Depreciation on old vs. new properties

23/01/2012


Question:  I’m 26 and want to purchase my first investment property in North Sydney, but am unsure if I should buy a new or old property. I’m looking for a two-bedroom, one-bathroom apartment, preferably with a lock-up garage or at least parking space. What are the advantages of buying a new property over old? How will the property’s age affect my tax claims on depreciation? How important is it to be able to claim depreciation? I was told by my friends it’s not worth buying properties that don’t have depreciation benefits because this will limit my ability to expand my portfolio later. Is this true?

 

Answer: The initial thing that strikes me about this question is that you don’t seem to have an investment strategy in place.

I’m not sure why you have decided to buy an apartment with specific features in a specific location, but I have the sneaking suspicion that it’s because you’re looking to buy an apartment you would like to live in. This is a common mistake that many people make when they’re buying their first investment property.

For example, you have already decided on the features and location that you want. The problem with this is that renters in the area may not be seeking this type of property or these specific features, which is where problems can arise.

The best way to identify what a tenant wants is to do the research by interviewing half a dozen property managers and asking them, “what do tenants want?” They’ll let you know whether it’s a second bathroom or off-street parking that renters really desire – or if a less-featured property that is five minutes’ walk from the train station will rent more quickly (or for more money) than a better-equipped property that is ten minutes’ walk.

Investors should use the results of their research as their shopping list, not their own list of wants and needs. It’s a trap that a lot of investors fall into, because they mistakenly think that if they are attracted to the property, then other people will be too. You have to remember that when you buy an investment property, it is a business decision. It’s all about the tenant and the cash flow and if the deal doesn’t stack up on those fronts, then it’s not worth pursuing.

In regards to buying new versus old properties, this really depends on the type of property you’re buying and the location, but personally I don’t believe in investing just for the tax benefits. It’s part of the equation, not the deciding factor. If you’re earning a really high income, then it’s great to buy a new property, as it doesn’t hurt to claim high deprecation benefits. If you’re buying an older property that’s okay too, as long as you’ve got the opportunity to add value or increase the rents via renovations and it fits with your investment strategy.

As far as depreciation limiting your ability to expand your portfolio, the answer to this is certainly not. Depreciation has nothing to do with growing your portfolio later; it depends on your borrowing power, your investment strategy, your income and your cash flow – and depreciation only impacts the last factor. My advice is to create a detailed investment strategy before you buy anything, to ensure your first property purchase kicks of your investment journey the right way.

  • Answer provided by Helen Collier-Kogtevs, Real Wealth Australia (www.realwealthaustralia.com.au)

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Comments
  • Chris says on 24/01/2012 11:05:29 AM

    Helen,

    What a lovely detailed answer that ignored the first two questions that were asked. Rather than presuming that the person doesn't have an investment strategy and presuming that they have selected a property type purely based on their likes - why don't you presume that they have a strategy and that they have done research and then provide some concrete answers to their questions - ie, What are the advantages of buying a new property over old? How will the property’s age affect my tax claims on depreciation?

  • Bruce says on 24/01/2012 02:39:55 PM

    Ouch Helen I think you were told or was is a dorothy dix question?

  • Bruce says on 24/01/2012 02:42:06 PM

    Ouch

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