New vs Established Properties

For this week’s blog, we’re going to take a deep dive into the pros and cons of purchasing new and existing property and let you in on a secret regarding which type will provide you with the most superior investment.

Plot spoiler for all serious property investors out there – existing property will always, without failure, outperform new properties.

And there are numerous reasons for this which we are going to go through. You may be wondering to yourself “but buyers who purchase new properties are always raving about depreciation benefits, stamp duty savings, high rents, low vacancy rates and reduced repairs and maintenance when compared to existing properties!”

Depreciation

Let’s break this down. Firstly, let’s start with depreciation. Developers of new properties will continuously push the benefits of depreciation upon interested buyers. However, as an investor, you must know that you should be looking to purchase a high value, appreciating ASSET, not a depreciating LIABILITY. Although tax depreciations may seem attractive (and your tax return may return a few thousand dollars back in your pocket come tax time), property investors want to spend as little money as possible on a depreciating asset. 

For new and existing properties, it is paramount to remember that the value of the asset is in the land – not in the build. Let’s look at an example below:

Existing property 

Total value of the property$600,000
Land value$400,000
House value$200,000

New property 

Total value of the property$600,000
Land value$200,000
House value$400,000

Both properties are the same value, however the new property will have the “depreciation benefits”, as marketed by the developers, attached to the new $400,000 house. What buyers DON’T see or comprehend is that they are purchasing a property that has a reduced land value ($200,000) when compared to the asset of the existing property ($600,000). Always remember, the value is in the LAND. NOT the house itself. This is why house and land packages are sold on significantly smaller pieces of land with minimal 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 too busy looking at the huge amount of “house” that takes up the block rather than being concerned with the lack of land in the front, back and side yards. 

Let’s now look at our examples again:

Existing property 

Total value of the property$600,000 
Land value$400,000More of your money is going to the asset
House value$200,000Less of your money is going to the liability

New property 

Total value of the property$600,000 
Land value$200,000Less of your money is going to the asset
House value$400,000More of your money is going to the liability (spruiked as “Depreciation Benefits”)

If you buy a new property, more of your money is purchasing a liability rather than an asset that will grow other time and provide you with scalable capital gains. Another point to note is that whenever a buyer purchases a new land and house package, there will always most likely be a 10-15% 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? 

For serious property investors who are set on purchasing an investment property below market price and picking up “instant equity”, existing property is the easiest way to achieve this. It’s just that simple. 

Capital Growth

Secondly, we’ll use our example to look at the appreciation of the two different properties. Let’s analyse the example after 7 years of growth where we’ll assume that the property’s value will double after that period, and that the buildings have depreciated at the same rate of 20% each. 

Existing property

Land value doubled = $800,000Asset
Building value $160,000Liability
Total value $960,000An increase of $360,000

New property

Land value doubled = $400,000Asset
Building value $320,000Liability
Total value $720,000An increase of $120,000

Difference between the appreciated value of the two properties = $240,000

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

‘Tax Benefits’

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

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. And as you can see in the examples above, the existing property’s land 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 $240,000 worth of tax depreciation, even at the highest marginal tax rate of 45%. 

Reference the earlier example:

Existing property

Land value doubled = $800,000Asset
Building value $160,000Liability
Total value $960,000An increase of $360,000

New property

Land value doubled = $400,000Asset
Building value $320,000Liability
Total value $720,000An increase of $120,000

Difference between the appreciated value of the two properties = $240,000

Again, the value in property is in the capital gains, NOT “tax savings”. And existing properties will outrun new properties when it comes to capital gains in nearly every scenario. 

Improvement Opportunities

Fourthly, let’s analyse the improvement opportunities offered by both new and established properties. For established properties, the buyer normally benefits from the improvement opportunities that a more “dated property” provides. Established properties, particularly those built pre 1990’s, are quite often due a renovation or “face-lift” which gives the buyer an opportunity to invest funds into the house in order to enhance the property’s value once completed. 

By renovating a kitchen, bathroom, outdoor entertaining area or bedrooms, investors can often reap the benefit of tens of thousands of dollars-worth in additional equity in the home from a simple renovation that may only cost you $5,000-$20,000, depending on how much you’d like to invest. 

Since new properties are often built with the most contemporary interiors and appliances on the market, investors aren’t in the position to make improvements to the home for another 10 or more years. Therefore, no additional value or equity can be introduced to the home. 

Other value-adding opportunities including sub-divisions and the establishment of granny-flats are options available to those with established properties. Since new-builds are quite often situated in estates where developers have divided the land as many times as possible in order to sell as many properties as they can, new builds often have no sub-division or granny-flat opportunities due to their constrained block size. Since the land size (the asset) is too small for any other improvements – the house (the liability) takes up too much room on the block for improvements. 

Stamp Duty

Finally, let’s take a look at stamp duty. Developers of new properties will continuously talk about the savings that their buyers make on stamp duty. 

For those who may not be familiar, stamp duty is paid upon the transfer of ownership of the land. In our example, the pre-developed land is worth $200,000, so the buyer only pays a small amount of stamp duty since there’s no house built on the block at the time of purchase. 

Let’s use an example of 4% for stamp duty. In this case, the buyer would only be paying $8,000. Once the land is purchased, the developer will then build the house on it. Let’s have another look at our example:

New property 

House and land package $600,000 
Buy land$200,000 
Stamp duty$8,000(4% of $200,000)
House build$400,000 

Old property

House$600,000($400,000 land value and $200,000 building value)
Stamp duty$24,000(2% of $200,000)

As you can see, when you purchase an established property, you’re paying stamp duty on both the land and the existing house. This totals to $16,000 more in stamp duty than the new property. New property buyers will be thinking “See? I’m saving over $16,000 upfront! Look at those incredible savings”. But this isn’t necessarily the case. When a buyer purchases a house and land package upfront, they will have to be paying interest on their loan for months as the property is built with no rental income to help cover the repayments and other relevant holding costs. Let’s see the example again:

New property 

Stamp duty saved$16,000($400,000 land and $200,000 house)
Minus interest~$5,000 
Interest on progress payments on construction loan~$3,000 
Net savings on stamp duty$8,000($16,000 minus $5,000 and $3,000 of interest)

All in all, the stamp duty savings for a new property dwindles down to a very negligible number ($8,000) which is practically nothing if we look back to the capital gains that our established property generated in its first 7 years of ownership when compared to the new property ($260,000 more to be exact). If you buy an established property, you will only be paying your mortgage repayments without rental income for as long as it takes to find a suitable tenant, which typically takes a few weeks max with the correct property manager.

For all of these significant reasons (and many more that would take several blogs to fully cover) we propose to you that established property is more likely to provide excellent returns to investors than new properties. 

Summary

In summary, we leave investors with these key lessons regarding the benefits of established property over new properties: 

  • Being successful in property is about seeing value in the land, not in the property itself.
  • Remember the golden rule of supply and demand. New developments in newly developed suburbs create a wealth of supply. This is not where any investor wants to buy. Buying an existing property in a pre-established suburb creates higher demand for renters, automatically making your property more attractive. If you buy a new property in a new estate, renters have an abundance of properties to choose from due to an abundance of supply. 
  •  New properties do not provide investors with any improvement potential (ie. sub-division or renovation). Those that buy established property have this choice which provides them with ample opportunity to enhance the value of the dwelling.
  • “Tax benefits” aren’t necessarily “benefits” you should be striving for. When you claim $10,000 on deprecation of a property, you are not “better off by the tax return of $4,500” (using the highest tax rate available), you’re worse off by $10,000. 
  • With new properties, you will always be paying a developer’s fee. What you think is “fair market price” will always be inflated by roughly 10-15% if a developer is involved. They need to line their pockets too! Fair and below market prices can only be secured through purchasing existing properties. 

If you’re interested in learning more about the abundant benefits of established homes, get in touch with us to book an obligation free Discovery Call. We’d love to be your trusted guide to achieving all of your property goals!