Existing Property vs. New Property
Before making a decision to purchase a new property Jane and Chris went through several sessions of one-to-one mentoring to ensure all their specific questions about buying new property compared to existing property. These included:
- the weekly cash impact on their budget
- their ability to purchase a 3 bedroom home in the next 5 years in Sydney
- funding and valuation risks
Client property criteria:
Property to be in a more established area close to schools, amenities, shops and easy access to employment node. Easily tenanted and sought after by young professionals that are likely to be more at work than at home.
Cash flow criteria:
Within client’s budget of $75-$125pw, recognizing that cash positive areas would result in less growth.
Budget:
Sufficient cash and savings to purchase up to $850,000
Location:
Brisbane Northside
WHAT YOU NEED TO KNOW
Purchasing property that is brand new can be exciting. For some investors it offers the potential for less maintenance problems and the purchase price is fixed. There’s no danger that prices will run out of hand.
New property carries lower rental yields but more tax savings
New property tends to offer lower rental yields compared to existing property. However, you are able to claim more depreciation as an expense in the first 5 years of owning the property. This means you’ll save more on tax and this will balance out the lower cash flows. Cash flows will differ from property to property. In general, properties around 5 to 15 years old will offer better net cash flows after tax than new property.
Capital growth can be limited for new property in early years
New property is priced a lot higher than existing property. There are higher built-in sales commissions, and costs for materials and construction. Your capital growth in the initial years on an existing property may exceed those on new property in a similar area. In a rising market, over the long term, new property can perform very well.
Be wary of oversupply in some locations
New off-the-plan apartments can be located in areas where there is significant oversupply. You could be paying a premium price for property in areas where you will see damp growth for a number of years. On top of that, rents will need to be lower to attract tenants as there will be more competition from other new units.
New house and land developments tend to be in locations that are further from established areas. These less established areas will have no shortage of land. It’s the scarcity of land that drives up prices. You will need to pick your areas carefully to ensure future growth rapidly creates a shortage of land.
Valuation and funding risks
New property carries significantly more valuation and funding risk. If you are taking a home loan to purchase new property, the bank may not value the property at the time of settlement at the same price as that which you agreed to pay. You will have to pay the shortfall out (which could be tens of thousands) of your own pocket.
There are a myriad of factors to consider when deciding on new vs. existing property.
Investigate how properties are being maintained
These areas are well established and do have some much older properties. Be careful to ensure that the roof of your property or building is sound and that there are no issues with cockroaches, pigeons, possums or rodents in the neighbourhood. Concrete cancer is a key issue if you purchase a property near the water.
If you’d like more information, please sign up for one of our property education workshops.
