What makes a better investment: Brand new or established properties?

Brand new properties 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.

1. New properties:

The pros

1. The biggest advantage of buying new properties as an investment is the depreciation benefits. This is particularly the case now that depreciation rules have been changed, as 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 generally needs less in terms of repairs and maintenance, and often the builder’s warranty is still in place to take care of any issues for a number of years after completion.

The cons

1. Most new properties — especially new apartments come at a premium price. You pay for the developer’s margin, for GST, for the marketing costs, and agents' fees. What this often means is that you give away the first four or five years of capital growth to the developer — and it’s not is to have!
2. The quality of the build can sometimes come second to profit, and some developers might scrimp on materials and finishes.
3. 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 centers where there is maximum capital growth. And if buying new apartments,  they are usually in high-rise towers in locations where there is an oversupply of similar properties putting a damper on rental growth as well as capital growth.
4. Special offers and incentives from developers are usually not as exciting as they initially look. For example, a rental guarantee might make the deal look better initially, but you usually pay for it at the purchase price and when the guarantee ends, you’re likely to receive a lower rent.

In summary:  While brand new properties may offer high tax deductions and attracts investors looking for cash flow, in general, this comes at the expense of capital growth and rental growth which is really what most property investors should be looking for.

2. Off The Plan:

Pros

1. Buying off the plan can work 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.
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 for a new property under the new guidelines, giving you more cash back 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 marketing costs and GST). In fact, on completion a significant percentage of valuations for off-the-plan purchases come in considerably below the contract price, meeting the buyers who have lost money right at the beginning of the investment journey.
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.
4. Currently, many banks are wary of lending for off-the-plan investments because they are concerned about the risks of oversupply, poor capital growth, and poor rental growth.  Either they will not lend it all in some developments, although require significantly larger deposits to cover their risk.
5. As with new properties developer’s incentives such as rental guarantees should be seen as a red flag — you need to ask yourself why the developer feels they need to place offer such an extravagant incentive.
6. Frequently the finishes of off-the-plan developments differ from that which the purchasers expect because the contracts allow builders quite some leeway.

In summary: Because of all the uncertainty of buying off the plan, you should be paying a discount on today’s market price, but in general, you’re paying a premium.  This means buyers must have a solid cash reserve to protect them against a potential ‘negative equity scenario.

3. Established 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 dictate, you can buy an established home there.
2. You can bag a real bargain on existing properties, as existing homes generally sell for far less than their brand-new counterparts. 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. But these can be found prior to purchase by conducting a building inspection
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 less than they used to be on existing properties,.

In summary: On the whole, the right established property can present an opportunity for you to manufacture growth and your options are endless in terms of location, however, there is the catch — you need to buy your property in the right location — one which will exhibit above-average capital growth.

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.

With so many options it makes sense to seek professional advice to help you narrow down these options to ensure you buy the right property.

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.