New v Established

Hi,

I have just found this forum. Thought there might be pinned discussion on new v established as preferred for IP.

From my reading and understanding:

New:
+ depreciation
+less maintenance
+stamp duty is two contacts, house and land
+often preferred by renters
-developers and marketing costs incorporated so less capital gains initially
-usually smaller blocks

Established:
+less risk
+more room for initial capital growth
+sometimes room for negotiation
-less or low depreciation claims
-more maintenance costs

Depreciation for tax seems to be one of the biggest benefits of new.
However, if you buy an established you can still increase your loan and claim interest on these capital upgrade costs. Your cost base will then be higher when you sell, making less capital gains.
New, you depreciate but pay at the end (although 50% reduced) capital gains, as your cost base is lower when selling.

Very interested to hear what others on here have to say.

 

What have you been reading to arrive at those points?

Too much focus on tax and deductions. Not enough on value and growth.

 

Comes from many sources.
Do you not agree ?

 

In my opinion buying established but near new or few years old is the best way to go...less maintainance costs and can negotiate better on the price.

 

It is better to get your own block of land and build the house yourself for multiple reasons. You can get a better location. You pay minimal stamp duty, only pay it on the land, saving tens of thousands, you can do landscaping yourself saving another 10k I have built a number of New houses, disruption for repairs is a non issue ,anyway repairs are covered for years under builders warrantee giving another advantage. You can have low or nil maintance garden, or automatic watering system, anyway again tenants responsibility to maintain garden or employ gardener. Houses will remain like new for 5 or 8 years at which point it can be a good time to sell before the paint and flooring starts looking not so fresh and before maintence needs doing which can reduce those depreciation and building allowances benefits. You can also get better yeilds, better more fastidious tenants with a new house. I have built houses for 200k after tax benefit cost me 180k, not including future benefits, rented for $280 a week. Yet people were paying $240k for same established houses and paying 15k in stamp duty on top making it negative cash flow. I say listen to the advice you have been given learn and understand the benefits of building new, and be wary of advice from strangers on some forum. People say buy the biggest block of land you can afford that is BS. Buy in tightly held locations when the oportunity arises. I have had 350sq metre blocks have more gains in one year than 1200 acres ever have in 3 years, Had a 300sqm block rise 25% before 3 month settlement . There are no rules, and no givens, as circumstances arent constant, it is what it is at the time.

 

Plenty of professional tenants out there who want to 'defrock' new properties, hang around 6-12 months then move into the next new house. You're left with reletting, clean up etc to bring it back to the as new condition.

 

With construction quality these days you can probably bet on the fact that once your warranty runs out you'll be dealing with more maintenance than an established property that was built when things were done properly anyway.

If I can find something built in the 80s or 90s for example, I know (broadly) that wear and tear aside, and from experience, that unplanned maintenance issues are actually less likely.

Depreciation is the cream on the cake. Focus on the cake.

- Andrew

 

New:
+often preferred by renters
-usually smaller blocks
What about when selling? Owner occupiers (and developers) usually want more land, you should be thinking who want's to buy my property when I sell it? I like to think about the end game, not much about the renter.

Established: I would add
+Depending on the year constructed a much more solid house - longer lasting.

 

Depends How you look at it, if you buy a 80 year old house it'll still be standing in 50 years but so will a new house. The likelihood is that they will both be at the end of their lives (except for heritage protection).

 

Me and partner are in the current situation of being about to buy a H&L package as our first IP, but sitting on the fence with our decision. It is such a widely debated subject, with individuals and interested companies strongly batting for one or the other as the better investment decision.

I wonder does anyone have a comparative model of their estimates or actual experience with each option, i.e. over a 20 year period how does a $500k new build investment compare against a $500k established investment, taking into account estimated or actual income and expenses, such as depreciation, stamp duty, repairs, vacancy, capital growth, rent income, etc.

I appreciate there is no one-size-fits-all data set that can "answer" the question, but at the end of the day, people strongly advocate for one or the other option and surely the best option is the one that produces the "best" financial outcome.

If anyone has actual or estimated data to support their new vs established preference over the long term, I'd love to see it.

 

This is a well trodden path and the comments above are excellent.

I would just make two points to back up the view that established is almost always better.

1) With new, you are typically (not always) over paying. This is because it is not a market price, but rather a price set by the developer to recoup his cost and to maintain his margins after marketing costs are taken out. Even if you are buying a property 1-2 years old, the original purchaser is usually hell bent on getting their initial investment back, and the prices are usually still too high.

2) You can get depreciation benefits out of established properties - but you have to renovate the property yourself.

Ultimately, investing in real estate is all about covering your downside and leveraging the appreciation of the land. Generally speaking, the only way to do this is by buying established. It is totally boring, but it is a way to de-risk the purchase.

Not only do you know what you are getting structurally (defects would have been ironed out years prior), but economically - you don't want to buy something at the beginning of its depreciation journey.

Depreciation puts downward pressure on the value of the asset, and usually there isn't enough land to out-grow this loss of value. If you buy something older, it is already depreciated and that downward pressure on the value just isn't there anymore. Downside covered. It means you are left with land value plus an income stream. Sounds good to me.

 

so neatly explained...one thing i find is new attracts good tenants and higher rent. That is the only advantage i find with new properties.

 

Can you achieve that same benefit by doing a cosmetic reno? An established premises with a fresh, new look...

 

There are a lot of nuances to this. Something that is new in an established area (constrained supply) can perform differently to something that is new in a house and land estate where there is vast quantities of future land to come (potential over supply)

 

I should also point out that if you build new (whether it's in an established suburbs or new land estates) and if you sell within 5 years of construction then you will probably need to pay GST as well as CGT on the sale.

 

Usually the ones strongly batting for new H&L are making a big commission on the sale... Yet to see anyone making such large commissions on existing stock being sold...

I can show data for heaps of brand new H&L properties that have lost a bunch capital growth (negative for many years) on smaller parcels of land than existing stock in the area, granted rental income on older houses was lower than new (by about $50 - $80 per week), but you had a bigger block of land. Land grows in value, houses reduce in value as they depreciate. a larger block can also provide future development opportunity.
If you're an investor aiming to maximise a portfolio and use equity growth from one property to get into the next then buying brand new can stop you in your tracks or at best delay your accumulation for many years.

Granted some areas are better than others and my comments above only reflect my experiences with South East QLD and the large estates built between Gold Coast and Brisbane