The age of a property is one of the most overlooked factors when investors make their purchases, although the impact this has on a long-term strategy is huge. Properties can be purchased at many stages of their lifecycle; the strategies for each of these life stages vary considerably and can yield different results from day one.
Benefits of buying brand new property:
Greater selection and choice: whether an apartment block, house and land or anything in between, your choice of which apartment or house you want is highest earlier in the lifecycle. As an example, if a property developer markets a 100-unit apartment building the first purchasers have a choice of all 100. As the development progresses to completion, the choice for the remaining purchasers is reduced to whatever hasn’t been selected already, that is, the leftovers. There are obviously exceptions to this rule when certain lots have been withheld from the market for particular reasons. The properties that are held for the longest period are typically done so because of their level of appeal: who wants to sell something special to them? This means the hidden gems you can never find from the real estate agent are better found before they’re built.
Improved cash flow: brand new properties benefit from an additional depreciation tax benefit. The Australian Tax Office allows the investor to offset a certain amount of money each year for the fact the materials of the building and the fixtures and fittings inside the building are worth less today than they were yesterday and continue to drop in value (depreciate) over time. As an aged property has already depreciated, it cannot be claimed to the same extent as a new property. Newer property also has greater appeal to tenants, likely yielding a higher rental amount than a comparable older property.
Larger asset base: given the cash flow superiority of new property the ability to hold a larger asset base is improved, allowing the investor to accumulate a strong portfolio over a shorter period of time without as many obstructions or stressors on lifestyle.
Mitigating unexpected expenses: as a property ages the maintenance costs tend to increase, which also increases the prevalence of unexpected costs. Further, new legislation can dictate new standards (particularly pertaining to safety), which can render aged property obsolete until work is done to meet the new standards. A well-known example of this is pool fencing but also includes insulation, electricity, balustrades, plumbing, asbestos, heating, cooling and security among others.
A successful investment strategy involves adopting a research driven property selection process and a long term holding period. As seen above, the key benefit of purchasing off the plan is how it enhances your overall investment strategy.
The most important aspect to consider when purchasing a property is your exit strategy. The property selection process can be critical to ensuring the future saleability of a property and in turn improving the properties potential capital appreciation. This is very much achieved because of the greater selection and choice you have when purchasing off the plan. Being able to select properties which offer the best floor plan, aspect and orientation can be instrumental to maximising growth in the long term.
The tax benefits, higher rental and mitigation of unexpected expenses when buying brand new are key to improving your cash flow position. This in turn, allows you to hold on to the property at a low cost. History suggests that holding your property for the long term enhances your potential for a capital gain.
Here’s a case study which looks at two purchaser’s cash flow positions and potential size of asset base when utilising the benefits of an off-the-plan purchase.
The Blue Wealth research and acquisition team’s role is to remove emotion from the property selection process and utilise research to provide our clients with the best investment opportunities possible.