New Versus Established Investment Properties

If you're intent on investing in a new property, then make sure you consider price, location and buyer demand

If you're intent on investing in a new property, then make sure you consider price, location and buyer demand

At Aquila we focus on established properties, because historically they've had much better performance

At Aquila we focus on established properties, because historically they've had much better performance

 

NEW VS ESTABLISHED - which is a better investment?

The debate on the issue is an ongoing theme in property investment, and this contribution is unlikely to put the matter to rest. While there is no definitive answer to this question, at Aquila Property Investment 95% of the properties we recommend for clients are established properties. Here are some of the reasons why:

  • There is higher demand for new property...but only when it's new! Expensive marketing, first-home owner grants, and people's desire for brand new things all drive up the price of new property. Of course, the day somebody moves into that new property, all of those benefits are lost, and the desirability of that property is decreased considerably (much like a new car being driven out of the showroom).
  • New property is frequently the wrong property type for the location. New property is built for the specific purpose of making a developer as much profit as possible. As such, it will usually be built to the maximum possible density allowable, or will be built where land is cheapest. This leads to large apartment complexes in the inner to middle ring, sardine-like townhouse developments further out and small-lot homes in the outer suburbs - none of which are particularly attractive for owner occupiers and thus are unlikely to rise in value as much as more desirable property types.
  • You can buy established property in better locations for the same price. Buying a great investment property isn't about running the numbers on a single property - it's about a rigorous process of comparison to find the best investment. So if you are looking at buying a new property, ask yourself, what can I buy for the same price elsewhere. You'll likely be able to buy an established property in the same area for less, or an established property in a better area for the same price. We know that property investment is about location; better locations have substantially outperformed poorer locations historically. If you need a reminder why, check out this link
New properties are frequently in areas where is there is too much supply of the same product, and not enough genuine demand from owner-occupiers.

New properties are frequently in areas where is there is too much supply of the same product, and not enough genuine demand from owner-occupiers.

Should i buy a new property because of depreciation?

The depreciation you can claim from a property against your taxable income is certainly a consideration for investors, because it helps your cashflow and therefore your ability to hold your investment property. New properties generally have the most depreciation to claim, for two main reasons:

  •  The capital works write-off, which is claimable at 2.5% per year for 40 years, is higher, because the overall cost of construction is higher.
  • Other depreciable items, such as a/c, carpets, dishwashers etc. are brand new, so there is more depreciation to occur, and therefore more to claim.

Just remember, you've paid for this depreciation already, by paying more for the building and its fixtures and fittings relative to an established property. And you'e only getting some of it back.  

Never invest purely for tax benefits - you need properties to increase in value to make money out of property investment. And it doesn't take much capital growth to outstrip depreciation - even on the highest marginal tax rate you only need 1% more growth per year to outstrip the depreciation claimable on most new properties.

Still intent on investing in a new property?

Then at least consider the following factors:

  • What is the area like that I'm buying in? Most new properties are sold either in large new apartment/townhouse complexes or new housing estates. That means there is likely to be a lot of new supply coming on at the same time to compete with your property. If you're going to buy new, try to buy in reasonably established locations, and for attached property, in small complexes. This will limit the chances of your investment reducing in value due to oversupply.
  • Who is buying other new properties in the area? A healthy property market is one where most buyers are owner-occupiers, as this signals there is genuine demand from people to live in the area. If most of the buyers in your chosen location are investors, this is a big concern. Investor-heavy markets are more risky, volatile and generally produce lower returns.

successful Property investment is about getting the basics righT

Always remember that getting a good return from your investment property is about buying the right property type in the right location at the right price. You can achieve this with both new or established property, but for the reasons we've discussed above, the deck is stacked against you more with new property. If in doubt, get some independent advice.