Is it better to buy a new or old investment property?

LACHLAN VIDLER
In this edited extract from their book, A Military Guide to Property Investing, Lachlan Vidler and Tori Colls share the five key reasons they believe established properties are a better option than new properties.

It’s one of the greatest debates in residential property investment – which provides superior investment potential: new or established property? We have a very strong bias towards established property. We will take you through some of the reasons why below, but above all else, established property has worked well for our portfolio and those of our clients. Some people have done well with portfolios based on purchasing new property, but we would argue that in general terms, established will outperform new.

1. Supply and demand

One of the biggest reasons we believe in established properties over new properties is supply and demand. While there are lots of factors that underpin property price growth, fundamentally, supply and demand is what it all boils down to. Unfortunately for new property, the supply side of the equation is out of balance.

Most new properties are built in large property estates, where most of the other properties are new as well. As sales rise, developers will continuously list more and more plots of land for sale. This means that developers control the supply of properties in the market. If there is no demand, developers just don’t list properties for sale. When demand begins to rise, developers continue to release properties until the demand has been satisfied. This means that it is very difficult for natural market pressure, which drives up property prices, to occur – it is all in the hands of the developer.

2. Location

Our next reason is location. Major cities have already been built out from the centre, and there are generally no opportunities close to the centre for developers to purchase large parcels of land to then develop into estates. Developers are required to purchase their large parcels of land on the outer fringes of cities, because that is the only place where this volume of land is now available. This means that those living in these outer-fringe suburbs are far away from CBDs, quality schools, renowned shopping areas and transport hubs.

 

Modern house facade
Image source: Lev Kropotov/Shutterstock.com

3. Depreciation

There are several mathematical reasons to choose established over new properties. Let’s start with depreciation. Developers of new properties will continuously push the benefits of depreciation upon interested buyers. However, as an investor, you know that you should be looking to purchase a high-value, appreciating asset, not a depreciating liability. Although tax depreciation may seem attractive (and your tax return may put a few extra thousand dollars back in your pocket), property investors want to spend as little money as possible on a depreciating asset.

For both new and established properties, it is paramount to remember that the value of the asset is in the land – not in the build. Let’s look at a hypothetical example, illustrated in the tables below.

Value – example established property

Total value of the property $600,000
Land value $375,000
House value $225,000

Value – example new property

Total value of the property $600,000
Land value $225,000
House value $375,000

Both properties are the same value, however the new property will have the ‘depreciation benefits’, as marketed by the developer, attached to the new $375,000 house. What buyers don’t see is that they are purchasing a property that has a reduced land value ($225,000) when compared to the asset of the existing property ($375,000).

Always remember: the value is in the land. This is why house and land packages are sold on significantly smaller pieces of land than established properties – with tiny front and back yards. Developers know that the value is in the land, so they attempt to divide it up as much as possible in order to put more dwellings on it and sell to more buyers who are captivated by the beautiful, brand-new property and the glossy brochures. When buyers inspect new properties in freshly established estates, they are generally too busy looking at the huge amount of ‘house’ they are getting for their money, rather than being concerned with the lack of land in the front, back and side yards.

Let’s look at our example again.

Value and result – example established property

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Total value of the property $600,000
Land value $375,000 More of your money is going to the asset
House value $225,000 Less of your money is going to the liability

Value and result – example new property

← Mobile/tablet users, scroll sideways to view full table →

Total value of the property $600,000
Land value $225,000 Less of your money is going to the asset
House value $375,000 More of your money is going to the liability

If you buy a new property, more of your money is purchasing a liability rather than an asset that will grow over time and provide you with scalable capital gains.

Another point to note is that whenever you purchase a new house and land package, there will be a developer’s fee hidden within the purchase price. Buyers of new properties need to be aware that they will rarely pay fair market price for a new build. Developers have to earn their money from somewhere, right?

4. Capital gains

Now, let’s use our example to look at the appreciation of the two different properties. Let’s analyse the example after 10 years of growth, during which time we’ll assume that the properties’ value will have doubled, and that the buildings will have depreciated at the same rate of 15% each.

Value after 10 years – example established property

Land value $750,000 Asset
House value $191,250 Liability
Total value $941,250 An increase of $341,250

Value after 10 years – example new property

Land value $450,000 Asset
House value $318,750 Liability
Total value $768,750 An increase of $168,750

The difference in the appreciated value of the two properties is $172,500.

As you can see, after appreciating the land and depreciating the property, the established property is in a league of its own, while the new property has fallen behind in value. This illustrates the importance of land value and ensuring that your future property investments have enough of it.

5. Tax benefits

Now, let’s tackle the ‘tax benefit’ argument for new properties. Developers and other investors who choose new properties over established ones will often say, “Just think about all of the tax benefits for the new property! Established property buyers certainly don’t reap those benefits.”

This is correct – if you count spending money as a ‘benefit’. Remember, as an investor you want to see your asset appreciating while pocketing as much cash as possible, not spending it or seeing it diminish over time. As you can see in the previous examples, the land of the established property is appreciating at a rate that a new property’s ‘tax benefits’ could simply never keep up with. We would be surprised if any investor could claim $172,500 worth of tax depreciation, even at the highest marginal tax rate of 45%.

Again, the value in property is in the capital gains, not in the alleged ‘tax savings’.

As you can see, established property will mathematically outperform new properties and this is why we personally choose to bolster our portfolios with high-performing, established properties.

 

Military Guide Book Cover

 

This is an edited extract from A Military Guide to Property Investing (Major Street Publishing $29.95), republished with permission.

 

 

 

Cover image source: Flotsam/Shutterstock.com


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