Pros of buying a brand new property
- Depreciation benefits – the newer the property the higher the amount of depreciation available to you. You can deduct 2.5 per cent on the structure of the property itself over forty years, which can lead to a significant tax deduction. Appliances such as air conditioners and dishwashers generally have a higher rate of depreciation. New properties are not affected by recent changes to depreciation legislation passed in November 2017.
- Tenant appeal– typically, new dwellings are perceived to be higher quality. This has greater appeal for tenants looking for modern appliances and technologies like reverse cycle or ducted air conditioning, who are prepared to pay higher rent. The ability to attract high quality tenants could mean that you lower the risk of untenanted periods for your investment property.
- Protection– builders of new properties in Australia are required to take out home warranty insurance which protects you in the event of a major building defect.
- Low maintenance – when you buy a new property you will benefit from the convenience of not having to spend money on repairs or maintenance particularly in the earlier years of ownership.
- Security – most items in a new property are covered by a builder’s warranty which means you can minimise your ongoing costs.
- Government incentives – there are stamp duty concessions and grants available for first home owner grants which could significantly reduce your upfront costs.
New is not always better, a few cons to consider before purchasing
- Less affordable – depending on the location and property type, new dwellings are generally more expensive than established dwellings which could mean that you struggle to meet your loan repayments. In addition, new properties often have high strata fees associated with maintaining communal facilities such as gyms and pools which could harm your cash flow.
- Limited value-adding potential – there is little opportunity to add value to the property once you’ve purchased it so it may take longer to achieve capital growth.
- Greater market risk – new properties are often the first to see price declines when the market softens, while established properties will either maintain their price value or experience a minimal adjustment.
There are benefits to consider if buying an older property
- Renovation potential – a major advantage of buying an established property is that you can renovate and add value to the property which can boost your equity. These renovations have potential to be tax deductible. If you are buying the property as an investment, it is worth consulting with a Quantity Surveyor before you begin your renovation to establish what depreciation deductions you will be able to claim.
- Affordability – an established property is generally more affordable than a new property which means that you may be at less risk of facing mortgage stress levels.
- Property history – historical data about the property will give you an idea of how the property value has changed over time which can help you make an informed decision.
- Negotiating power – when you buy an established property, you can negotiate a fair price. Vendors of established properties often have a motivation to sell relatively quickly so you can use this to your advantage to negotiate a bargain.
- Capital growth – generally, a well-bought established property will outperform the averages over the long term and experience high capital appreciation which will benefit your long-term cash flow.
Always weigh up the risks with older property too
- Maintenance – an older property may need upgrades and repairs due to wear and tear on the property over time. Not only could this eat into your profit, if a major renovation needs to take place, this could mean that you risk loss of rental income if tenants need to temporarily vacate.
- Lower rental return – if the property is older and in need of repair, the rental return will typically be lower compared to a newer property.
- Less appeal – established properties typically have less appeal than new properties as they may have an outdated design.
- Lower depreciation deductions – following legislation changes passed in November 2017, you can’t claim depreciation for previously used plant and equipment found in second-hand properties.Whether you’re buying an old or new property, try not to be seduced by up-front savings or emotional attachments. It’s more about selecting a low maintenance property in the right location that has no hidden surprises and potential for future capital growth and increasing rental yields.