12 Dec Buying a new or established property : what’s the right choice for investors?
Should I buy a new or established property as an investment?
This is one of the questions that we are most frequently asked by potential investors who are looking for the most effective way of growing their wealth.
Of course, every investor is different and will have their own unique goals, so not all strategies will be right in all circumstances — in particular, your income and the amount you are looking to invest will play a significant role in determining what sort of investment strategy is best for you. At the same time, there are some universal principles in property investing that apply to most people, regardless of financial circumstances or long-term goals.
Below, we outline some general principles of property investing and how they apply when investing in either new or established properties, in order to help create an investment strategy that works for you.
The length of your investment is crucial to building your wealth
In our view, the key to successful property investment is almost always the length of time you own a property, more so than the timing of your entry into the market or whether the property is already established or is a new build.
In either case, the price of your property will more than likely rise, fall, and then rise again over the course of your investment. However, this is to be expected — the property market in Australia has always been a volatile one.
This is why holding an investment property as long as possible is the key to substantial growth. Although there are always short-term fluctuations, long-term the trend has always been for property prices to increase, so the longer you own an investment property the more likely it is that you will benefit from the almost inevitable long-term increase in its value.
What does ‘positive after tax’ mean and why is it important?
Positive after tax is the term that is used when you receive more money in rent from an investment property than you spend on maintaining the property, and reflects the position you are in after your tax refund has been received.
This is hard to achieve at present, with our current high interest rates, but with tax benefits and strong depreciation in holding a new property, it is usually possible to get close to being positive after tax.
When it comes to achieving positive after tax status, it will generally be the case that new builds are better able to attract premium rents than older properties. At the same time, an older property is likely to have greater maintenance costs in order to keep it in pristine condition, so there are going to be greater outgoings, thus reducing the amount of cash that can be generated each month.
Older properties may also need to be retro-fitted in order to meet the latest government regulations, e.g., heating and cooling upgrades, fire and smoke alarms, etc., all of which diminish the potential returns.
There is also the added advantage that in some cases there are significant tax breaks to investors who build new properties. These are not usually available when purchasing an older, existing property, meaning in most locations it makes financial sense to take advantage of the tax concessions as a means of increasing potential profits.
Being able to generate cash flow from an investment property can also be an important factor in generating greater borrowing capacity, which can then be used to finance additional property purchases.
Growing your capital when investing in new or established property
Capital growth from an investment can be achieved in a number of ways, and is not necessarily dependent of the age of the property. Instead, what is important (not surprisingly) is the location and associated demand in that city or neighbourhood, the amenities and infrastructure in the region, as well as the overall appeal of the property itself.
These are the qualities that buyers look for, and so are features that are likely to increase the potential rental rate or sell on price of an investment property.
Even more importantly, the key when you are trying to grow a property portfolio is to buy an investment property at a price that enables you to grow equity at a rapid rate. This is essential to being able to get access to further lending, and thereby purchase additional properties. Ultimately, this is what you need to be able to do to successfully grow your wealth from investing.
In our experience, it is generally the case the new properties offer investors more opportunities to buy at a price that then grows at a sufficiently rapid rate to access the funds required to purchase additional investment properties — the real key to financial success.
Buying new or established property — what’s the verdict?
Based on our extensive experience and expertise in the Australian property market, we have found that new properties consistently offer investors the best opportunities to grow their wealth.
They generally require less maintenance and upkeep, return higher rents, and provide greater tax incentives, all of which reduce the costs associated with owning an investment property and thereby increase profits.
There are, of course, scenarios in which purchasing an established property makes good financial sense and can contribute to growing a successful property portfolio, but the holding costs can be greater and therefore harder to hold for the average mum and dad investor.
However, for the majority of investors looking to grow their wealth, we would recommend purchasing a new property rather than an older one that is already well established.
Talk to Power of Property to find out more
If you want to find out more about the relative merits of investing in new or established property, arrange a one-to-one strategy session with Michael Lawton and Danielle Charlton.
We can advise you as to the best strategy for your investment goals, and also provide you with access to exclusive new properties and developments across Australia that are not yet on the market for the general public.