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Which Investment Property to buy: New vs Old?

WHICH INVESTMENT PROPERTY TO BUY: NEW VERSUS OLD?

If you mention to friends, family and colleagues that you are looking to buy an investment property, chances are everyone will jump at the opportunity to tell you what sort of property you should buy and everyone always has an opinion on what is better – buying established or buying new.

WHICH INVESTMENT PROPERTY TO BUY: NEW VERSUS OLD?

If you mention to friends, family and colleagues that you are looking to buy an investment property, chances are everyone will jump at the opportunity to tell you what sort of property you should buy and everyone always has an opinion on what is better – buying established or buying new. There are many arguments for and against but here are some of the most common reasons which pop up time and time again:

WHY BUY OLD ?

- Opportunity to negotiate on the purchase price;

- Opportunity to ‘value add’ to the property by renovating or refurbishing;

- Opportunity to ‘pick up a bargain’

- Stronger performers in slower markets;

- Established historical sales data; 

- You pay a premium for new properties

WHY BUY NEW ? 

•  Quality construction;

• Modern design with better energy efficiency and sustainability features;

• Attract quality tenants willing to pay a premium;

• Lower vacancy rates;

• Lower maintenance costs;

• Higher claimable depreciation value;

• Generally a better resale value;

• Structural guarantees and warranties apply.

You can argue the pros and cons of old versus new until the cows come home but one of the most compelling arguments lies in the depreciation value of the home. The Australian Tax Office has determined investors can claim depreciation on any home for a 40 year period from the date construction is complete at 2.5% per annum. So, if a home is brand new you can claim full depreciation benefits where as if a house is 15 years old, you can only claim depreciation on the remaining 25 years. Take for example if we were to compare two very similar houses on the same street which are built on the same sized block of land and are almost identical except one is brand new and the other is five years old. The brand new house is on the market for $400,000 whilst the slightly older property is on the market for $375,000. Many investors would assume the older property is the smarter choice because you are immediately $25,000 in front. But is this really the case?

In the case of the new home which is on the market for $400,000 you can claim depreciation on the total amount of the building (including the fixtures and fittings) so you are paying the true value of what the land in really worth. However, in the case of the older home, you can only claim depreciation on the remaining 35 years (rather than the full 40 years if it was a brand new building) which may result in you paying more than what the land is really worth.

As the property is five years old you have also missed out on the opportunity to depreciate the fixtures and fittings included in the property such as window treatments and carpets.

The following table compares the two properties side-by-side and shows how depreciation can impact on the perceived purchase price of the land.

 

  NEW HOUSE OLD HOUSE
(FIVE YEARS OLD)
ASKING PRICE $400,000 $375,000
LAND VALUE $200,000 $200,000
BUILDING VALUE $200,000 $175,000
(asking price minus comparable land value)
DEPRECIABLE AMOUNT $200,000 $153,125
($200,000 x 2.5%) x 40 years ($175,000 x 2.5%) x 35 years
REAL PURCHASE PRICE $200,000 $221,875
(asking price minus depreciable amount) (asking price minus depreciable amount)

 Property experts argue land appreciates in value whilst buildings depreciate so if this is the case, when we compare the two properties you are effectively paying more than $21,000 extra for the land with the older property. It makes for an interesting argument, doesn’t it? As depreciation specifically impacts your property investment, it is important to have a solid understanding of what it is and how it works before you purchase a property. For a detailed explanation and all the information you need to know, make sure you speak to an Investor Assist Property Investment Specialist.

 

DISCLAIMER:This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances.