Why shiny and new investment properties might not be the best…
A brand new house or unit might seem like an appealing investment, but it’s important not to be lured by their shiny outside and pristine interior.
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.
Here are a couple of home truths 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, looking for existing properties and then adding value through quality refurbishments can be a winning strategy.
What about the 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, there is usually lower capital growth in the first few years because you often pay a premium for newer homes.
It is also a complete misconception that only new properties are eligible for tax depreciation.
Investors can claim depreciation on their properties for up to forty years 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 homes, which can deliver substantial depreciation benefits.
What about the maintenance involved in a new property?
While you would expect this to be the case, it often isn’t so.
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).
Getting a thorough property inspection before committing to any home – 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.
What about the cost of new vs. established?
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.
Most of the numbers that you see floating around for new properties are projections – educated guesses, in what is usually an overcrowded market. Secondly, how can you actually determine fair market value?
Others are inflated because of overseas investors paying too much.
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 very possible to buy established properties below market value and in fact, we are often finding apartments for up to 20 per cent below replacement cost.
This is why buying an established property is the way to go.
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.
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