What is the best investment property to buy: old or new?
Investing in a property can be one of the most financially rewarding decisions you ever make. It can also be a decision that drains your finances. So how do you increase your chances of buying an investment property that builds your wealth?
The difference between successful property investors and those who struggle comes down to a few simple but very important factors:
- How hands on you want to be: Your investment of time and effort: do you want to embark on improvements and renovations to add value, or do you have enough going on in your life, and you want a ‘set and forget’ style investment?
- Experience vs risk: Undertaking improvements or development of a property requires an element of skill and careful calculation. With that comes a degree of risk in managing the costs, time and profitability of the project. Therefore, for some, investing in good quality stable performers pay off too. Consider investing in a way that matches your skills and experience so you can manage your risk. The more understanding you gain, the more comfortable you will become with the risk and reward aspect of property.
- Market growth vs manufacturing equity: This links into both of the above points. There are a number of ways to boost your property’s value, such as renovating, adding a granny flat, building a duplex or doing a development. But this involves risk, not only within the project itself but in the current market you are buying into and possibly selling in. Building an investment property can be a straightforward process if you have the right balance of inclusions, functional floor plan and trusted builder. New properties work in the right kind of location, not over-exposed to competition but meeting the desires of the tenant population. Striking a tight balance of supply and demand gets the uplift in value.
Now, most people only purchase or sell properties a handful of times in their life. Therefore, unless they have an interest and the time to renovate, the majority of property investors buy and hold their properties. Property is a long-term investment, so let the asset mature in the market by holding it for a number of years, typically 7 or more. This is known as a ‘buy and hold’ strategy and it’s the most common way that people invest in property, for a few reasons:
- It is low involvement, therefore lower stress.
- You are building wealth and creating passive income.
- You can rely on your team of experts to help you manage and optimise your investment.
If you’ve decided this is the right type of strategy for you, then your next step is to decide whether to buy an old or new property.
In my experience, I’ve learnt that locations that are changing provide opportunities for growth. They allow your money or buying dollars to stretch further. For instance, if you look at Sydney right now, buying a house is a very expensive prospect. If you look beyond Sydney, buying a house and land is a realistic option for many people.
We also see new properties as relevant to create housing in locations where there is population growth, via urban sprawl or interstate migration. Likewise for established suburbs where land is sub-dividable or if there are suburbs blending and filling any available space in desirable suburbs. What is important is that locations are linked to infrastructure and employment, and if there’s a new catalyst in the area, even better.
For example, the forecast for population growth on the Sunshine Coast is a further 200,000 people in the next 20 years. That requires an additional 76,000 new homes. That is a significant shortage for this location – and a big opportunity for investors to be part of the solution.
What are the benefits of buying a new property?
Aside from meeting the current demand for new housing, investors tend to invest in new homes when they want a low maintenance option with high depreciation value and tax benefits.
For investors who have approximately 20 years until you retire, it means the property is easy to maintain whilst you own it, and still of a reasonable age to re-sell down the track. This is unlike buying a 40-year-old property now, and over the next 20 years having to deal with the issues of an aging property and the costs associated with fixing and replacing things.
Building homes now in an era of technology and appreciation for size, light and space gives investors more control over flow, floor plans and living spaces. It means having the option to include amenities that provide greater comfort for tenants, like a plumbed fridge space or a second living area. Most of our new builds also have a 6-star energy rating and some can have solar panels upgrades.
From a rental perspective, there is strong demand for new homes and they generally fetch a higher rent. If they are in the right locations, they will also attract a good quality demographic of tenant. In the right market, they are also likely to grow in value before the build is even finished.
But not all new properties are created equal…
The intent as an investor is not simply to buy any new property or a new house and land package. It is to find locations that feature the fundamental factors for growth, like infrastructure, employment, demand and a shortage of supply.
Within these locations, you can then build a house that meets the expectations and needs of the local tenants. This is the key to our approach versus just buying anything new, as what you buy is just as important as how you invest.
It’s also important to mitigate risks along the way. A successful build means mitigating any variables and working with a builder who will support you beyond the sales process, and can consistently deliver in the build and post-handover phases. At API we represent a group of buyers, which means we have greater influence on the builders if there are issues encountered. It’s very different being one owner trying to hold a builder accountable; builders know that if they don’t look after our clients, they jeopardise losing the whole group.
Building a new house or investing in an existing property requires thought around location, rental performance and long-term returns. The key difference between the two is that new properties are low maintenance, offer great tax depreciation, and you have influence in what you are building to match the current needs and wants of tenants now. To learn more about investing in property and tailoring a strategy to suit your situation, contact our friendly team today.