Is Older Better? Buying Old vs New in the Property Market
May investors are challenged with the choice of investing into new or existing property for their next purchase. If capital growth is your long-term strategy, you need to find the best investment that is going to get you to your goal. Working out your strategy first is paramount, working out whether buying established or new should be secondary as it needs to fit into your plan.
Here are some takeaways to help you with your decision:
Supply and demand
Everything about the property market comes down to supply and demand. In order to achieve solid long-term capital growth you need limited supply. This is a limited supply of the potential properties to come to market to compete against you as a property for tenants or purchasers. Established areas in a tightly held and are not zoned for high density living will always bolster much better grow compared to areas with high supply levels of new properties.
Approximately 5% of any market is “on the market”. That means that if you buy in a block of 400 units approximately 20 units for always be on the market for sale at any one time. similarly when you’re trying to rent the property you can have much more competition therefore in order to rent your property and most likely have to discount your rent. so you limiting your potential for growth in both the value and rental return of your property.
Many investors fall into the trap buying investment properties that have been built for investors. These new developments are sold directly from the developer, and will most-likely be sold totally to investors. The issue here is the what the when it comes time to sell the property in the future your only market to sell to other investors. Instead where you can buy into tightly-held established suburbs where your eventual buyers can typically be owner occupiers. Especially on a property you have renovated, this is where you can see some strong profits where you were selling to people who will call this property home.
Large apartment blocks or land estates that have been targeted solely to investors usually decline in the living standard and quality of upkeep overtime. When the neighbours of your property are mainly owner-occupiers the presentation of your building or street will always be much higher.
A very strong reason that most investors use to buy new comes down to the huge amounts of depreciation they can claim on their brand new investment property. I get this argument but at the same time you can manufacture this depreciation ability through renovation in an established property. When you renovate and install a brand new kitchen with new appliances, new air conditioner, new carpets and blinds, all of these parts of the property can be depreciated. Plus the majority of the depreciation you can claim comes in the first few years. Soon after that the amount that you can claim is limited due to the methods of how calculate depreciation in real estate in Australia.
Buying a property for the ability to be able to depreciate it strongly for the first few years is a very flawed investment strategy my eyes. Especially when you are sacrificing so much potential growth for the sake of a few years depreciation for the benefit of your tax return.
True value of a property (selling fees, suburb data for accurate value comparison)
Buying new properties, particularily in land estates can be very difficult to value accurately. New estates with limited resale sales evidence make it very difficult to work out exactly what your property will be worth once it is completed. To compare a brand new house in a new estate to the median house price of that suburb it is usually a very confronting exercise. And the reason for this is very simple, the price you pay for a brand new property is based on the cost of the land, and the cost of the build, plus the developer’s margin. Plus every other stakeholders margin in between.
One enormous expense it is part of the purchase price of any new investment property other selling fees paid by the developer to the salesperson you’re dealing with. We have seen sales commissions between 6% and 10% of the sale price. This is disgustingly inflated from industry standard selling fees. Where almost a tenth of what you are paying for the property is the selling fee for the investment consultant your working with, you then start wondering what the true value of that property. Similarly valuers do struggle to put values on these properties, especially when they find out the exorbitant selling fees have been paid by the developer. In a lot of cases they will allow for these fees therefore reducing the evaluation of that provide to the bank for your finance.
Investing in property is risky business if you stack the odds against yourself. Keeping things simple and buying in areas of limited supply where you can maximize the market You eventually sell to will see much better long term capital growth. Buying new does have it’s perks, though I strongly believe that buying quality established property will always give you a better long-term result.