New properties require minimal maintenance. They offer potential tax incentives and have more appeal to a tenant. But in the long term, will it give you the capital growth you expect? Is it worth spending your hard-earned cash to buy a brand new house off the plan? Here’s the lowdown on the benefits and downsides of purchasing both types of properties.
I often see people spend months gaining information and insights into the property market, yet they make one common cardinal mistake: buying the wrong type of property! Most people see the short term gains and ignore the holistic picture.
I will answer the million-dollar question of whether to buy an old or new property by explaining the factors you should assess before deciding. Every day many of us see the sponsored ads on Facebook and YouTube from a buyers’ agent or property investor trying to sell you a brand-new property. Buyers’ agents or property investment companies fake it to their clients by saying things like it is a growth corridor, you will see great appreciation, and there will be a rental guarantee. These words are red-flagging risks! Remember, if anyone is trying to do a service for you in real estate, whether trying to educate you or help you find or buy a property, they are getting paid for it. If they are trying to sell you a brand-new property, they are getting paid by the developer or the builder to sell that property.
I often see people getting fooled by thinking that such offers are unique and that the prices are already rising. Prices are rising because the developer is artificially inflating the cost of the land. When the developer completes the project and leaves, you will see acres of land, maybe not in that estate, but around the estate. There are more than 1,000 companies in Australia that operate in this way. Their buyers’ agents or property investment companies often offer the clients cheap courses. It is an initial hook to ultimately sell a house because they are getting paid by the developer to offload those properties to you.
Also, these new properties are generally in areas with a lot of land; hence, the developers can produce so many housing land packages or townhouses. There is a lot of land, and there is no shortage of building approvals. In economics, if a good or service is scarce, its price increases. So, if something is available in abundance, it is bound to be cheap. That is the reason new property will underperform in terms of growth. The easy availability of resources is the enemy of growth. If you still consider investing in such areas, don’t forget to see the forest for the trees. The house prices in fringe areas of a city crash the most in a downturn, or when the property prices come down.
The second factor is land to asset ratio. To understand the land to asset ratio, let’s say that you decide to buy a $700,000 property. The land should be valued at at least 60% of the price as a rule of thumb. It is the land that appreciates with time and not the building. The value of the building depreciates. It is where many people go wrong. So, if you are paying $700,000 for a piece of land that’s valued at $300,000, it doesn’t matter even if it’s 500 square metres; you really shouldn’t be doing that. It doesn’t matter that the property will give you great rent and is a positively geared investment because positive gearing will not show you the growth.
Some people think that brand new properties have more depreciation than established properties which can boost the cash flow and save on tax. The reality is that when you sell the property, whether it’s in five years or 10 years, you need to pay half of that depreciation, about 45 to 50%, back to the Australian Tax office. If you are saving $10,000 in depreciation per year for ten years, it comes out to be $100,000. So, when you sell the property, you will pay back $45,000 or a bit more to the ATO, all in one lump sum. It is a considerable liability to carry on your back! Do you really want to do it? None of your well-known property investment companies will ever tell you this because that is their marketing tactic.
In fact, established properties also depreciate. And you can get an established property with positive cash flow. Once you show depreciation of the property, it becomes a negative gearing property. Depreciation is a non-cash expense. You can offset depreciation against your income tax. So, it’s essential to understand that depreciation is not a strategy but a bonus of property investing.
Many people tell me they are super busy and risk-averse and prefer a new property because tenants are always easy to find. In reality, there is much more competition in new areas, and a tenant is spoilt for choices. Whereas despite the lower tenant appeal in older properties, it is still easier to find tenants because of lack of competition. Take, for instance, my example; I probably had about five weeks of vacancy in nine established residential properties in the ten or so years. There’s no way to prove that to you, but, yes, only five weeks of vacancy! So, if you buy an established property in the right area and the correct type of dwelling, then vacancy rates will always be low, and the rent will rise too.
One more reason why the rental guarantee on a new property is low is that the rental guarantee is baked into the purchase price. So, if an investor says that a property will guarantee $600 rent a week for the next five years, they have already baked that money into the purchase price. It means you have already paid for it. More importantly, you need to understand that the rent will go down once that rental guarantee finishes. So, if the area isn’t fundamentally sound, which you have no way of telling, then the market rent will come down after three or five years, and that’s when you start suffering.
Let’s move to the maintenance part of the property. Undoubtedly a new property is low maintenance. You would hardly be spending $500 per year on it. On an old, established property 20 or 30 years old, you would pay $1,500 to $2,000 in maintenance per year. So over ten years, you would spend some $20,000. Whereas on a brand-new property, the amount would be $5,000, so the difference is $15,000. So how much growth have you sacrificed for saving $15,000 for 10 years? Tomorrow if you want to sell your house, you will regret buying a brand-new property that you could add no value to. In established properties, you can add value by taking the equity out for a deposit for the second house.
Established properties beat brand new properties every day of the week unless you are the developer; unless you found the land, you built it, you have gained the development approval, and you have done everything yourself!
The author is a Brisbane-based property investor and a famous YouTuber. Through his videos, he shares his knowledge on how to grow wealth and passive income through property investing. For more, visit consultingbypk.com.au
New properties require minimal maintenance. They offer potential tax incentives & have more appeal to a tenant. But in the long term, will it give you the capital growth you expect? #TheIndianSun #Propertyscapehttps://t.co/UaeSzoMrPB
— The Indian Sun (@The_Indian_Sun) March 14, 2022