Investing In New Property Vs Established
Tuesday, December 13, 2016 / Property Investment, Real Estate
You are likely to get some very strong, very passionate responses from both sides of this debate, depending on who you speak to.
There are a lot of valid reasons for each decision, and ultimately it does all come down to your individual investment strategy and the goals that you have in place.
As always, this information presented is intended to be a guide only, and we recommend that you speak to a professional investment strategist to help you to come up with the best options for your goals.
Reasons to Purchase Investment Property New
- It’s generally easier to find tenants
There is something special about a brand new home that makes people excited about the idea of setting up a new life there. The walls are all freshly painted, the floors are perfect, the bathrooms are modern; it just has a better feel to it. Unsurprisingly, the type of tenants who are more eager to be renting a new home are also the type of tenants who are more likely to look after the home and treat it with the respect that you expect. Not only that, if the home you are renting out is brand new and it is competing in the rental market against other homes that are more worn or older, with dated fixtures etc, then your home will be getting applications for tenancies much faster and in greater volume. Having more applications gives your property manager a wider selection of who to award the tenancy to.
- Reduced repair and maintenance costs
With a newer home there is going to be less work that you need to get done. If you buy an established home there can be all sorts of repairs that are lurking unseen, such as major plumbing and electrical work. When you purchase the home brand new you know that everything is fresh and not in need of any servicing or maintenance for quite some time to come. After all, you are purchasing this investment so that you will have more money in the future, not so that you can pour money into an older building’s upkeep!
- You will receive structural guarantees and warranties
If having a smaller need for repairs and maintenance wasn’t a good enough incentive, you will also have the peace and mind knowing that if there are any major building defects that they will be covered by the builder’s insurance. So in the unlikely event that there are any major problems with the building, they will not be your problem to fix financially! Even if you go through all the processes of finding a great building inspector an established home will still have less guarantees on it than a brand new home.
- You will save on stamp duty
Depending on which State you live in, you may be able to save a considerable amount of money on stamp duty. The tax system is geared towards making it more inviting to have investors building new homes, and adding to the existing housing stock that exists within the market. Not only are these incentives here to encourage an increase in the Australian housing stock, but the Government also keeps these incentives going in order to keep the construction industry well stimulated.
- Full turn key building is becoming the norm
Not that long ago people would regularly build or buy a home that did not have any landscaping, finishings, floor coverings etc, this is often not the case anymore. Most builders, especially when they are purposefully building in order to serve the investment markets, offer ‘full turn key’. In other words, this means that when you get the keys to the new home, it is 100% ready to be lived in and rented out.
- You may get a better rental yield
New properties generally attract better rental returns than what you may be able to get from an older home. Not only that, it means that you will be able to keep the rent higher for a much longer period of time before you have to repaint etc in order to keep the home updated and desirable.
- Off-Plan may mean you can lock in the price
If you are buying off the plan you will often be able to lock in the price for the property and then not pay the remainder until construction has been completed. With construction times taking anything from one to three years, this means that you will be buying a property for today’s values, but not paying for it until the area itself has had another year or more of growth. This can be a great way to make sure that you are ahead of the growth curb from day one. Additionally, if you purchase earlier in the releases, then you will most likely be getting a discounted price. As the developer will sell the earlier homes in the development (or apartments in the complex) for a lower price to ensure that they have their pre-sales completed and can commence construction. As construction comes closer to an end, they are more likely to increase the price.
You will receive far better tax breaks and depreciation
The real kicker when it comes to the benefits of purchasing a new house rather than an established house is the depreciation claims that you can lodge with the Australian Tax Office. Depreciation in short, is a claim that you make for the gradual loss of value in the building aspect of your investment. The Tax office has decreed that you can claim 2.5% per annum depreciation on the building and any fittings and components (such as dishwashers, water heaters etc), this can be claimed for up to 40 years after the completion of construction. On older houses you are not able to claim the depreciation of some of the fittings, such as dishwashers etc, as these are deemed to have a shorter depreciation scale than the primary structure. In addition, you can only claim for the amount of time left on the building within the 40 year limit. For example, if you purchase a house that is 5 years old, you may only claim on 35 years of depreciation. Whilst land consistently appreciates in value, a building will consistently depreciate. Here is a table that shows the true land cost of a two homes, one brand new and one established
As we can see, the depreciation claims that can be made on even a 5 year old home, compared to a brand new home, are quite different. For the newer home, a full depreciation claim can be made, however for the newer home there is much less that can be claimed.
Reasons to Purchase Investment Property as Established
- When you purchase from an individual you may have more bargaining power
Buying and selling established property can involve quite serious bargaining, negotiating and compromising. Whereas a developer may have considerable time before they truly need to offload a property, this is often not the case for an owner occupier. If the person selling the home has a tenuous settlement on their next home, or if they are in a position where they need to sell the home quickly, then you may be able to pick it up for considerably less than standard market value.
- You may be able to quickly boost the equity
If you purchase a more run down building then you can often very quickly do some additional work on the property and find yourself sitting with a much higher value than you originally bought it for. Likewise, if you do some additional renovations to an established property you have just bought, then you will once again be increasing your equity much quicker than waiting for the area to grow naturally. This strategy however does require additional expertise.
- Established properties come in established suburbs
When you buy an existing home it is generally going to be in an established suburb, you will be able to do research on the suburb as a whole and you will be able to get a good historical understanding of how the suburb has been tracking over time; how much it is already growing in value.
Whether you buy new or established property is just one of the many considerations that need to be evaluated before determining the right property investment for you. If you are interested in seeing an investment strategist and discussing the differences that are available in various investment strategies, do not hesitate to contact us and have a chat with one of our friendly investment strategists at any time.
Finding the right strategy and property that will support your goals and ambitions can be a detailed process, never be afraid to seek some help!