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07 Aug 2019
07 Aug 2019

What type of property should you buy?

First Home Buyer
Investing
Property
Tips
What type of property should you buy?

What type of property should you buy?

 Something old, something new

Read time: 10 minutes

When it comes to buying things like shoes, TVs, computers or even cars, your preference is probably to buy brand new. Who doesn’t love breathing in a lungful of that new car smell or the satisfaction of peeling the protective film off an untarnished screen? But when it comes to property, there is much more to consider when deciding whether to purchase new or old.

An oldie, but a goodie

Old or existing properties can have many benefits over newly built, off-the-plan properties. so here are a few:

More bang for your buck

When you purchase a property, you pay for the building and all its bells and whistles as well as the land that it sits on. When you purchase a new one, you are not only paying for the building and the land, the price will also include the developer’s profit margin as well as their marketing and staffing costs. Essentially, you end up paying for your property plus developer’s surcharge. Think of it as if you’re paying retail price, straight off the department store shelf.

With older houses, you pay for what you get. That means you’re paying for the building and the land sans the retail markup. Furthermore, when buying a pre-owned property, the price is also negotiable. Why pay the full retail price when you can raid an op shop for a bargain?

When it comes to capital growth it is important to remember that buildings depreciate (decrease in value) over time, whereas land appreciates (increases in value). This means the older the property, the more that you are paying the most important, appreciating asset which is the land. A good rule of thumb when looking for older properties, is to have 70% of the value in the land and 30% in the building, that way if the building collapses, you will still retain a significant portion of value for the property.

As close to printing money as you can get

With new properties, the assumption is that you have milked as much out of the land and the building as possible. Everything is shiny and brand new after purchase, so the only way to make money is to sit back and wait for the capital to grow.

With older properties, you have the opportunity to manufacture capital growth through renovations or, if you are confident enough, by developing the property into multiple dwellings. Generally, a skilfully completed renovation will increase the capital of the property by more than what was spent, effectively generating money out of thin air.

The human factor

When you are looking at older homes, more often than not, you will be dealing directly with the owners who are real people. These vendors have put their property up for sale for one reason or another and can be emotionally driven. If you understand the reason for sale you have the ability to negotiate a fair price for the property. You have more wiggle room in terms of price when it comes to purchasing old over new.

Unlike individual private sales, developers have a bottom line they have done extensive analysis into how much they should charge for a property so there is almost no negotiating when it comes to new properties. You are essentially buying off a company and companies don’t have emotions – all they care about is hitting their bottom line and then moving onto the next project.

History repeats itself

One big benefit of purchasing old over new is that you will be backed by historic trends. You are able to research the area (and maybe even the street) and find comparable sales which will give you the best idea as to how much you can realistically expect to pay for the property.

By looking at the long term historic trends, you will also be able to predict the future capital growth of the property with some reasonable accuracy. This will benefit you in terms of understanding your future equity position and long-term cash flow.

When purchasing within new estates you will find it almost impossible to find comparable properties that will give you an idea on how much you should pay and as most new developments are on the fringes you will have a very vague idea on future capital growth on the area, you are as good as guessing when it comes to new properties.

Shiny and new but is it better?

What are some benefits to purchasing a new property over the old?

Tax benefits

One of the most coveted benefits when purchasing new as an investor is the tax benefits and incentives that you can claim. Property depreciation refers to the wear and tear that a property encounters through time. This depreciation is a loss in value and fixtures. When it comes to tax time, you can offset your income with the annual loss of your property ,essentially reducing your taxable income and hopefully receiving a nice tax refund from the government.

New properties have a much greater amount of depreciation available when compared to older properties. The tax depreciation benefits that you get as a result of purchasing new can reduce the holding cost of your investment property and even potentially push you into positive cash flow.

Better tenants

Typically, when it comes to finding tenants for a property, there tends to be a bias towards newer properties. If people are paying for somewhere to live, they will typically choose based on location, cost, and age/condition of the property. In shiny new properties, everything is working, modern and perceived to be of higher quality compared to an older property.

Due to this perception, higher quality tenants are prepared to pay more for a newer property than an older one. You are also more likely to get tenants that will take better care of your property as damage in newer properties stands out a lot more – no good tenant wants to lose their bond or receive a negative rental review when they move out.

Hate surprises? Don’t we all!

When you buy new you don’t expect to have any maintenance issues. Not having any unexpected maintenance issues can not only save you your hard-earned cash but it will also save you the stress of having to DIY or call a contractor to do repairs.

Also, with many new builds, everything is still under warranty with most lasting a few years so if there are any unexpected breakdowns in appliances or structural issues in the building, the builder will come back and do all the repairs for you.

New builds also mean you can move into the house and not worry about completing renovations or changing any of the furnishings as everything is done for you (and usually to your specifications). So, all you have to do is either move in or find some tenants.

At the end of the day, there is not one that is better than the other. They are all different in many ways and have different benefits and choosing between the two will depend on your situation, whether you are investing or planning to live in it, the location and even where we are at in the property cycle. Keep these tips in mind when deciding and good luck with your house hunting!

Need help with buying property in Melbourne? Get in touch with our buyer’s advocates now.

Aaron Tan