Some property investment advisors may argue that purchasing new properties (as opposed to older, established properties) is too expensive and not worth the paper the title deed is written on. But we think differently. Below, we’ll highlight the numerous benefits there are to purchasing new properties as opposed to purchasing already established properties.
In the beginning, such an investment might seem expensive. But in the long term, it works out to be a lot more affordable and, at the end of the day, more lucrative.
When purchasing a property, you’ll find that the amount of depreciation that you can take advantage of will be higher if your property is brand new. The most experienced investors will always tell you to consider depreciation before actually buying property.
Depreciation, put simply, refers to the general wearing and tearing of a property and its ‘depreciating’ effect on the value of the property. When you invest in a property with high depreciation, it’s a huge tax benefit. You do not pay depreciation as your property falls in value. Rather, the depreciated value is claimed when you process your tax return at the end of the financial year – and you can get a hefty chunk of it back.
Normal household appliances like air conditioners have high depreciation rates.
By claiming so many tax deductions in the form of depreciation, people earning a taxable income above $80,000 per year may be qualify to pay less than $50 per week on their new investment property.
New properties are not that expensive
The reality is that purchasing new properties are only less affordable from a pure price tag perspective. But, as any seasoned property investor will tell you, this is only half the story.
From a cash flow perspective, you’ll see that the tax benefits associated with depreciation (as outlined above) as well as the higher yields, will render your property cheaper week to week.
By keeping this in mind, investors will pay up to 30 per cent of their property simply by using tax, the rest will be paid for from rent by a tenant. Some people after tax benefits will end up tax flow positive.
For many Australians, new property is much more affordable due to the above.
Higher tenant appeal
Do tenants want an old, rundown apartment or a new one?
The general rule of thumb is people perceive newer properties to be better, i.e. of higher quality. Newer property therefore means tenants are more likely to consider it as a place in which to rent.
Tenants will more likely be drawn to more modern looking properties and modern appliances. They’ll be prepared to put down a bond and perhaps even pay higher rent for it. If you can draw in high quality tenants who appreciate a new property, it could very well mean you minimise the risk of ‘dead’ tenantless periods.
Home warranty insurance protection
For new properties, builders are legally required to take out home warranty insurance (also called home indemnity insurance or the home building compensation fund) in every Australian state (except Tasmania).
That way, you can protect yourself against dodgy builders who do a bad job in building your property. The insurance covers a whole range of things like defective building work, and it may also cover you for reasonable costs associated with finding alternative accommodation.
Lower amounts of maintenance
Because you’ve just purchased a brand new property, you won’t have to worry about spending time and money to repair it or maintain it.
By contrast, if you purchase an older, established property, the chances are you will be faced with having to pay to maintain its creaks and cracks.
Some people argue that old property provides so-called “renovation potential”. They claim that a significant benefit of purchasing established properties is that you can boost its equity by renovating it (and repairing its creaks and cracks).
The reality is, however, is that if you don’t know what you’re doing, there’s a very high risk of overcapitalising and losing money. Even professional investors and renovators blow their budget, and there is strong risk that the property (requiring further capital from you) will not achieve the price hoped for.
Out with the Old, in With the New
Over time, the most important thing when purchasing an investment property is capital growth for most investors so it is important to balance tax deductions (like depreciation) with opportunity for growth. A highly effective way to achieve that balance is to purchase a new property rather than an established one.
Affordability, furthermore, is also a very important factor – if people can’t afford to keep their property for at least 10 years they may not get the benefit from it. This is where a strategy to pay less than $50 per week (using depreciation as a tax benefit) can be really important in sustaining a profitable investment.
Questions? Feel free to contact a member of our specialist property advisory team at EDA Property. Our property investment specialists have had many years’ combined experience in advising everyday Australian on choosing the best investment property to suit their individual circumstances.