Choose the best area before considering investing in a new or old property: MLomas
By M Lomas
Monday, 15 October 2012
It’s probably one of the original property investing debates – should you buy an established property or a new one? And, as in most debates, there is no single answer. In fact, the answer is – it depends.
Ask any property developer and you’ll hear "buy only new".
A new property comes with significant depreciation benefits, meaning that you are more likely to see a positive cashflow – a situation where the shortfall between income and expenses on a property is removed by tax benefits that exceed that shortfall.
Of course, we should ignore the fact that of course a developer thinks new is best, and also that, depending upon whom you buy from, very often developer profit hikes your buy-in price above that which you would pay for a similar property a few years old.
The point is, you need to consider the entire argument before you decide what to buy.
New properties do carry depreciation benefits. However, if you have ever fully read a depreciation report (and why wouldn’t you, such scintillating reading they are!), you may have noted that often the depreciation available in years two and three is higher than it was in that first year. Why is this? Once items fall into a "low value pool", as they tend to do after a few years, you get to claim larger chunks of them in one go. And so the argument for buying a brand-new property to improve tax benefits is actually mostly moot.
I’ve also found that often a property that is two to three years old is better value than the new one.
It’s like that brand-new car that loses 15% of its value as you are driving it out of the show room – with a new property the premium you pay for having everything shiny and new is quickly absorbed and value is lost almost immediately.
The property that is a few years old has also been run in a little, with any major issues most likely identified and fixed already. These points have little meaning for the owner-occupier, who most likely plans to stay for years and whose asset is capital gains tax-free, but for the investor, who needs every dollar of equity to enable future leveraging, that premium can be costly in the bigger picture.
Remember, too, that the "value" of a property is determined by the recent sales in the area.
A new property is harder to value, as there is little to compare it with. I’ve lost count of the number of times that I have seen investors buy property in massive new developments, only to find that a year later the property is worth $40,000 less.
This loss is likely due to a combination of factors – the developer profit (and middleman commission) made it more expensive in the first place, the size of the development created a supply issue for which there was not enough demand, and the market was now undergoing its first real test – re-sales were happening and the true value was finally being realised.
|Of course, where that new property is not part of an overall estate, then it’s easy to tell if it’s at market value, as it will be compared to the older properties around it.||Demand is a big consideration, both from purchasers and renters.
An older home situated within a swathe of brand new properties would make an unwise choice and is likely to have less demand from the available renters than a property which is more the norm for the area.
But where the area has a greater proportion of established properties and a demonstrated demand for them from renters, that "new" property might not add any bottom-line benefits to the investor, and might just cost more.
If the new property is the same price as the older property, then the newer one is the intelligent choice, as maintenance costs should be less. However, I don’t think I’ve ever seen a new property available at the same price as an established one, so the extra that you will pay has to be considered alongside the savings you might make on maintenance.
Investors really should not be starting their search for property with a decision to go out and find only a new property, as this suggests that all they are considering is cashflow. I’ve seen many beautiful new properties full of tax benefits being sold by middlemen on big commissions to investors who simply want to see a positive cashflow, and those investors didn’t bother to analyse the real viability of that underlying asset in investment terms.
The result is a positive cashflow property that fails to thrive and a disappointed investor who realises that you cannot retire on cashflow alone!
Rather than take part in the ‘new or old’ debate, all investors should first determine where the best area is in which to buy. Then they should find out what type of property is most in demand there.
It’s likely that an established property, as long as it’s not too old and therefore a maintenance trap, fits the bill quite nicely and doesn’t carry the premium that a brand-new property does. It’s also likely that, as long as it’s only a few years old, the tax benefits will be just as good anyway, the rent return the same, and the lower price will mean that great cashflows still exist and there’s profit to be made.
Linda and Carlos Debello
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