Old Existing Property or New House and Land Package: Which Is the Better Investment?
Property investors have maintained a long-standing debate about whether buying an established property or building a new home is the best investment option. There are definite pros and cons to consider with each option.
Buying an existing property offers the opportunity to negotiate on the purchase price. The vendor may have the property advertised at a preferred sale price, but as the buyer you are able to negotiate and haggle a bit until you’re happy with the amount you want to pay for the home.
Yet when you sign up for a new house and land package, the costs are rarely negotiable. The land price is set by the developer and the building costs are set by your builder, so there’s little room to negotiate.
One of the biggest debates many property investors have when discussing new versus old is cash flow. An investor buying an established property can charge rent immediately and begin to cover their costs. As soon as the landlord picks up the keys on settlement day, a tenant is able to move in.
When you build a new property, the tenants can’t start paying rent until the building is completed. Investors need to take into account how they will cover the interest costs charged on the property during construction before they receive any rental income.
Of course, many tenants are happy to pay slightly higher rent to secure a newly-built home, so it’s likely that a new property could achieve slightly higher rental yields than some older properties in the same area.
Older homes offer savvy investors the opportunity to add value to the property by completing some renovations. Improving an older property’s appeal not only offers the potential to increase property value and available equity; it could also mean tenants are willing to pay more rent for the same home.
There are also plenty of opportunities for new homes to appreciate in value, especially if you’ve chosen to build in an up-and-coming location.
Property investors can claim depreciation on any capital works, plant and equipment on their rental properties. The cost of capital works on a new property can be depreciated for up to 40 years, so a newly-built property may have a much higher level of depreciation than an established home can offer.
However, investors buying older homes are able to claim some depreciation on the actual building, as long as it was constructed after 1987. There are also differences in the rate at which some of the fixtures and fittings within the building are depreciated. Items such as flooring or window coverings and appliances are all depreciated over differing lengths of time and at different rates, so it’s likely that any depreciation in a new property will offer greater tax advantages.
Inner-city properties are always in high demand from investors and tenants alike. However, the vast majority of inner-city properties are already located in well-established suburbs with very little opportunity to find vacant land to build a new property.
Many investors lament that the only vacant land opportunities are located in new housing developments in outer suburbs or in locations that haven’t been fully developed yet.
When you buy an established property, you are expected to pay stamp duty on the entire purchase price. However, when you buy a house and land package, you’re only charged stamp duty on the land value and not on the value of the entire package.
Most established homes will require maintenance as they age. The costs associated with maintaining or repairing a leaky roof, old plumbing, aging electricals, and structural issues could cause cash flow issues and other financial problems if you’re not prepared.
By comparison, newly-built homes require less ongoing maintenance, which means lower maintenance costs for the investor initially. A new property is covered by a builder’s structural guarantee and home warranties, so an investor has the advantage of being protected for several years against major repairs or maintenance issues. New homes also shouldn’t need ongoing maintenance of aging electrical or plumbing systems.
New homes are built with modern designs and constructed using energy efficient materials. Some builders also include various sustainability features in their new construction designs, which have a higher appeal for many tenants.
Choosing the right property for your investment portfolio involves more than just ticking off a few boxes on a checklist. Be sure you do your research and complete all your due diligence about what type of property might be right for your investment portfolio.
This article provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such as it does not take into account your personal circumstances or needs. Professional advice should be sought prior to any action being taken in reliance on any of the information.