Most of us have bought a car by now. Did you have a hard time deciding whether you should buy a new or used car?
I am sure you have heard people debating the pros and cons of buying a new vs second hand, and to be quite honest, it is a similar debate when it comes to purchasing your investment property.
In this week’s post, let us have a look at the upsides and downsides of each option
Upsides of buying new properties
New properties are attractive to passive investors who are time-poor and would like to have a property that requires little effort on their behalf. There is usually lower maintenance, and if there happens to be any defects after completion, the builder or builder’s insurance should cover any repair cost.
New properties have an appeal to tenants as they usually have lots of light and space, and may come with other amenities such as swimming pool and gym (new apartment complexes). Tenants with good income are often prepared to pay higher rent for new properties particularly if they are close to their work.
From a tax point of view, new properties usually offer higher or longer depreciation benefits, not only from the fixtures and fittings but also from capital works. It is possible for investors to use these tax benefits to assist with monthly cash flow.
Downsides of buying houses
The main disadvantage of purchasing new properties is that the cost to purchase may be higher than that for an old property in the same area, as developers have to cover their costs and profit margins. This is exactly like buying a new car, you pay premium price for it.
Many people who purchase new properties may make emotional rather than business decision, as they may have fallen in love with the look of the place and how it makes them feel. If they have paid an inflated price for the property, it may take them longer to realise capital growth.
Another reason that growth may be affected is because there may be a few very similar properties being sold at the same time, such as in a brand new development. A few hasty re-sales can affect the values of all the properties in the immediate area. This can have an impact if you either are trying to sell a property or trying to release equity from your own property.
Brand new properties do not allow much room to add value by renovating because the developer has already done all the work. Therefore, unless an investor has purchased at a well under market value price, they will need to wait for the natural growth to occur, which in this case may take longer than an established property.
What about old properties?
One of the main advantages with old properties is the fact that you get less price fluctuation than new properties in the same area, and you have the ability to add instant value through renovations, subdivision and development. Some investors have even managed to get their property for “free” by subdividing a large block and selling off a portion of the land to cover the purchase cost.
It has been proven that the scarcity of land is what drives property value upwards, and older properties generally have a bigger land component.
Investors can be more certain that the property they are purchasing has a ‘true’ market value, with no profit margin set by the seller. They are usually found in well-established suburbs, which can demonstrate consistent growth.
Downsides of buying old properties
Potential high maintenance costs are probably the biggest downside of owning an old property. There may be a loss of rental income if renovations need to be done. It may be also harder to attract good quality tenants to an older property.
In addition, tax benefits are not as good with old properties due to lower depreciation values. Rental may not be as high if the property is in need of repair and/or renovation, which could effect on your monthly cash flow as the rental return you can command will be lower.