Both old and new properties have advantages and disadvantages, and which you choose will depend on your financial circumstances and long-term goals.
But when you get down to brass tacks, what are the pros and cons of buying new versus existing properties?
Existing properties have a lot to offer. They tend to have bigger rooms and, if not yet subdivided, much bigger gardens – excellent for attracting long-term tenants like families. They also offer character and charm, a quality often lost in newer builds.
When it comes time to research suburbs and property types, at the click of a mouse you can have decades of sale and rental trends to cast your eye over.
Another big plus of established homes is that you have the power to negotiate the price and/or inclusions, especially if you find some highly motivated vendors who are keen to move on quickly – something that can’t be said for buying new builds from developers, or buying off the plan.
On the downside? Old properties can look tired and may require big spends on modernisation and renovation. Things crack, break and fall down, and you’ll be putting your hand in your pocket yet again to pay more tradies’ invoices.
While you may be able to claim some of these repairs as tax deductions on investment properties, it’s always best to discuss this with your accountant or financial planner first, so you know exactly where you stand.
What about new properties? It’s easy to be drawn in by their shiny, cookie-cutter exteriors and high-tech inclusions, but these properties come with their own set of risks. If you’re buying a brand spanking new home in a new estate, the rental market is an unknown quantity – you won’t have reliable figures for median rents or vacancy rates to rely on.
You may also find that local services and amenities are playing catch-up with population growth, and the lack of good schools, transport links and shopping facilities could be a deterrent to potential tenants. Properties knocked up hastily by developers can also have a reputation for shoddy workmanship and faults, which may see you forking out for repairs sooner than you’d like.
On the plus side, new properties offer better depreciation benefits for investors under the current taxation system, and can be more attractive to tenants than rundown older places.
You also have a little more protection from major defects and faults, as builders of new properties must ensure they are covered by home warranty insurance, whereas if you purchase an existing dwelling it’s up to you to do the due diligence and organise inspections to check for such issues.
And if the property is well built, you’ll likely have fewer maintenance expenses than with an older, dilapidated home.
The negatives of new and old
The issue is somewhat complicated by the pollies in Canberra, who reign supreme over the legislation that makes property investment such an attractive proposition for everyday Australians.
That legislation is, of course, negative gearing, and should the ALP win the election this May they are proposing a major overhaul of the current rules. Their amendments will include restricting negative gearing to newly built properties that add to the existing housing stock, meaning you’ll no longer be able to claim negative gearing deductions if you buy an existing property as an investment.
They also plan to reduce the capital gains tax exemption from 50% to 25%, in an effort to help more first-time homebuyers get onto the property ladder. This move will mean investors pay the taxman a much bigger share of their property profits when they sell.
With all of this potential upheaval afoot, it’s more important than ever to be clear on why you’re investing in property, and what your long-term goals are.
When you’re buying an investment property, it’s best to see any tax concessions or benefits you might be eligible for at the time as an added bonus, rather than your main purpose for investing.
Instead of focusing your strategy around negative gearing, think about how the property will grow in value over time, and how you’ll use this equity to build your wealth. That way, if legislation or conditions do change down the track, or if you no longer have the required taxable income to take full advantage of perks like negative gearing, your property portfolio will still be a valuable asset, even if you can no longer use it as a tax deduction.
The key thing to remember is that, whether you believe an old or new property best suits your investment strategy, the sooner you can get the ball rolling and begin building your portfolio the better. The Aussie/CoreLogic 25 Years of Housing Trends report looked at the Australian property market over the last quarter of a century, revealing that since 1993 Australia-wide median house values have shot up a whopping 412%. During that time, unit prices also experienced stellar growth to the tune of 316%. That’s an annual capital gain of 6.8% for houses and 5.9% for units.
While there were, of course, growth cycles, flatter periods and a few little dips in value, these findings demonstrate that property remains one of the best avenues for building wealth.
Compare these results to the share market, and they seem even more impressive. Aussie and CoreLogic found that the ASX All Ordinaries Index rose by just by 261% over the same time period, falling well short of the enormous returns property has offered. If the trends we’ve seen over the past 25 years were to continue to 2043, median house prices in Australia could hit $2.9m, with units not far behind at $2.1m!
As you can see, there are some enormous long-term capital gains to be made from property investment, especially if you buy sooner rather than later, giving the property more time to grow in value.
Particularly in the current cooling property climate, there are plenty of bargains to be had around Melbourne and Sydney, making it the perfect time for investors to add to their portfolio. And with the election not yet decided, this could be one of your last opportunities to take advantage of tax concessions via negative gearing – whichever property type you choose.