Here are the points to consider before you decide.
Owning a house is undoubtedly one of the most significant investment dreams Australians have. Acquiring this dream involves a lot of research and decision making. One of the dilemmas you'll initially face when buying a house is deciding whether to buy an old or new property. But, there is no simple answer to this question because choosing the best property investment isn't as straightforward as it seems.
Various factors may influence your decision while buying the house. Buyers must understand that not knowing these factors and not having a clear strategy often leads to missing out on financial investments and losing money. One's preferences are specific and unique, and maybe what's acceptable for one buyer may not be fine for another.
Whilst both old and new properties have their fair share of pros and cons, one type may be a better fit for your investment vision and goals. You will be able to narrow your options if you understand the differences early on.
In this article, we'll look at the benefits and drawbacks of old vs new properties to help you come up with a decision.
Why Invest In New Properties?
The Australian housing industry has seen a boom in the last few years. A plethora of choices means more options for first-time buyers entering the market.
✅ Depreciation Power
Brand new properties have the most significant depreciation benefits. You can claim more on the depreciation for a new house than an existing house that includes fittings and fixtures.
✅ Less Needed Inspections
Less money is spent on services or maintenance. Since everything will be covered under the builder's warranty, you are less worried about building or pest inspections. It provides coverage for any structural issues for a few months after completion.
✅ Modern Comforts
Modern homes often come with various built-in conveniences, such as dishwashers, refrigerators, microwaves, and wine chillers. Some also include master suites with spa or workout rooms and an entertainment area. The time-poor young couples are more attracted to these properties as they are fitted with new flashy fixtures.
✅ More Appealing to Tenants
New properties are generally more appealing to tenants because of modern amenities, pre-installed appliances, which tenants are willing to pay for. Additionally, your investment property will most likely remain occupied because you can attract quality tenants, reducing vacancy risks.
✅ Government Grants
If you are a first-time homebuyer, you may qualify for the First Home Owners Grant, reducing the upfront costs. The stamp duty is less as well when you buy the home and land packages.
🚫 No Available Market History
Newly constructed properties have little or no historical market data at all. This may be considered a risk because to make an informed purchase, an investor must have a solid understanding of the local market and its trends and the growth around that area for the long term.
The locations of new homes tend to be farther away from the city. Perhaps there are fewer entertainment options nearby or would require you to commute a little longer. Commuting to the city area is a bit of a challenge as the transport is still in progress.
🚫 More Expensive
New properties are typically sold at a premium since the developer's margin, and marketing costs are included. It would be best always to think that you are generally giving away the first few years of capital growth in paying the premium.
🚫 Market Risk
A market downturn traditionally affects newer properties first. Long-term, established properties typically retain or increase in value.
Case Study: Rental Appeal Drops Eventually for New Builds
Jasmine bought a property in a new estate for $500,000, where only a handful of properties were available for rent. She was thrilled to learn that a family was happy to pay a rent of $540 per week, which was equivalent to an attractive gross yield of 5.6%. However, after two years, Jasmine struggled to find a replacement tenant and could only collect $460 per week, and the gross yield declined to 4.8%. Several new properties were completed in the estate during this time, but the rental demand didn't grow.
Why Consider Buying Old Properties?
Existing or old homes have already been lived in or sold before you purchased them, so there are fewer unknowns.
The price of an established property tends to be lower than a new property, so you can potentially avoid high mortgage pressure. If you are actively looking into the market, then you can sometimes grab a motivated vendor and grab a good bargain on the existing property.
✅ Ideal for improvements
Through renovations and improvements, you can add significant value to an old property. Fortunately, the expenses that you'll use for these renovations are tax-deductible. Just a simple makeover can improve a property's value, rentability, rental return, and depreciation. These makeovers will also attract quality tenants.
✅ Holds more value
Land tends to hold more value in older properties because, generally speaking, land tends to increase in value over time. There is no limitation to where to buy as you can look for good deals and look near the city area.
✅ Market History
You will be able to access relevant information such as previous sale prices and real estate history.
✅ Capital Growth
A property that has been established for a while generally performs better and appreciates more. Older properties tend to have a proven resale value. Refer to Positive vs Negative Gearing article.
In most cases, older properties are in areas with more established infrastructure like schools, transportation, and hospitals. These infrastructures drive property growth.
It is the timing when you enter the market and where it is in the property cycle that counts. So we drew our client's long-term strategy and worked out her first purchase last year. This year we sourced her second property, which is her first interstate property, focussing on cash flow and long-term growth with minimal market risk, considering her circumstances.
The property is:
Strategy: Long term Buy and Hold, Upfront Equity
Location: Regional QLD in the Growth Corridor
Particulars: Low maintenance, 3 Bedroom Brick home
Renovated bathroom and kitchen with quality finishes
Massive side access, plenty of room for granny flat
Rental Appraisal: $370 p.w
Rental Yield: 6.07%
Negotiated Price: $317.2k
A fantastic result for a delighted client as it met her primary objectives. It has:
a positive cash flow,
rental appeal giving her security and
granny flat potential.
🚫 High Maintenance
Investors should always have an emergency fund or buffer available when buying an old property because maintenance or repairs may come unexpectedly. It is likely to have a negative gearing effect on your cash flow.
🚫 Less Appealing to Tenants
Due to the desire for everything to be new, functional, and full of lifestyle features, older properties are less appealing to modern tenants.
🚫 Lower Depreciation Writeoffs
The depreciation of the used equipment found in second-hand properties may not be depreciated well.
By reviewing these perks and fallbacks, you can see what properties will perform best given your strategy, portfolio, and financial circumstances.
What's The Best Option For You?
The best investment property will always be determined by the property's location, available amenities, size, and current condition. To develop the best investment decision, you should understand your situation and assess the property condition. Your property portfolio strategy, portfolio goals, and financial circumstances will all play a part in the success of your investment property.
Your objectives will ultimately determine the best property investment strategy. If by any chance you are planning to use the property as an investment, upgrading or renovating an old home and including new features will likely result in a higher return on investment.
Ultimately, the final decision will revolve around what you value. The hard work you put into your research will eventually pay off in the end.
It is highly recommended that you seek out the advice of a professional when purchasing a home. The right team by your side can make a huge difference. Our team can help you become a sophisticated and educated investor and scale a borderless property portfolio.
Buying a property in different areas comes with a risk as you never know if the house you are looking after is the right property since you are residing in another place. It would help if you worked with a trusted independent expert to research the property and what the locals do within the area to ensure that you will get the right property based on what the local needs and wants.
This is where we, Get RARE Properties, comes to your assistance. We are an independent buyers' agent here to guide you through the complexities of purchasing properties. With us in your team, you can ensure that you will get the right personalised strategy, the right property at the right place. As experienced property investors and negotiators, we look at the property as a business transaction and do not let emotions creep in. We will help you choose the best deal at the right negotiated price and save you from undue stress making the process very pleasing and rewarding.
Next steps: Should you want to learn how the author built his $5m balanced portfolio in 7 years and aspire to own something similar, feel free to get in touch via email at firstname.lastname@example.org or book an appointment here.
Disclaimer: This article is general in nature and does not take into account your situation. You should consider whether the information is appropriate to your needs, and where applicable, seek professional advice from a financial adviser.