Naivety to the rules of the real estate market can often drive the first time buyer to believe that cheaper properties make a better investment. The idea is that they are getting a better deal because they are paying less. In reality, when you take a closer look into what you’re purchasing it becomes evident that nothing comes without a price and if something seems too good to be true (or too cheap to be true) it probably is.
The same rule applies for the age of your property. This is something that doesn’t attract much attention when buying in, however it should if you are going to achieve the strongest results. So, what does provide the best results as an investment? Should you look for new or old?
This actually quite a loaded question when you understand the pros and cons of each. I wanted to take the time this week to run over the day to day differences of new and old property for investors, and to show you why new property wins everytime.
Strong Cashflow: New properties definitely give the investor an upper hand when it comes to cashflow. 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 (depreciation). These values on old properties have already depreciated and cannot be claimed at the extent of new properties, if at all.
Newer property also has greater appeal to tenants, likely yielding a higher rental amount than a comparable older property. These factors allow for investors to gain an advantageous cashflow position week to week and hold quality assets for longer.
More 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. For example, if a 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.
Often in the established market you will be stuck with whatever is on offer and have to make a decision based on the pros and cons of a single asset. Now imagine being able to choose the best property in the best old property neighborhood and get in before any anyone else. This is what new property and premarket access provides to Blue Wealth clients.
Exit Strategy: When initially making your decision to invest, you must envision who the property will appeal to in the long run. The appeal of the property to the wider market will in turn attract the most demand and give you the strongest resale results. We call this concept the ‘Exit Strategy’ and it provides clients with the strongest results when it comes time to exit the investment in the long run. Not only will new property hold its appeal for longer due to sustained quality, but being able to buy the best floor plans/design/aspects will ensure that your exit strategy appeals to an owner occupier market.
Lower Maintenance Costs: as a property ages the maintenance costs tend to increase, which also increases the recurrence of unexpected costs. Further, new legislation can dictate new standards which can render aged property obsolete these standards are met. A well-known example of this is pool fencing but also includes insulation, electricity, balustrades, plumbing, asbestos, heating, cooling and security among others. As all of the fixtures and fittings within the property are also old, replacement of features can strain investors rental returns. In new property these are mitigated significantly and again provides investors with a more healthy back pocket when it comes time to collect rent.
When broken down it becomes clear that new property offers to investors what the established market cannot. Lower holding costs week to week, more appeal for buyers and the ability to select more appealing assets to add to your portfolio. In our current market conditions, new property has never been easier to hold
Smart investors adopt a research driven investment strategy and a long term holding period. Ultimately, this allows for optimal results and capital gain. 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 and supplements your long term strategy.