Looking to join the ‘investor club’ and buy your first investment property?
Potential investors in real estate have the choice of buying a new property or a charming, timeless older-style property. But which is better? As with any big decision, there are pros and cons that come with both.
Plus, when comparing investment properties, you also want to keep the properties tenant appeal top of mind. Ask yourself - will this property attract long-term tenants?
Find out whether an established or new property is best for investing.
Pros of buying an established property
Purchasing an established property is traditionally the most common option for property investors. Established properties can include freestanding homes, apartments, units, or townhomes which have been previously lived in.
Here are the benefits of buying an established property when you’re ready to invest:
- Timeless appeal - Established properties tend to have an architectural charm and individuality about them which you may not find in brand new homes. They typically have bigger rooms and more space e.g. land.
- Possibility to negotiate price - Investors have more opportunity to negotiate on the sale price by using the sellers motivation.
- Better potential for capital growth - Older properties will generally outperform the average and see higher capital appreciation.
- Value can be added through upgrades - Renovation, improvements, subdivision, or development can potentially add more value to the property and even improve rental return. These costs are also tax deductible.
- More value in land - Established properties are generally more likely to have their own land, which can provide huge boosts in value. Land also tends to grow in value while the building loses value over time.
- Property history - You have access to the property history, and previous sale prices. You’re able to see the change in property value over time and whether it’s a worthwhile investment.
- View the property - You can inspect the features of the property/building and make a fully informed decision before purchasing.
Other pros include producing rental income from day one and the age old saying, ‘location location location.’ Older properties are generally located in areas with more established infrastructure e.g. schools, hospitals, transport, shops, etc. These infrastructures are also drivers of property growth.
Disadvantages of buying an established property
While there are many pros to established properties, there are also some cons to consider:
- High maintenance - An older property may require more maintenance. This means you may have to create a buffer for any unexpected repairs or upgrades.
- Potential for less tenant appeal - People love new and shiny things so an older property may not be as appealing for tenants.
- Warranty - No structural warranties for properties generally older than six years.
- Could have lower rental return compared to newer properties
- Depreciation deduction not as high as new properties
Pros of buying a new home
When it comes to real estate, buying a new property can give investors certain advantages over established properties including:
- Less maintenance - less likely to need repairs in the short term and appliances will be under warranty.
- Depreciation benefits - New properties are good with depreciation. There are two areas with which you can claim depreciation on your investment property - capital works and depreciating asset. Capital works is the cost of building the investment property. This depreciation is spread over 40 years, which is the given lifespan the ATO says a building lasts before it needs replacing. A depreciating asset is “an asset that has a limited effective life” according to the ATO. This includes internal fixtures and fittings such as stoves, carpets and so on. Essentially, the newer the property, the higher the amount of depreciation you can avail.
- More appealing to tenants - New homes are perceived to be of higher quality, which thus attracts higher quality tenants (lowers risk of vacancy periods) who are often willing to pay a premium price. This is often due to the modern amenities, appliances, and technologies in the home.
- Likely to be environmentally friendly - New homes tend to have energy efficient systems and products in place such as rooftop solar systems, solar hot water, double glazing for windows, and energy efficient lighting. These types of features often lower utility bills.
Cons of buying a new home
While new properties have their perks, there are also drawbacks to buying one:
- Less affordable - New homes tend to go for a premium price as the developer/s profit margin and marketing costs are built into the price. Sometimes you may pay above market value. This also means the developer will unlikely move on the final sale price.
- Over supply - With new apartments and townhouses especially, there is a constant supply of new homes hitting the market. This means there can often be hundreds or thousands of homes competing against one another.
- Limited value adding - As it’s a new home, you can’t add value to the property through renovations which may take longer to achieve capital growth.
- Potential market risk - History shows newer properties are usually first to get hit when the market slows.
- New properties don’t have a history of rent - It can be difficult to estimate rental returns.
Other disadvantages to consider are the possible delays in handing over the finished product and limited land. Generally, homes built in new housing developments (or estates) have smaller block sizes, so subdividing the property or adding a granny flat aren’t possible.
Weighing it up - how to decide the right choice for you
Are you better off investing your hard-earned money into an existing property or buying a brand new investment property?
Ultimately, it all comes down to what will suit your personal situation better.
While new properties offer potential depreciation incentives and might have more appeal to a tenant, established properties are also great for investors who are looking for capital growth or to add more value through renovations and upgrades.
Before you make a decision, it can be beneficial to thoroughly research your options and understand the market you’re buying into. This includes rental returns, rental vacancy, and lifestyle advantages for tenants - location. A desirable location with access to nearby amenities such as shops, transport, schools, and entertainment facilities will likely gain high rental yields.
If you’ve decided the type of investment property you’re after and are ready to buy, loans.com.au’s team of friendly lending specialists are here to help you settle quickly.
DO I QUALIFY?