In the ultimate battle of youth against experience, Your Investment Property tests whether old properties trump new properties or vice versa. While opinions differ, the arguments speak for themselves
For investors, there are few issues that spark as much debate as whether to invest in new or older properties. It’s like choosing between an Apple and Android-based phone.
For many investors, the issue is something they have had to consider time and time again. Both property types have their advantages and both certainly have drawbacks. Adding to the confusion is the scope of far-ranging opinions among property investment advisors themselves.
The simple answer is that the choice between one of the other depends largely on the individual. But how do you know what you need to look for? How do you know your risk appetite? And most importantly, how do you know you’ll be happy with your choice of either?
These are all million dollar questions and to help we’ve asked a team of experts for their opinions and let their arguments speak for themselves. We’ve presented them with a do-or-die question: “if you had to go for only new or old properties, which would you choose?” Here are their thoughts:
LIZ STERZEL, MD of Property Wizards
Opportunities to subdivide
Greater land component
Without doubt, older properties are the way to go.
Firstly, they’re ripe for adding value which can help fast-track your wealth. 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. A well-done renovation can make an older property as attractive as a new one, but with more growth potential.
Well selected older properties are also more likely to be able to be subdivided for increased wealth. Let’s say you keep the original home and build two more on the subdivided portion. That leaves you owning three properties while only forking out once for the costs associated with buying and you keep the developer’s margin in your pocket, not theirs.
Secondly, older properties tend to hold more value in the land than in the bricks and mortar. Given that, generally, when it comes to property, land grows in value while buildings drop, older properties are a smarter choice. Those that can still contribute income towards your mortgage are ideal so buy a good, solid older home that doesn’t call for too much maintenance in the best area you can afford. It’s a recipe for reasonable rental returns and maximum growth. The golden rule is: 70% of your money into the land and no more than 30 percent into the bricks and mortar.
Even when taking higher rental rates and depreciation allowances of newer properties into account, the potential extra capital growth of an older property wins out.
Of course, holding older properties can burn a hole in your pocket but if you build a new home behind your older house, you are balancing your cash flow with the old and new.
LINDY LEAR, Property Advisor, Rocket Property Group
More desirable for buyers
I am definitely a fan of buying new properties. I believe that for investors who lead busy lives, want to keep the process easy, stress free and low risk, there are many benefits to only buying new properties.
Number one is that an investor can still have a diverse portfolio with all new properties. They can diversify in location and property type to achieve this. I have new houses, new apartments and new townhouses in my portfolio, in a variety of locations and all interstate, all tenanted and achieving good rental yields.
My portfolio of new properties is cash flow positive with the extra help of the tax man as well as the tenant. That is my favourite reason for buying new properties because the tenant and the taxman are paying for my properties. New properties attract higher tax claims due to having higher depreciation allowances. It is very nice of the government to give me back more tax refund than the expenses on my property each year. So I end up with positive cash flow properties because they are new.
In areas of strong capital growth driven by demand, a shortage of accommodation can occur. This makes new properties in higher demand from families moving to the area, or companies looking for accommodation for their workers. There is never a problem with renting, as new properties get snapped up first, usually for higher rent. New properties attract premium tenants willing to pay a premium rent.
New properties also allow an investor to easily anticipate their holding costs, as there are no unexpected maintenance issues like with older properties. Everything is under builders or appliance warranty for many years. This can make a huge difference to your cash flow.
There’s also that appeal to modern tenants (who can be very demanding), as everything is new, shiny and working and full of lifestyle features. More light, more windows, balconies or alfresco area, larger bedrooms, ensuites, multiple living areas all give you greater tenant appeal and rent.
By buying a house and land package (i.e. having a new house built fully ready for a tenant), there are substantial savings as you only pay stamp duty on the land component, often saving over $10,000 -$15,000 on full stamp duty if it was a completed older home . This gives investors a great head start into the market.
BRYCE HOLDAWAY, Property advisor and buyer’s agent, Empower Wealth
Proven resale value
I’d go for established properties, ideally within 10-15km’s of a capital city job market that has proven infrastructure, such as public transport and restaurants.
I prefer suburbs that have residents with above average incomes and where there are prospects for income growth. I find these suburbs tend to be closer to the city in established areas. Suburbs with period homes are generally quite desirable with owner occupiers and this timeless appeal helps attract higher income earners to the area.
Established properties also have a proven resale value, since any exchange is between a willing buyer and a willing seller and will likely meet the market.
On the other hand, new properties need to factor in a premium as the developer is looking to make a margin for their efforts. Developers also have a marketing budget to sell their property and this is all factored in when setting the price. The prices are not market tested until they are subsequently resold.
And while the big draw card of buying new is the great depreciation benefits, I’d prefer to create depreciation on an established property through a well-planned renovation. You can generally add value immediately to established property but it’s very difficult to do to new properties.
If I’m buying a house, I look for a period style property with some outdoor space, good storage, parking and a floor plan that has good “balance” and “flow”.
If I’m buying an apartment, I like the older blocks built in the 60’s or 70’s, where there are no more than 20 units in the building and ideally less than 10. I avoid places with gyms or lifts. I find older apartments are solid construction and have stood the test of time.
TABITHA BRIGHT, Head property coach and mentor (NZ, Vic & Tas), Positive Real Estate
I strongly believe you need both. This will allow you more diversity: you’ll pay less tax buying new and you’ll have a multiplier of value in your portfolio when you buy old.
For new property, depreciation allowances are a great way to minimise your tax. The newer the property, the better the allowances you can claim on the building value (and the fixtures and fittings) and the average Australian can sometimes claim back 70%-80% of their tax. Even if your property is cash flow positive, the ATO will often refund between $1,400 and $12,000.
New properties also come with structural building guarantees and are often seen as a low risk way for people with limited cash to enter the property market, as reserves for unexpected repairs are usually not needed.
The major advantage of older property is that it has the scope for potential improvements – hence greater profits and the chance to multiply your returns through value adding strategies.
Of course, tenants often prefer more modern housing and if your property is too old, it will have vacancy issues and high repair and maintenance bills. Such properties tend to be great to renovate, but aren’t good sources of cash flow, at least until you've added the value.
I also love adding older property into my portfolio because it’s easier to negotiate discounts. You can often find out why the vendor is selling and adjust your offer to suit.
RICH HARVEY, MD, Propertybuyer.com.au
Pick: It depends on the area
I go for both. I like to buy older houses in established areas, where there’s ongoing and high demand, but I’ve also got brand new properties in my portfolio. The key is that I’m buying the new properties in high growth areas, so I’m getting high returns.
In my experience older houses have solid bones, and while there’s renovation potential, they’re also often in great areas next to established infrastructure – all your hospitals, schools and transport. The disadvantage is that even if you do renovate the costs could easily blow out. Rental returns tend to be lower too, so that’s something to consider.
New properties don’t usually have maintenance issues, which is great, but you’re going to be paying a retail price and the position, compared to more established homes, won’t be optimal. I also don’t advocate buying new property where there is a high amount of stock coming onto the market, which is going to dilute prices.
Of course, there are always exceptions. If you look at Sydney, you could buy a house and land package in Ropes Crossing, but just across the road in St Marys there are lots of established properties. You could easily add a granny flat to one of them and get a positive cash return. If you went for new, you’d just pay a premium and your returns wouldn’t be as good.
On the other hand, if you took areas like Mackay or Gladstone – boom areas – there is a lot of new supply coming onto the market but there is also huge level of demand. You’ll do better in those markets by buying new because they will attract better quality tenants and the growth will be better.
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