Brand new or existing homes: Which is the better investment?

Brand new homes deliver different benefits to existing properties, from depreciation power to capital growth potential.

When it comes to deciding which one makes the best investment, there’s no blanket answer – but there are factors that could sway your decision.

Rather than attempting to categorise one as better than the other, which is a ‘one-size-fits-all' approach that I don’t tend to advocate, let’s look at the pros and cons of these property types.

This way, you can start to see which property will deliver results according to your strategy, portfolio and financial circumstances.

New properties

The pros

1. The biggest advantage is the depreciation benefits, which are at a maximum for brand-new properties. This is particularly the case now that depreciation rules have been changed for existing properties.

This means brand new properties will now deliver the greatest depreciation returns.

2. Newer properties, which often have modern high-tech gadgets that young generations love, are popular with tenants who are attracted to the shiny new fixtures and fittings.

3. A new property needs less in terms of repairs and maintenance, and often the builder’s warranty is still in place to take care of any structural issues for a few months after completion.

The cons

1. Location can often be compromised when searching for new houses; it’s unlikely that Greenfield estates and subdivisions are going to be close to the city centres.

Also, the demographics of these locations mean that they’re predominantly younger families who are more interest-rate sensitive.

These areas tend to have significantly lower capital growth than inner and middle-ring suburbs and it’s really the capital growth of your property that will build your financial freedom.

2. Generally, you pay a premium for new properties since you pay GST, developers profit margin, marketing costs etc.

This means you give away the first few years of capital growth to the developer, and it’s not his to have!

3. The quality of the build can sometimes come second to profit, and some developers might scrimp on materials and labour.

4. Offers from developers may not stack up financially as conditions change.

For example, a rental guarantee might make the deal look better initially, but when the guarantee terminates the yield might not work in your favour anymore.

In summary

While new properties offer high tax deductions which may improve your cash flow, you generally considerably lower capital growth and this is the part that’s really important in your property’s investment performance.

Off the plan

Pros

1. In theory, buying off the plan works to your advantage in a rising market, because you lock in a purchase price at the start of construction, and take advantage of value growth and yields after completion.

However, in reality, over the last few years, many off-the-plan purchasers found that on completion their property was valued for considerably less than their contract price.

2. The required deposit for an off-the-plan purchase may be lower than that required for an existing property, giving you time to save during the construction phase. In some cases, you may be able to use the equity in other properties to fund your deposit.

3. The same depreciation benefits are in place as for a new property under the new guidelines, giving you more cashback in the early years to help you with loan serviceability.

Cons

1. Off-the-plan properties are typically bought at a premium price, so you might end up overpaying (remember, your purchase price will include the developer’s profit margin, marketing costs and GST).

2. If the market takes a downturn during construction, you’ll find yourself settling on a finished property that is worth less than what you bought it for – and you’ll be footing the bill for the difference between the new bank valuation and the agreed purchase price.

3. In new developments, whether they’re housing estates or apartment complexes, the volume of properties that will come online at similar times can affect rental demand, which can force you to lower your rent to stay competitive.

In summary

Off the plan, developments may seem to suit your strategy, but buyers must have a solid cash reserve to protect them against a potential ‘negative equity' scenario.

In my mind, you should be buying off the plan at a discount for all the risks involved, yet you usually pay a premium.

Existing properties

Pros

1. There’s no limit to location. You can buy in the inner-city, in blue-chip suburbs, or regionally – whatever your strategy and budget dictates, you can buy an established property there.

2. You can bag a real bargain on existing properties, as existing homes generally sell for far less than their brand-new counterparts.

I like buying established properties because if you buy from motivated vendors, you can often buy at a good price.

Of course, buying under market value gives you instant equity and access to a property you might not have been able to afford otherwise.

3. You can manufacture growth through improvements, which can deliver a huge boost to the value and yield you can garner from the property.

In addition, you might be able to subdivide and develop or add a secondary dwelling to drastically improve your rental return.

Cons

1. Hidden problems, defects or structural issues in the building can be very costly and cause huge headaches for owners, tenants and property managers alike.

2. Renovation budgets and time frames can – and often do – blow out to such proportions that any profit is negligible. Unforeseen problems with council approval can even put the kibosh on your development plans completely.

3. The depreciation benefits on offer are now a great deal lower on existing properties, which can substantially impact your cash flow.

In summary

Ultimately, each property is unique and must be weighed upon its own merits, whilst also being measured against your personal circumstances and your portfolio goals.

However, established properties tend to win out as they present an opportunity for you to manufacture growth and your options are endless in terms of location.

Of course, not all established dwellings are investment-grade properties, so you still need to do careful due diligence.

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.