Should you invest in a brand new or an established property?
To be fair, there’s no right or wrong answer to this question. Good value opportunities can be found in both property types. Each type of property though does inherit some advantages and disadvantages which we’ve outlined and discussed below.
Brand New Property – Pros
One of the most significant benefits to purchasing a brand-new/off-the-plan property is often the one which is least spoken about. It’s the choice and ability to cherry pick the best property within a complex. Rather than being limited to what’s available on the established market or what someone is willing to sell at any given time, early access provides you with the opportunity to buy the best possible property within your chosen location.
The reason it’s often not mentioned is because there’s no direct cost incurred or easily realised.
Higher rentability/Tenant demand
New properties tend to inherit higher demand when competing with an older established property on the rental market. Their higher quality means a rental premium can be justified.
Lower rental turnover
The tendency to relocate to the ‘new shiny place’ is not as common for a tenant residing in a property only a few years old. You’re less likely to suffer from new competition than you may be with a tenant in a dwelling 10 – 20 years old of lesser quality and no amenity.
Lower maintenance/modern finishes
In most cases, the age of the property protects the landlord from any unexpected maintenance costs. You will avoid needing to replace kitchens or bathrooms to compete with the newer stock on the market. These can be costly exercises.
New apartment amenity
This cannot be said for all new development but in some cases, projects may include a pool, gym or communal space. Admittedly, this does generally mean an increase in strata fees so a higher rent is warranted. It does however help to retain tenants for the long term.
Arguably, the most significant benefit from a holding cost perspective is the added depreciation benefits applicable only to new properties. On all investment property purchases there’s strong tax deduction benefits; negative gearing, depreciation of building and on new properties the depreciation of fittings and fixtures. Generally, this equates to an additional $6,000 – $8,000 worth of tax deductibility in the first year of ownership on a property worth around $600,000.
The depreciation of the building is applicable for 40 years from building completion. There are many apartment complexes approaching the end of this period and therefore no longer applicable for another significant deduction.
Brand New Property – Cons
New properties can come with a premium price which may not be supported by a bank. To avoid this an investor needs to understand the market and make direct comparisons to established properties to justify property prices,
For a property which is purchased off the plan, there is a risk of a developer unable to achieve funding. There is also potential for construction issues to arise, delaying completion dates. These can be avoided by working with tier one developers who engage the best builders and trades in the industry. This will ensure quality standards are high and delivery is as per schedule.
Established Property – Pros
The biggest drawcard for established price is that there is generally a cheaper entry point and rightly so. In some cases, you’re buying a property which is 30 odd years old, it should be cheaper than one which is brand new. What’s often not considered is the ongoing running costs which can be higher on an established property as a result of higher vacancy, rental turnover, higher maintenance costs and the lack of depreciation benefits.
Ability to add value
For the thrifty investor with the ability to renovate, an older dwelling provides the opportunity to add value through improvements. This is not desired by everyone and it’s challenging to identify feasible options for this exercise. The benefit of identifying a property which will naturally grow in value courtesy of market movements is far more significant than that which can be added via improvements.
Size of apartment complexes
Most older properties are in boutique blocks of 6 – 20 apartments. Investors can be easily scared off by the higher density of most new developments and the uncertainty around build quality.
Established Property – Cons
Your deductibility potential is far lower in an established property. You don’t receive the benefits of depreciation of fittings and fixtures and your potential to depreciate a building component will vary based on a properties age.
So, should you invest in a brand-new property or an established one?
For any investor their desire is to identify a high-quality property which will grow in value that they can hold onto at a low cost.
Evidently, from a higher rentability, lower vacancy and higher tax deductibility perspective your holding cost position is much stronger on a new property. These benefits allow you to hold any property value for almost half the weekly cost it’d be if it were an established one.
In addition, the key benefits of established properties are not exclusive to those property types. They can also be achieved when buying a new property. A willingness to engage an expert and commit time to the research process will enable you to find brand new boutique developments priced in line with market.