Want to buy an investment property in Australia? First, you should learn the benefits of buying new real estate.
At Eda we support the saying ‘old ways won’t open new doors’. And, while new properties appear to cost more upfront, the ongoing benefits of buying a new property can outweigh these costs over time.
Many investors take a short term view and compare the upfront costs of new or old properties. We think differently. Property is a long term investment. And the benefits of buying new real estate should be realised over time. The advantages of buying new can be realised for more than 10 years. This offers a significant advantage to savvy long term investors. Below we highlight some of the numerous benefits of buying new rather than old properties.
The benefits of new real estate and depreciation
In Australia, you can offset investment costs against the tax you pay. For property investors, this includes the depreciation of their building and its contents. Click here to see the ATO rules.
The newer the property the more you can claim. In order to maximise the tax benefits, purchasers must be the first property owner. And, depreciation is one of the most important benefits of purchasing new real estate.
Put simply, it refers to the general wear and tear of a property and its ‘depreciating’ effect on its value. When you invest in a property with high depreciation, it’s a huge tax benefit. All buildings lose value over time. The depreciated value can be claimed when you process your tax return. And, smart investors can get a hefty chunk of it back.
SOME THINGS YOU CAN DEPRECIATE
- Flooring, tiles
- Normal household appliances like air conditioners, ovens, stovetops
By claiming so many tax deductions in the form of depreciation, people earning a taxable income above $80,000 per year may be qualified to pay less than $50 per week on their new investment property.
New real estate is not that expensive
Purchasing a new property is only less affordable from a pure price tag perspective. And, this is only half the story. The benefits of buying new real estate are accumulated over time.
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 make your property cheaper week to week, year to year.
By keeping this in mind, investors may only pay for a fraction of their property. For example, 70% of the ongoing costs may be covered by the rent you receive. The remaining 30% may be collected as tax rebates. For some, the benefits of buying new real estate will actually make them cash-flow-positive.
For many Australians, the main benefit of buying new real estate is quite simple – affordability.
Buying new real estate equals higher tenant appeal
Do tenants want an old, rundown property or a new one?
Generally, people think newer properties are better. Newer properties will attract better tenants. They also attract better weekly rent.
Tenants are drawn to modern-looking properties and new appliances. So, in turn, you will experience higher demand for your property. All of this equals:
- More income
- Less risk of damage
- Less risk of vacancy
Benefits of buying new includes 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).
However, 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. There is a strong risk that the property will not achieve the price you need to cover the renovation costs.
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.