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Old vs new property
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Old property vs new property
Advantages of buying a new property
New or off-the-plan properties are good with depreciation. Investors can claim furnishing costs as a tax deduction over 5-10 years. Investors can also claim to cost of building the investment property as depreciation over 40 years. For example, you could make $7,500 in tax write offs on a new building that costs $300,000 to build (2.5% per year)
Newer properties will attract usually attract better tenants who are more likely to pay a premium. This means not only vacancy rates will be lower, but there will be higher income from rent from tenants who are likely to stay long term.
Old properties have more wear and tear, meaning that they have a higher chance having obsolete plumbing electrical and heating systems and may not even comply with current building standards. New properties on the other hand, will have a much lower maintenance cost
Advantages of old property
When you buy a new property, you’re not only paying for the actual building, you’re also handing over a large chunk of money to the developer. This is because developers build not only margins into the price, but also the marketing costs to make a profit. On the other hand, in old/established properties, you have the potential to negotiate a great deal and pay a fair price, as well as bringing in immediate capital growth.
When buying a new property, everything is not only new, but done for you. This means that, although you should avoid anything that needs structural repair, you sacrifice the opportunity to add value or manufacture capital growth. In comparison, an old/established property comes with the opportunity for refurbishment and development, allowing the investor to significantly increase capital growth.
New apartment sand houses are often the first to see prices soften when the overall market loses momentum; meanwhile, established homes will either maintain their value or experience a very minimal adjustment.
Many older/established properties were built at a time when the area itself was in its early development stages, meaning they are usually located closer to the commercial and business districts of the city, boosting the price of the house
Disadvantages
Often, older homes may have outdated heating, electrical, or plumbing systems that do not comply with modern building codes. Before buying an old property, it’s better to hire a professional to check the condition of the home to make sure that they are functional and safe
Insuring an old home can often be more expensive then insuring a new one as there is more likely of the older/established property to experience problems/defects
Older/established homes have a higher chance of having obsolete plumbing electrical and heating systems and may not even comply with current building standards. Moreover, there is more of a chance of these breaking down and needing to be repaired.
Older properties tend to come with less storage space as, in modern day, we tend to have more items than ever before. This can be less attractive to tenants and actually hurt the value of the property
As the property grows old, so do the trees that surround it. As tree roots grow, they can encroach the foundation and damage the driveway, ground floor area and plumbing systems of the home. A decision to relocate the tree or renovate the home would be expensive
What about off the plan?
Off the plan investment refers to buying a house or unit before the building works have been completed/started. The decision to buy is made on the basis of what the developer says will be constructed. Potential investors are supplied with a wide range of information about what the property will look like once its completed, this may include design blueprints or plans, artist rendering of interiors, architectural models of the exterior and even display suites and site tours.
Advantages
Because you lock in a purchase price at the start of construction and take advantage of value growth and yields after completion, off the plan can work to an investors advatange
The deposit required for off-the-plan is usually less than required for an existing property, giving the investor time to save during the construction phase.
Off-the-plan investment properties come with major transfer duty (stamp duty) concessions, investors can save huge on stamp duty. For example, in Victoria, investors can save over $18,500 on a $500,000 property. Moreover, there are extended payment periods. In some cases, buyers can defer payments by 15 months instead of three.
As mentioned previously, new properties have huge depreciation benefits
Changes to the Australian building code mean new properties must meet energy efficiency requirements so your off-the-plan home will be fitted with some of the most power saving appliances and gas/water/electricity systems on the market
Off-the-plan makes it easier to get into the property market as you only need a 10% deposit and you can pay the balance of the purchase price at settlement, once construction is complete. This means you can use this time to save towards furniture and other costs as well as having more time to plan, helping to bring in more tenants
Getting in early in an off-the-plan development means that investors have the best pick of apartments which will produce the best rental returns
Disadvantages
Investing in off-the-plan comes with a significant risk. If the builder goes bankrupt, you risk the development never being finished, meaning you risk losing significant time what could have been used to put the money towards over investments. Moreover, some builders might not even give you your deposit back. Necessary due diligence and research is a requirement for these off-the-plan investments. This will help you not only reduce risk, but also mean you’re more likely to be approved for finance as banks prefer to approve off-the-plan properties constructed by reputable builders. Moreover, it’s necessary to ensure that there is a clause in your contract that details if the development doesn’t go ahead, you will be reimbursed in full. This is why it’s important to have a good lawyer during your investment plan, more specifically one that doesn’t work for the same company that you are purchasing the property from. In other words avoid one stop shops offering off-the-plan investment.
When investing in off-the-plan, it’s important to remember that the developer doesn’t look into your personal finances and whether the amount you’re borrowing is right for your situation. So, generally, as long as you have a 10% deposit, the developer will give you a contract. This is risky as the bank can still not finance your loan when the off-the-plan property is finished. This will leave you in an uncomfortable position as the developer can seize your deposit if you can’t settle, and then sue you if the property sells for less than what you’d agree to pay for. Say by the time the $450,000 property is built, the bank only values it at $400,000. If you’ve only got the 10% of $50,000 this will mean you’d still need to come up with at least 10% to settle.
The sunset clause is a statement in the contract that effectively put a time limit on the contract’s validity. If settlement has not taken place by eth end date included in the clause, both parties are legally entitled to walk away from the contract. In recent years, there has been an increase in the number of occasions where developers have purposely run over the time outlined in the sunset clause, so that they can terminate the contract and attempt to resell the apartment for a higher price. Although state governments have introduced legalisation to protect buyers, it’s still important to ensure your developer updates your contract so that the sunset date falls at a later. This reiterates the importance of having a lawyer that doesn’t work for the same investment property group you are buying from.
Of course, when buying off-the-plan you can’t physically see what you are purchasing. This means, you might not receive what you had originally been promised, especially if developers have run into financial issues along the journey. Moreover, when buying off-the-plan, you’re being sold a dream which has been artfully rendered by architects and graphic designers. These architects/graphic designers are often only used in the marketing process and can actually not have much to do with the entire project. In fact, some architects are only included in the original concept and that’s where their contribution ends For example, in 2018 the Opal Tower unit owners lost significantly after the tower was evacuated on Christmas Eve when cracks started to appear in the building. This is because the developers did not do a good enough job of building the tower, including defects in common areas. The owners incurred a huge loss as well as all but ruling out their ability to receive finances from banks.
When buying a new property, investors will pay a premium price. Similar to buying a brand new car, the minute its used, investors will start to lose money. Research conducted by BISOxford showed that between 2011 and 2016, nearly half of new apartment resales in Melbourne sold for less than the original purchase price, despite the rest of the Melbourne property market booming during this period. Of course, no property investment comes without a risk but when investing in off-the-plan, investors are much more likely to record a loss. In fact, in Melbourne a unit is 4.5 times more likely to sell at a loss than a house is. In Brisbane, that figure is 5.5. Considering in off-the-plan investment you’re not only paying for the property, but development costs and profits for the developers, it’s a significant risk
In a report titled “an examination of building defects in residential multi-owned properties”, Dr Nicola Johnston from Deakin University analysed 212 properties in NSW, Victoria and Queensland found that 85% of all the buildings analysed had at least one defect. Moreover, many people in positions in authority do not check the quality of the workmanship. Certifiers only inspect 10% of the job, and only after the work is complete. This means that not only could some defects be missed during inspection, but could miss defects along the way. These defects can significantly hurt the