By Ian Hosking Richards
I prefer to purchase all my investment properties new for a numer of reasons.
One great reason is that it makes it much easier to accurately anticipate cash flow. With a new property you know that you have a few years worth of use before there are any maintenance or repair issues, and if something does go wrong in the early years it should be covered by a warranty or guarantee. When buying an older style property you always run the risk of unanticipated maintenance issues, and in my experience most investors do not factor in an adequate maintenance allowance into their cash flow forecasts for such properties. For example, if the air-conditioning or hot water system packs up the day after settlement, you might have to fork out a couple of thousand dollars - yet the expense does not add to the value of the property or allow you to charge more rent. All it does is erode your cash flow, and if you have not made adequate provision for this expense, it could cause financial stress.
Another reason to buy new is that contemporary layouts and design features more accurately reflect current market demand. Consider a standard older-style two bedroom unit. Typically you may have one main bedroom, one smaller bedroom, and a shared bathroom. Potential views, use of natural light and outdoor living may not be maximised.
My experience is that good tenants are demanding, and though you will pay a premium for a new apartment, you will be able to charge more rent which will compensate for the higher price. A typical new unit will also be much more appealing to potential tenants, especially for the many who may be sharing with others, as each one is likely to enjoy a bedroom of equal size and their own bathroom. New developments that address the lifestyle requirements of today's demanding tenant will definitely have an edge over an older style property.
New properties will also help to maximise tax benefits, thereby reducing holding costs. A good depreciation schedule will itemise historical building cost allowances as well as allowances for fixtures and fittings. The former can generate deductions for 40 years, whereas the bulk of depreciation for fixtures and fittings is realised in the first five years, which can generate tax rebates in the early years of up to $100 or more per week - depending on marginal ratesof tax.
In conclusion, it is important to realise that 'cheaper' property may actually end up costing you more and give you less capital growth. Always do a cash flow assessment in order to determine your weekly holding costs, factoring in any applicable depreciation allowances. This will allow you to compare properties of different value and with varying income and associated expenses. Even in terms of the deposit, the difference between an older $250,000 unit and a brand spanking new $400,000 townhouse in a great suburb is not that much. For example if you are borrowing 90% from the bank, an extra $15,000 will get you a property worth $150,000 more. If both properties appreciate annually by 10%, the more expensive property should give you an extra $15,000 in capital growth in the first year alone, and depending on the cash flow forecast may end up being cheaper to own.
Ian Hosking Richards is a successful property investor with a portfolio of over 30 properties and is the CEO and founder of Rocket Property Group, a leading independent real estate agency that helps hundreds of people a year enter the property market or grow their existing portfolios.
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