Should You Invest in a New or Established Property?
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Many people love the idea of a ‘fixer upper’.
The satisfaction of securing an impressive rent or sale price on an older, well-worn home after months of renovations is enough to make any property investor jump right on board. They manage quite well on The Block, after all!
However, contrary to popular belief, improving an existing home does not always offer a better return on investment than purchasing a new property. In some cases, investing in a newer build can be more lucrative in the long run.
So, landlords, how do you decide whether an established or new property is right for you?
What sets apart new and established homes?
Firstly, it's important to understand the distinction between the two. While new properties refer to those that have just been built or are still under construction, established properties are typically older and have been occupied previously. As mentioned, each offers its own advantages and disadvantages for prospective owners. Established homes often sit in well-developed neighbourhoods full of amenities that have serviced families for generations. On the other hand, newer homes are frequently built in areas undergoing rapid development, meaning they have great prospects for future growth. Let’s begin by considering what investing in a new property could look like.
Investing in a new property
When it comes to buying a new property, investors have a few options, including off-the-plan purchases, house and land packages and turnkey developments. When purchasing off the plan – that is, buying a property before it is built – the expectation is that its value will rise by the time construction is completed. This type of investment often comes with tax benefits, and it also allows you to customise the property to suit your preferences. With a house and land package, you purchase a block and choose a pre-designed home to be constructed on the site. While this option offers greater control over your property’s layout and design, it can involve additional costs for certain finishing touches like landscaping.
Australian rules and regulations surrounding property investment tend to favour new properties to drive up their appeal and demand on the market. For example, foreign investors are limited to new builds under FIRB rules, and eligible first homebuyers are supported in buying new homes by a number of state government incentives.
Here are some of the key advantages that new properties offer:
- Lower maintenance costs. Since everything is brand new, from appliances to infrastructure, investors can rely on warranties and avoid costly repairs for the first few years.
- Higher rental income. Many newer properties are fitted out with modern, energy-efficient features that drive up the rental demand. In today’s competitive market, tenants are often willing to pay a premium for new properties equipped with the latest technology and comforts.
- Tax benefits. Buying off the plan often allows landlords to claim depreciation benefits. These tax deductions can help offset the initial purchase costs and improve your cash flow.
- Capital growth potential. As mentioned, the locations where new properties are constructed tend to grow at a rapid pace, meaning they can offer better prospects for capital growth down the line than established builds. As the neighbourhood develops, the value of the property typically increases, providing a significant return on investment over time.
However, investing in a new property is not without its challenges. One drawback is the limited ability to add value through renovations, which could restrict the potential for further increasing your property’s worth. Additionally, off-the-plan developments can face delays in construction, which could push back your rental income and add extra costs. Before you commit to this kind of investment, be sure to research the developer’s track record to ensure your future home is in safe hands.
Investing in an established property
Let’s now look into some of the many advantages established properties can provide:
- Renovation opportunities. Adding modern features or refreshing a dated property can attract higher-quality tenants and boost your rent price. Plus, they’re tax-deductible!
- Immediate rental income. Many established homes are already tenanted, so there’s no waiting period before you can start generating cash flow, unlike new builds where you may have to wait for construction to finish.
- Lower entry costs. Often, established properties can be purchased at a lower price compared to new developments. This can make it easier for investors to enter the market with less upfront capital, particularly in competitive areas.
The main risks with an older property lie in its history. Some can come with hidden issues such as structural problems, outdated plumbing and electrical systems or other ongoing maintenance needs, all of which can be expensive to address. A thorough building inspection is crucial to avoid any unwelcome surprises. It’s also worth noting that some established homes may not command the same rental yield as new properties, particularly if they lack the modern, energy-saving features that more and more tenants are seeking. Furthermore, they don’t offer the same level of depreciation benefits, which can reduce the amount of tax deductions available to you.
How do I decide?
Choosing to invest in either a new or established property can be overwhelming, especially when factoring in dynamic market conditions and your own long-term financial goals. At Shead, our team of property experts use detailed market analyses to help you get the best out of your investment and find a property that will set you up for success in the future. Get in touch today!
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