A common question that is often asked by new real estate investors is, “Should I purchase new or old properties?” The answer is that both have their pros and cons.
Some of the biggest ones are that modern or newer properties are highly appealing to purchasers, as they are visually captivating and look more alluring for potential renters. However, buying a modern property comes with a higher price tag. By comparison, older properties tend come at a lower price point, though they can also look outdated and be less appealing in the eyes of both the purchaser and potential tenants.
Some other pros of investing in new properties include:
Tax write-offs: New or off-the-plan properties are really good with depreciation, especially in the first five years. Investors can also claim furnishing costs as a tax deduction over 5- 10 years., along with the cost of building the investment property as depreciation over 40 years (as that’s the length of time the ATO says a building will last before it needs replacing). For example, on a new building that costs $250,000 to build, you could make a $6,250 tax claim (i.e. 2.5% per year).
Attractive to tenants: Generally, newer houses and units have modern amenities, appliances and technologies pre-installed, such as energy efficient heating, smart appliances, smart locks and security systems, etc. As such, tenants are prepared to pay a premium. Being able to attract high-quality tenants means you reduce the risk and frequency of vacancy of your investment property.
Security and protection: Home Building Compensation (HBC) is a legal requirement in all states except for Tasmania. This entitles homeowners of new homes to a certain level of protection against major structural defects. New homes also provide a physically more secure and protected property.
Low maintenance overheads: Since almost everything in new properties is under builder or appliance warranty, there’s minimal maintenance required. Things tend to break or need replacing more often as they get older, which is why you’ll find these costs are considerably higher for older properties.
Government incentives: Government incentives like the First Homeowners Grant are available for first home buyers, which can reduce the upfront funds that you need to come up with. Plus, you only pay stamp duty on the land value when buying a house and land package.
Some other cons include:
Less affordable: With a new property, the developer’s margin and marketing costs are also factored into the price. As such, these properties are sold at a premium. Moreover, since both foreign investors and first home buyers are attracted to this property type, this pushes the prices upwards even further.
Limited opportunity: There aren’t as many opportunities to add value to new properties through renovations and improvements, so it may take longer to achieve capital growth.
Greater market risk: Historically, newer properties are the first to get hit when the market moves down, whereas established properties tend to maintain their value or adjust over the long term.
Limited land component: Due to the comparatively limited land available with newer properties, subdividing the property or adding a granny flat at the back is usually not viable. As a rule of thumb, 70% of your cash should go into the land, and 30% into the bricks and mortar.
By comparison, some of the pros of investing in an old property are:
Ideal for adding value: There’s significant potential to add more value to an older property through renovations and improvements. Even a cosmetic makeover can improve the value, rentability, rental return and depreciation of an older property – something that can’t be done with a new property. Best of all, these costs are tax-deductible.
More value in the land: Older properties tend to hold more value in the land than the building itself. Generally, land tends to grow in value, whereas buildings lose value over time.
Property history: By purchasing an older property, you will be able to see the property’s sale history and previous sale prices. Older properties have a proven resale value, meaning they are likely to attain market value when sold.
Capital growth: More often than not, an established property will outperform the average and see higher capital appreciation in comparison to brand new properties.
Next to established infrastructure: Older properties tend to be located in areas with more established infrastructure, such as transportation, schools, hospitals and so on. These infrastructures are also drivers of property growth.
However, older properties also come with some cons – for example:
High maintenance: Holding an established property as an investor means creating a buffer for unexpected maintenance and repairs. This usually puts stress on your cashflow, as it will likely be negatively geared.
Lower rental return: Older properties have lower rental returns compared to newer builds.
Less tenant appeal: Modern tenants often want something that is new, shiny and working, and packed with lifestyle features. Because older properties are generally lacking in these things, they tend to have lower tenant appeal.
Lower depreciation write-offs: Older properties have lower depreciation write-offs due to all fixtures and appliances being outdated and used. Because their value has been slowly depreciating since the property was first built, you are unable to claim the depreciation that has already occurred.