and do you really need the hassle at this point?

Selling both home and section and moving to a village or apartment sometimes has the negative of leaving friends and neighbours. Most folk I have encountered really enjoy the new found friends, the lovely surroundings, the security and the social side of life of apartment or village living. Your comment regarding corporate fees is a little ill-found now that the Government has introduced much stricter rules to protect village members, but it is still a consideration I agree, so shop around to get a handle on the different fees and costs.

Selling off the section does add to your ready capital and therefore income and takes away the hassle of building. But make sure you have very, very good covenants on the agreement so you are not disappointed with what appears in your back or front garden – be warned!

If you were to sell the section for say $250,000 after fees this could add about $20,000 gross before tax per annum to your income, at present rates.

I suggest you take a three fold approach; Talk to a good lawyer about the covenant issues then a reputable local builder about how to maximise the value of the site and how you might best benefit.

Once you have these ideas in writing consider your own needs over the next 15 or 20 years and visit the local apartment or village options to see how they appeal.

The correct path forward will then be clear. A wee final word of warning, be sure you do not fall into any GST or taxation traps, take good advice on these points in particular.

Original Article published May 2005