You’ve decided to buy an investment property – congratulations! But now the question is: which type of investment property is best? Is it better to buy a place that’s brand-new? Or does a property age to perfection, just like a fine wine?
Here are some of the key factors to consider when deciding between old and new investment properties.
Buying a new investment property
Many property investors think that buying a new investment property will increase their chances of renting out the property faster and attract a higher calibre of tenants. While those are legitimate potential advantages, there are also drawbacks to buying a brand-new property. Here’s what to consider:
- Tax benefits – The newer the property, the higher the amount of depreciation tax benefits available to you. In fact you can deduct 2.5% on the property itself for up to 40 years after construction, which can lead to a significant tax deduction.
- Insurance – Builders of new properties in Australia must take out home warranty insurance, which offers you protection in the event of a major building defect.
- Greater tenant appeal – Newer properties tend to be more highly sought-after by tenants, which ups your chances of renting out the property quickly and lowers the chances of costly untenanted periods.
- Government incentives – You may be eligible for stamp duty concessions and grants when buying a property off-the-plan, which could significantly reduce your upfront and ongoing costs.
- Less maintenance – Because the property is new, it’s likely you won’t have to outlay money on major repairs or maintenance.
- More expensive – Depending on the property type and its location, you may have to pay more for a newer property, which means you’ll need to charge more for rent to earn enough income to make your repayments.
- Higher market risk – New properties often see steeper price declines in a market downturn, which could impact the value of the property when you decide to sell.
- Minor value-adding potential – Because the property is new, there’s not much you can do in the way of renovations or other improvements to boost its value.
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Buying an old investment property
Older houses in Australia tend to be cheaper and have more value-adding potential, but is buying an ageing property akin to investing in a lemon? There are a number of potential benefits and disadvantages to think about:
- Fixer-upper potential – A big drawcard of buying an established property is that you can renovate and add instant value to the property, which can boost your equity when you decide to sell. Renovations are also often tax deductible.
- Price history – Historical information about the property give you a clearer picture about how it’s value has tracked over time, and where it’s likely to go from here.
- Affordability – Not surprisingly, older properties tend to come with a lower price tag, which can give you more options for investing on a tighter budget.
- Negotiating power – If you’re investing in a property that’s in need of some TLC, you may be able to negotiate the price down.
- Capital growth – Generally speaking, an established property will outperform a new property in terms of capital growth over the long term.
- Higher maintenance and repair costs – Older properties come with more wear and tear, which means you could have to eat the cost of more repairs and upgrades. If a major renovation is needed, you might also face a loss of rental income during an untenanted period.
- Less market appeal – Tenants typically want to live in a property that’s new or renovated, and if your property is outdated in its design, it may be more difficult to rent out.
- Lower rental return – Older properties tend to command cheaper rents, which means you could see a lower rental return by investing in an ageing property.
So, is it better to invest in an older property or a brand-new abode? The simple answer is that it depends on your budget and investment goals. In either case, it’s a good idea to look for a property in an area with solid lifestyle appeal and good growth potential.