Choose the best area before considering investing in a new or old property

It’s probably one of the original property investing debates – should you buy an established property or a new one?  And, as in most debates, there is no single answer.  In fact, the answer is – it depends.

Ask any property developer and you'll hear "buy only new". 

A new property comes with significant depreciation benefits, meaning that you are more likely to see a positive cashflow – a situation where the shortfall between income and expenses on a property is removed by tax benefits that exceed that shortfall. 

Of course, we should ignore the fact that of course a developer thinks new is best, and also that, depending upon whom you buy from, very often developer profit hikes your buy-in price above that which you would pay for a similar property a few years old.

The point is, you need to consider the entire argument before you decide what to buy.

New properties do carry depreciation benefits.  However, if you have ever fully read a depreciation report (and why wouldn’t you, such scintillating reading they are!), you may have noted that often the depreciation available in years two and three is higher than it was in that first year.  Why is this? Once items fall into a "low value pool", as they tend to do after a few years, you get to claim larger chunks of them in one go.   And so the argument for buying a brand-new property to improve tax benefits is actually mostly moot.

I’ve also found that often a property that is two to three years old is better value than the new one. 

It’s like that brand-new car that loses 15% of its value as you are driving it out of the show room – with a new property the premium you pay for having everything shiny and new is quickly absorbed and value is lost almost immediately.

The property that is a few years old has also been run in a little, with any major issues most likely identified and fixed already.  These points have little meaning for the owner-occupier, who most likely plans to stay for years and whose asset is capital gains tax-free, but for the investor, who needs every dollar of equity to enable future leveraging, that premium can be costly in the bigger picture.

Remember, too, that the "value" of a property is determined by the recent sales in the area. 

A new property is harder to value, as there is little to compare it with.  I’ve lost count of the number of times that I have seen investors buy property in massive new developments, only to find that a year later the property is worth $40,000 less. 

This loss is likely due to a combination of factors – the developer profit (and middleman commission) made it more expensive in the first place, the size of the development created a supply issue for which there was not enough demand, and the market was now undergoing its first real test – re-sales were happening and the true value was finally being realised. 

Of course, where that new property is not part of an overall estate, then it’s easy to tell if it’s at market value, as it will be compared to the older properties around it.