In the red corner: Old properties
For his view on the old versus new debate, Your Investment Property consulted George Raptis, director of Metropole Property Investment Strategists’ Sydney office. He sided firmly with well-established properties.
“Let’s face it, when it comes to buying big ticket items we all love shiny new things,” says Raptis. “Whether it’s a car, a big screen TV or a luxurious lounge suite, most of us will go straight to the store that sells its goods straight off the factory floor in favour of a second-hand dealer. The most expensive item you’re likely to purchase in your life is property, and for many people it’s new or nothing when it comes to the family home.”
Raptis believes buying new is definitely a no-no if you’re looking for the ideal investment – that is, unless you’re a developer who can build a new project at cost and then on-sell at retail prices.
“Most investors are not, and have no intention of ever donning a hard hat. For the majority of investors, established properties will always offer far better capital growth potential than a new build for a whole number of reasons,” he adds.
- A better deal
Raptis argues that, when you buy a new property, you’re not only paying for the actual building, you’re also handing over a large chunk of money to the developer.
“In order to make a profit, developers build not only their margins into the price, but their marketing costs as well. Therefore, you end up paying a premium for your new investment which will invariably come with a hefty price tag. Essentially, you are handing your first few years’ worth of capital growth straight to the developer.”
The situation is reversed with established properties when you ‘buy well’ (either at or below the property’s intrinsic value), he continues.
“When you invest in established real estate, you have the potential to negotiate a great deal and pay a fair price, as well as enjoying immediate capital growth in most instances,” says Raptis. “Additionally, buying an established property that needs some TLC can mean paying substantially less than it might be worth, if you can look past the cosmetic flaws and see the potential. Often, you will have less buyer competition for tired or messy buildings because most people just see too much hard work.”
- Value-add potential
When you buy a new home, everything is already done for you; new floor and window coverings, modern kitchens and bathrooms and a fresh coat of paint. All that’s left to do is find some tenants to move in. While this might seem appealing, Raptis insists this is actually a huge disadvantage when it comes to investing in a new property.
“The problem is that you have sacrificed the potential to add value or manufacture capital growth that comes with an established house or apartment,” he says. “Although you should avoid anything that needs costly, structural repair, something that’s a bit dated and could do with modernising provides the perfect opportunity to create immediate capital growth and outperform the averages.
“We have seen clients turn a $20,000 refurbishment into an extra $60,000-plus in capital gains, as well as increasing their rental yield at the same time. That’s something that is simply not possible to achieve with new property.”
- Nice and easy negotiating
Raptis also believes that it is much simpler to secure an established property for a far better price than you will ever pay for a new build.
“Think about it this way: a developer would not construct a dwelling that they have to sell immediately and potentially lose money on. This has occurred in very slow markets, but it’s a rarity that we see very little of,” he comments. On the other hand, buying an established home means dealing with an imperfect market and vendor emotions.
“Vendors of established homes are often motivated to sell for one reason or another. Maybe they’re upgrading, relocating or have to sell due to personal circumstances like divorce or an inability to pay their mortgage. When you buy an established house you have the opportunity to uncover the vendor’s motivation and use this to drive a hard bargain. “
- Better than an educated guess
One of the most critical factors when it comes to investing in real estate is to know your market, he adds, and conducting extensive research into values in the immediate area and on comparable properties to the one you are looking at is one of the best ways to ensure you don’t over-capitalise on your investment.
Raptis argues that this is a much more difficult prospect if you are buying new, particularly if the new property is in a relatively immature area such as a housing estate. You also have less historical data at your disposal to make an informed decision when it comes to pricing, and fewer comparable property sales to refer to.
- Stronger performer in a slower market
One of the big issues with new – and, in particular, off the plan – properties, is that when the market slows so too does your rate of growth, says Raptis.
“New apartments and houses are often the first to see prices soften when the overall market loses momentum; meanwhile, established homes will either maintain their value or experience a very minimal adjustment,” he says. “Generally speaking, a well-bought established property will outperform the averages over the long term and boast excellent capital appreciation, without taking too savage a beating during lulls in the overall real estate market.”
So, are there any disadvantages to buying established? Is there any point where purchasing a new build makes more financial sense? Raptis says there isn’t.
“Some proponents of new properties will argue that you forego numerous depreciation benefits when you buy older homes. I would argue that buying an established property and undertaking minor renovations actually creates additional depreciation benefits,” says Raptis. “More to the point, you should never buy an investment property for perceived tax benefits: it should always come down to long-term capital gains.”
Raptis admits that maintenance issues are almost unavoidable in established properties; hot water systems give up the ghost, some of the plumbing might not be up to par and tenants might complain about a bit of a leaky roof in winter. But any little niggles that might crop up along the way can be taken care of when you do those value-add refurbishments.
“That’s not to say you should wade in blindly, of course: you should never buy an established property without commissioning a building survey to ensure you are not sinking your investment dollars into a money pit,” he adds.
In the blue corner: New properties
Your Investment Property canvassed Nora Surya and Alex Huang of residential developers Metro Equity Property Group for their views.
Surya argues that ‘old versus new’ is not as simple a question as it seems.
“Old and new properties both have distinct, unique advantages,” she says. “Although it’s often argued that an older house in a good suburb provides better long-term capital growth than a brand new unit in a less desirable suburb, the opposite is also true. A brand new unit in a good suburb provides better capital growth than an older house in a less desirable suburb.”
Another key area of debate is price, adds Huang.
“This is probably the most pivotal factor that plays an important role when choosing which property to buy. New properties are often seen as more costly than an established dwelling: however, this is not always true either. It is unquestionably possible for savvy investors to come across opportunities to purchase great investment properties below their true value – and that includes new properties.”
Opportunities such as these may not always be easy to come by, admit the pair, but they are present nonetheless, especially in markets like the one we are currently in.
Surya argues that new properties do have a number of other advantages over older properties. New properties are often:
- more energy efficient and environmentally-friendly than older properties
- attract higher-quality tenants, who are willing to pay a premium price
- often translate to lower vacancy rates
- have lower maintenance costs
- have a higher claimable depreciation value
- result in better, more consistent cash flow, which normally equates to a higher resale value
However, Huang cautions that choosing the right property is not as simple as ticking off a list of bullet points.
“A property’s intrinsic value is determined by a range of factors, which include – but are not limited to – location, land size, design, history, local community, socio-economic environment, local amenities, transport and proximity to employment,” he says. “All these factors make up what savvy investors recognise as key considerations when they look into putting money in any kind of property investment vehicle.”
Huang argues that, due to the sheer number of these key considerations, investors should first and foremost consider their own circumstances to determine what strategy would be best to employ.
“So, while new properties may have a number of advantages over older properties in general, individual circumstances can affect this: a slight difference in a key considerable factor, even as minor as a street number, can often lead to a significantly different result,” he adds. “Just because a property is new does not mean it is automatically a good investment.”
Surya adds that this is as true for older investment properties as it is for new properties, however. She also points out that, investors may not have a choice about what type of property to go for if they wish to invest in certain areas.
“There is a growing trend that has become more apparent lately, as people choose to live in inner-city precincts, closer to work and the attractions of urban life. This has meant that the land that inner urban properties sit on has become all the more valuable and will continue to see yet more growth in the coming years – and is all the more desirable for investors”
Increasingly, the types of properties that you will most likely find occupying these strategic locations are brand new apartments, she says.
“Admittedly, established properties will also share in this upward price growth; however, most of them present a difficult barrier to entry for most investors, since a large proportion of these houses now easily cost more than $1 million. It’s also worth bearing in mind that the million-dollar-plus price bracket is often the first to be affected should financial markets go pear-shaped.”
Nevertheless, the pair caution that not all apartments are created equal – despite what some developers promise. They suggest keeping in mind the key considerations mentioned above: poorly-designed or poorly-located apartments will miss out on growth – as might those located in high rise towers, due to the sheer amount of stock available.
“Even so, new apartments that tick the right boxes in terms of location, design and scarcity therefore represent an affordable, more sustainable way to gain access to suburbs with proven capital growth,” concludes Surya. :As a result, owners of new apartments in these areas are now on the driver’s seat on a journey to capital heaven, due to the rising value of the land under their feet.”