Article by Kim Easterbrook
For the average buyer, it can be a very daunting task to purchase an investment property. How can the average buyer, who has no knowledge of the property market know they are making the most profitable investment choice? How can they know what type of property is going to give them the biggest return on their investment with the least amount of risk? There are many so called ‘experts’ in the market place advising to purchase off the plan, brand new and established properties. It is very difficult for an investor to know who to believe and which way to turn.
There are pros and cons to both types of properties, so it is a matter of matching the right investment to your needs.
Let’s take a look at the off plan/brand new property scenario to begin:
- Savings in stamp duty;
- Higher depreciation rates due to higher construction component of the sale, allowing higher tax write offs;
- Nice and new, first one to live in the property;
- Six and a half year structural guarantees by the builders;
- You are paying for developers and builders profit margins;
- You don’t get to see the finished product until its complete, risk that quality or build may not be up to the standard that you were informed of at contract signing;
- No guarantees that the builder will meet the deadlines, and projects could go on for a lot longer than previously anticipated;
- No capital growth until all properties within the development are sold;
- Many newer developments comprise of smaller sized apartments than the older established apartments, to allow for more on the block;
- Some builders have been known to cut corners, to cut costs and increase profit margins;
- Some offer substantial rental guarantees which are factored into the price of property without the buyer realising;
- Usually have have higher body corporate fees.
- The property is tangible and therefore you can see what you are buying;
- Higher percentage of ownership in the land vs construction cost which usually results in a higher capital growth rates, land appreciates, buildings depreciate;
- Older style constructions are usually built better and bigger than many modern developments (please note that this is not always the case and some builders who do build with care).
- Not paying the premium cost of being brand new, I always use the classic example, a brand new property is no different to buying a brand new car. The moment you drive a brand new car out of the showroom, you lose value. A brand new property is no different.
- You don’t get the lovely brand new feel;
- No structural warranties for properties older than six and a half years;
- Higher on-going maintenance costs;
- Even more confused? I can understand why. Only an expert in the field would be able to read through the pros and cons, and determine which is the best investment for your needs.
Generally speaking a property purchased off the plan and an established, will be worth roughly the same amount in ten year’s time. We have many examples to support this.
So why, at the beginning, would you pay the premium price which includes rental guarantees, developers profit margins and builders profit margins? Because of the depreciation benefits and stamp duty savings you say? In actual fact, the premium price you pay now, far outweighs the tax benefits you will receive later.
A good example of this is a case study that we completed on two properties in South Yarra. A two bedroom apartment in South Yarra, which was an older style established property, sold in 2001 for $273,000. The same property sold again in 2009 for $575,000. A similar type of property which was brand new, sold in 2001 for $410,000, and then sold again for $370,000 six months later (which demonstrates the loss in value which usually occurs once the property is second hand). The same property sold again for $585,000 in 2009. So in the initial purchase stage, an extra $137,000 was spent to get the same result 8 years later. Some of this outlay is offset by depreciation and stamp duty savings; however, additional costs are also outlaid due to higher borrowing costs. The end result was not enough savings to outweigh the $137,000 initial purchase outlay.
The stamp duty savings and tax depreciation benefits you receive when buying an off plan/new property do not compensate for the loss in capital growth you should achieve from an established property. As buyers advocates, we are paid a fee to purchase properties that best suit our clients needs and help them achieve their long term goals, and for our investors, that means buying established properties.