updated 4th October 2016
Investing in New Properties
New properties are attractive to passive investors who are time-poor and would like to have a property that requires little effort on their behalf. There is usually lower maintenance, and if there happens to be any defects after completion, the builder or builder’s insurance should cover any cost involved.
New properties have an appeal to tenants as they usually have lots of light and space, and may also come with other amenities such as swimming pool and gym (new apartment complexes). Tenants with good incomes are often prepared to pay higher rent for new properties particularly if they are situated close to their work.
From a tax point of view, new properties usually offer higher or longer depreciation benefits, not only from the fixtures and fittings but also from capital works. It is possible for investors to use these tax benefits to assist with monthly cash flow.
The main disadvantage of purchasing new properties is that the cost to purchase may be higher than an old property in the same area, as developers have to cover their costs and profit margins.
Many people who purchase new properties may make emotional rather than business decisions, as they may have fallen in love with the look of the place and how it makes them feel. If they have paid an inflated price for the property it may take longer to realize capital growth.
Another reason that growth may be affected is because there may be a few properties that are very similar being sold at the same time, such as in a brand new development. A few hasty re-sales can affect the values of all the properties in the immediate area. This can have an impact both if you are trying to sell a property or are trying to release equity from your own property. If properties have been sold for lower prices, it will reduce the market value of your own property.
As a general rule, brand new properties don’t allow much room to add value by renovating as all the work has already been done by the developer, so unless an investor has purchased at well under market value they will need to wait for the natural capital growth to occur.
Investing in Old Properties
One of the biggest advantages of old properties is the fact that you get less price fluctuation than new properties in the same area, plus you gain the ability to add instant value through renovations, subdivision and development. Some investors have even managed to get their property for “free” by subdividing a large block and selling off a portion of the land.
It has been proven that land, and the scarcity of it is what drives property value upwards, and older properties generally have a bigger land component.
Investors can be more certain that the property they are purchasing has a ‘true’ market value, with no profit margin set by the seller. They are usually found in well established suburbs which can demonstrate consistent growth.
High maintenance costs are probably the biggest disadvantage of old properties. There may be a loss of rental income if renovations need to be done. It may be also harder to attract good quality tenants to an old property, unless it has had some renovations done to it to modernise it.
Also, tax benefits are not as good with old properties due to lower depreciation values. Rental may not be as high if the property is very run down, which could impact on your monthly cash flow as the rental yield you can command will be lower than could be achieved with a new property.