The fresh smell, the clean slate, the low maintenance and the primal need to be the first to mark your territory: these are just some of the reasons why buying a brand new house or unit is enticing.
However, that doesn’t mean it is a smart decision.
The truth is, there are no ifs or buts about it – established properties make the best investments.
When it comes to property investing, you can’t be distracted by the lure of superficial appeal.
It has to primarily be a financial decision – which means leaving your own desires and prejudices at the door when looking at established properties.
“But new properties are so much nicer,” I hear you interject.
Nice doesn’t cut it as an investment strategy – and I’m fairly certain that no matter what your objection is, I have an answer for them all:
But… new properties are easier to rent
There’s no denying that tenants can be just as swayed by their emotional when deciding where to live as we are as investors, deciding where to buy.
But here are a couple of home truths you need to consider when buying an investment property:
- Australia in general, and capital cities in particular, has a shortage of rental properties. With limited options on the market, renters are still flocking to established properties in droves. Other factors like location and rental costs will continue to be major drivers of the rental market.
- If you are thinking new properties are easier to rent, you probably aren’t alone. Chances are if you buy a unit in a brand new apartment complex, it will be filled with investors just like you. I prefer to buy in predominantly owner-occupied areas because the buildings are generally better cared for and there is less competition (and as a result, higher demand) for rentals.
- Buying an established property does not mean that it has to stay as it is – in fact, I recommend looking for existing properties and then adding value through quality refurbishments.
But… there are more tax benefits for new properties
There are indeed many tax benefits for new properties, but that is not the whole picture.
While you initially get greater tax depreciation allowances for brand new properties – which you pay for by paying a premium for new properties – there is usually slower capital growth in the first few years because you pay this premium for newer dwellings.
It is also a misconception that only new properties are eligible for tax depreciation.
Investors can claim depreciation on established properties and by working with a reputable quantity surveyor, you can ensure you receive maximum depreciation benefits in older homes and units.
This particularly true of renovated properties, which can deliver substantial depreciation benefits.
But… there is less maintenance involved in a new property.
While you would expect this to be the case, it often isn’t.
You’ve heard the saying, “They just don’t make ‘em like they used to.”
It stands true in property as well.
New properties can and do have maintenance and structural issues, from peeling paint to cracks in the walls and ceiling, and building insurance policies only cover so much (and for so long).
In fact I don’t think I’ve come across a major apartment complex that hasn’t had water leak problems.
Getting a thorough building inspection before committing to any property – new or old – is always recommended to confirm the structural integrity of the property.
It also pays to look at the bigger picture, because if you buy an established property with the intention of adding value through renovations, you can always address minor maintenance issues then.
But… new properties don’t cost that much more than established properties.
There do seem to be some affordable deals available for new properties, but as always it is crucial that you do your homework first, and be sure to ask a couple of hard questions.
First of all, what are you actually paying for?
When you buy directly from a developer you are inadvertently paying for the developer’s margin, the agent’s commission and the cost of marketing – combined, these figures amount to tens of thousands of dollars.
In real terms, this means you’re actually squandering your first few years of capital growth and even instantly losing value.
If you’re not holding for the long term, you can say goodbye to a favourable resale value – especially in a slow market.
Secondly, how can you actually determine fair market value?
Most of the numbers that you see floating around for new (and particularly off the plan) properties are projections – educated guesses, in what is usually an overcrowded market.
When you buy an established property you can access historical data and market research, which paints a much clearer and more insightful picture of what you’re actually buying.
Finally, where is the wriggle room?
When you buy a brand new property, your room to negotiate prices is strictly regulated by a set price list.
When you are buying an established property, on the other hand, you are working in the realm of emotions and imperfections – a market that is ever changing – and with vendors whose motivations for selling are varied, to say the least.
In the current market, it is still possible to buy established properties below “intrinsic” value and in fact, we are often finding apartments for up to 20 per cent below replacement cost.
This is why, in my view, buying an established property is the way to go.
I believe most investors will find the best success buying an existing property with ‘character’ and renovating it to add value, resulting in a higher yielding, tax efficient investment.