New Or Established – what makes a better investment?

Let’s face it, when it comes to buying big ticket items we all love new, shiny things.

Whether it’s a car, a big screen TV or a luxurious lounge suite, most of us will go straight to the store that sells its goods straight off the showroom floor in favour of a second hand dealer, right?

Of course the most expensive item you’re likely to purchase in your life is property and for many people, it’s new or nothing when it comes to the family home.

Now this is all well and good; who doesn’t have their heart set on a beautiful, clean new home minus the lived in look?

As a home buyer, you can be forgiven for going with your heart rather than your head, but in the real estate game, new is definitely a no-no if you’re looking for the ideal investment.

Let me qualify that last statement; if you’re a developer who can build a new project at cost, by all means go for it!

But most investors are not developers and have no intention of ever donning a hard hat.

Without a doubt, for the majority of investors, established properties will always offer far better capital growth potential than a new build for a whole number of reasons.

So let’s take a look at the benefits of old versus new.

1. A better deal

When you buy a new property, you’re not only paying for the actual building, you’re also handing over a large chunk of money to the developer.

This is because in order to make a profit, they build not only their margins into the price, but their marketing costs as well. 

Therefore, you end up paying a premium for your new investment which will invariably come with a hefty price tag.

Essentially, you are handing your first few years’ worth of capital growth straight to the developer!

With established properties on the other hand, when you buy well (either at or below the property’s intrinsic value), you end up paying below replacement cost and almost instantly making a capital gain.

When you invest in established real estate you have the potential to negotiate a great deal and pay a fair price, as well as enjoying immediate capital growth in most instances.

Additionally, buying an established property that needs some TLC can mean paying substantially less than it might be worth if you have the ability to look past the cosmetic flaws and see the potential.

Often you will have less buyer competition for tired or messy buildings because most people just see too much hard work.

2. Value add potential

Obviously, when you buy a new home everything is already done for you; new floor and window coverings, modern kitchens and bathrooms and a fresh coat of paint.

All that’s left to do is find some tenants to move in and enjoy! 

While this might seem appealing, it is actually a huge disadvantage when it comes to investing in a new property.

The problem is you have sacrificed the potential to add value, or manufacture capital growth, that comes with an established house or apartment.

At Metropole, the ability to add value is one of the primary attributes we look for in an investment property.

Although you should avoid anything that needs loads of costly, structural repair, something that’s a bit dated and could do with modernising provides the perfect opportunity to create immediate capital growth and outperform the averages.

We have seen clients turn a $40,000 refurbishment into an extra $60,000 plus in capital gains and increase their rental yield at the same time; something that is simply not possible to achieve with new property.

3. Nice and easy negotiating

Okay, so most property negotiations are never nice and easy, but it is much simpler to secure an established property for a far better price than you will ever pay for a new build.

Why?

Think about it this way…a developer would not construct a dwelling that they have to sell immediately and potentially lose money on. 

Sure, in a very tight market this has occurred, but it’s a rarity that we see very little of.

On the other hand, buying an established home means dealing with an imperfect market and vendor emotions.

What I mean by this is that vendors of established homes are often motivated to sell for one reason or another.

Maybe they’re upgrading, relocating or have to sell due to personal circumstances like divorce or an inability to pay their mortgage.

Basically, when you buy an established house you have the opportunity to uncover the vendor’s motivation and use this to drive a hard bargain, picking up a great buy in the process.

4. Better than an educated guess

One of the most critical factors when it comes to investing in real estate is to know your market.

Conducting extensive research into not only values in the immediate area, but on comparable properties to the one you are looking at, is one of the best ways to ensure you don’t over-capitalise on your inv

Obviously this is a much more difficult prospect if you are buying new; particularly if the new property is in a relatively immature area such as a housing estate.estment.

With this type of property you have less historical data at your disposal to make an informed decision when it comes to pricing and less comparable property sales to refer to.

5. Stronger performer in a slower market

One of the big issues with new and in particular off the plan properties, is that when the market slows so too does your rate of growth. 

New apartments and houses are often the first to see prices soften when the overall market loses momentum.

Often though, established homes will either maintain their value or experience a very minimal adjustment.

Generally speaking a well bought established property will outperform the averages over the long term and boast excellent capital appreciation, without taking too savage a beating during lulls in the overall real estate market.

So are there any disadvantages to buying established?

Is there any point where purchasing a new build makes more financial sense?

To put it bluntly, not in my opinion.

Some proponents of new properties will argue that you forego numerous depreciation benefits when you buy older homes. 

In response, I would argue that buying an established property and undertaking minor renovations creates additional depreciation benefits and more to the point; you should never buy an investment property for perceived tax benefits, it should always come down to the long term capital gains.

Then there are the new property investment enthusiasts who insist that when you buy an older home, you buy someone else’s problems.

Sure, maintenance issues are almost unavoidable in established properties; hot water systems give up the ghost, some of the plumbing might not be up to par and your tenants might complain about a bit of a leaky roof in winter.

But when you do those value add refurbishments, you can take care of any little niggles that might crop up along the way.  

Additionally, you should never buy an established property without commissioning a building survey to ensure you are not sinking your investment dollars into a money pit.

By doing so, you will avoid any nightmarish repair bills that can come with an older style dwelling.

What it all comes down to is the inescapable fact that property is all about supply and demand.

While you might have to go a long way to find another remarkable example of unique architectural grandeur, in a beautiful tree lined street; such as you might come across in an older suburb with character filled, established period homes…new houses in sprawling estates are a dime a dozen.

What do you think will fare better given the passage of time; a one in a million property antiquity or the modern McMansion suffering from an identity crisis?

I know which one I’ll put my money on every time.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.