It’s one of the most common questions: If I'm going to invest in property, should I buy a new or established property?
There is no right or wrong answer, according to Jerry Collova, Managing Director with PEB Group. "What property you buy depends on your own situation, your investment goals and where you are in your property investment journey. Are you new to property investing or are you an experienced investor? Are you a high-risk taker and searching for higher returns or the complete opposite and don't like taking risks. Are you after a long term or short term strategy? Do you need cash flow and tax deductions from the start or do you have cash reserves to fund renovations and development on established properties?” he said.
Both types of properties have their upsides and downsides which need to be considered carefully. Not knowing these and not having a clear strategy is where many people miss out on creating wealth and in some cases lose money. “That’s why we continually stress that you should always get professional property investment advice, to let you know of any other hidden advantages and disadvantages each type of property offers,” Mr Collova said. “Also, have that someone on your side, batting for you, to ensure that you do not stray from your strategy.”
What Type of Property Investor Are You? – What’s Your Strategy?
Do you want to:
• Buy and hold for capital growth?
• Buy and hold for retirement income?
• Subdivide and build for profit?
• Renovate for profit?
• Reduce tax?
• Generate cash flow?
Your answers to these questions will help you determine what sort of properties you should invest in.
Old Properties as an Investment - Are They Really Cheaper?
Depending on the area, old properties can seem cheaper (comparatively eg. in the same area) than newly built homes, but you have to consider more than just the purchase price, this is where you can get caught out. With a comparatively cheaper purchase price it may seem that there is more potential for capital growth on an older home. Whereas a new home will be priced by developers at the top of the market, i.e. at today’s current valuation, so capital growth will be limited in the short term. “Remember, it's the land component that appreciates in value” said Mr Collova.
However, with an older property there will be maintenance and renovation costs plus older homes may be harder to let than newer homes, so you may end up with lower rental returns and longer vacancy periods, all of which will affect your cash flow.
“One of the biggest downsides is that there may be no or very limited tax depreciation on an established property, and that has a dramatic effect on your cash flow and investment return,” Mr Collova said. “If you really need to be generating and maximising cash flow from the start, then you should buy a new property not an established one,” he said.
Are You a Renovator or a Delegator?
Reality TV has shown us all the financial success and disasters of renovating a property. Inexpensive cosmetic renovations can add much value to an older property, but you have to ask yourself “Am I really a handyman or will I need to hire professional tradespeople to do the work”. More importantly, “Do I have the time and do I want the stress of managing a project?" If you can do it yourself then there is substantial profits to be made, but if you have to hire people you can end up spending as much on the renovation as you get back from the eventual sale.
Also property location needs to be considered. If new estates are being built nearby, it may seem like just sitting on an old home or doing some minor renovations will see the value increase to near what the new homes are selling for. However, is your property really in the same area? EG Will the market perceive your property to be in a desired area or just outside of it? The difference can be substantial.
Are You Really Getting Maximum Value for Your Money?
Older homes are normally on larger blocks than newer homes, so there is often potential to subdivide. Buying with this in mind for some time in the future, in our opinion, is a sound medium risk strategy if you have clear directions, the capital to fund it and fully understand your risks. However if you are after maximum rental return, this strategy may not be the best to take; i.e. you may not be getting maximum value for your money.
The Real Cost of Subdivision
As mentioned above, the potential for subdivision can be a false attraction. Do your numbers to ensure your project will be profitable in today's market with clear contingencies, both positive and negative. Just the processing costs of a subdivision can be substantial and all factors should be taken into consideration before you purchase with this strategy in mind. There is no room for speculation or trying to time the market to make a profit.
“If the numbers stack up and you are going to subdivide, then you need to start now,” Mr Collova said. “Your funds may be tied up for years before you see a return, so the sooner you start the better."
“Subdivision really is for experienced investors who have sufficient funds behind them to complete the project,” Mr Collova said. “For the inexperienced it may be worth having third parties project manage or advise on the subdivision.”
Modern Homes for Modern Living - The Advantages of New Homes for Investment
We all know that modern life has changed dramatically over the past decade. Digital technology, energy efficiency and environmental consciousness have all had tremendous impact on what we expect from our homes. Today newly constructed properties feature all the latest design trends, construction methods, features and services that were unimaginable not so long ago.
If you are buying an investment property to generate a rental return, then new homes are obviously more attractive to the modern customer. A modern or new property is a much more attractive rental proposition and you are likely to get higher rents, attract better quality tenants, have lower vacancy rates and less maintenance costs. It is also more likely to be compliant with its legal obligation’s under the Residential and Tenancy Act if you are aware of the requirements and these have been included into the build. Also, when it comes time to sell the property, it is likely to be a more attractive purchase and therefore easier to sell.
Understanding the Benefits of Tax Depreciation
“If you are in the market for an investment property to improve your cash-flow, then really, tax depreciation is one of the biggest reasons and benefits, for buying a new property,” Mr Collova said. “You can be claiming deductions and substantially improve your cash flow from day one. Plus you are able to claim the construction deductions for 40 years, i.e. when replacement may be required on the building according to the tax department.”
So Which Property Should I Buy?
“There are so many factors to consider when working out a property’s value as an investment, that just choosing between old and new is too simplistic, and even financially dangerous,” Mr Collova, said. “The question shouldn't even be about old or new, it should be about what is the best property investment strategy for you? Any property investor should consider their own circumstances and investment goals first before buying any property. A property’s value is determined by many factors, which can include location, land size, house design, services and features, suburb history, the local community, socio-economic environment, local amenities, proximity to schools, transport and employment. The almost endless number of issues to consider is why we keep stressing the importance of getting expert professional advice,” Mr Collova said. Before you put any money into any sort of investment, you need to know and understand all of the key factors. Not doing so has the potential to cost rather than make you money.
Have you heard of a Tax Variation or Withholding Declaration? Using one could help you pay off your home years sooner...
*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.
PEB Group is a complete property advisory service for Perth families. Offices are located in Inglewood and Willetton, Perth, Western Australia and offer service in - Financial Planning · Finance Broking · Property Management · Property Sales · Property Investment · Development
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