The big decision for investors: Should I buy a new or established property?
Buying an investment property is a big, life-changing decision. There is a wide choice including location, type, layout, amenity, price, yield, timeframes, etc. This is in addition to whether you want to buy an established or new property. Both options have their own set of advantages and drawbacks, making the choice a deeply personal one that hinges on individual preferences, legal status, financial circumstances, and long-term goals.
What are the rules?
Foreign buyers can only buy new properties, so this simplifies the decision considerably to just an off-the-plan or newly built (but not sold by the developer yet) house and land package.
However, we often have a situation with foreign buyers where they or one of their close relatives have Permanent Residency (or even Citizenship) in Australia. It is often possible, or even advantageous, to be able to widen the property choice to all the established properties on the market that aren’t new.
So, what’s the difference between established vs new properties?
An established house often carries a unique charm, and may even have some historic features, are usually on larger blocks, with established gardens, good looking streetscapes, established neighbourhood, close to existing transport, and within highly sought after school zones.
However, established properties may suffer from ‘less house/ more garden’ which means more maintenance – for an investment this could lead to the tenant either not wanting the property or not looking after it thoroughly.
Also, older established properties may not be compliant with new standards and/or need replacement of wiring/plumbing/appliances (e.g., air con, gas heater, hot water service) which could cost the new owner a lot in unexpected costs. They may also have an unappealing floor plan or orientation, so they can’t maximise the space and have very dark cold rooms. Lastly, it is more difficult and expensive to customise these, apart for minor cosmetic changes (e.g., painting, or new carpets).
However, the most important thing to consider is the risk of something being wrong with the property – even if you remembered to do a building inspection, if something is missed or happens later, then you are liable (including any previous non-approved building works).
On the other hand, building a new house (whether off-the plan, or more so ‘house and land’) allows for complete customization. From the layout to the finishing touches, every aspect of the house can be tailored to the buyer’s desires and budget. An important resource that investors can draw upon is the local property manager, and asking what tenants are looking for (and willing to pay more and/or stay longer for). This may include fly screens, air conditioning, solar panels with heat pump hot water, electric car charging points, etc.
These additions/changes can be incorporated into the initial build with no wastage (e.g., not having to scrap a new gas hot water system and replace with a solar heat pump hot water system). Also, a major benefit of this is that rather than paying 100% cash after the build for the changes, it can be incorporated into the housing loan with the bank lending up to 85% of the cost. Tenants also prefer new homes for several reasons including low maintenance, open plan layout, lower costs due to being built to new & higher standards for insulation & efficiency. Lastly, and most importantly, a new build is covered by a building warranty. The structural component of this is typically just under 7 years, certain Tick built homes have a 20-year structural warranty.
Another major benefit of new is that there are often multiple blocks of land available within a stage for sale at the same time. The similar sized blocks of land usually cost the same in $/m2 for standard blocks in the same stage – so picking a block that is better is also an important choice that can be available with a new property.
In addition to this, in master planned estates, good developers will publish compulsory design guidelines, which are usually much stricter than local government/ council requirements. In established areas there are only basic council requirements and houses of completely different sizes, types, colour schemes. All these houses sit beside each other and detract from the streetscape – thus lowering overall values. In new master planned estates, they have common elements and common colour schemes leading to appealing streetscapes. Another, not commonly advertised feature of this streetscape engineering, is that within the design guidelines a façade usually can’t be located with 2-4 houses of an existing one, so getting in early often gives the buyer more choice too!
The drawbacks for new lies in the time and effort required to make countless decisions and oversee the construction process. However, using a quality builder and a ‘turn-key’ building contract, you can make all your decisions upfront, and they will deliver the end product ready to go. So, you just have to ‘turn the key’ as everything is done for you. However, in the current environment, the risk of a builder going bankrupt during construction is the highest it’s ever been, due to difficulty getting materials & cost escalations, weather related delays, delays & cost increases for skilled tradespeople, approval delays, etc. This is why it is so important to have a fixed price contract (which includes or limits site costs) from a reputable builder with strong financial backing.
On an established property, a buyer pays stamp duty on the full price of the property (with foreign buyers paying an additional surcharge on top), and in some cases depending on the age of the property there may be hidden repair costs and the need for updates which can add significantly to the purchase price. This can make a seemingly cheaper established property option more expensive in the long run.
A big advantage of a new House and Land package (but not newly built or off-the-plan) is the ability to have ‘split contracts’ i.e., a land contract and a separate build contract. The buyer pays significantly less stamp duty (and foreign buyer’s surcharge) than if they were levied on the total of the land plus the building contracts. Simply put, the buyer is not charged stamp duty on the building contract, as they are building a house on a block of land they already own. However, the downside is that they are paying interest on the drawn down amount from the bank for each stage as the build progresses, which can take 6-12 months.
Most financiers, including banks value House and Land differently to an established or off-the-plan property, which can have a big impact on the amount of saving you may need. For an established or off-the-plan property valuation (and hence what they will lend up to 80-85% against) they will look at recent sales of similar properties in the area – and if one was particularly low (e.g., a mortgagee in procession ‘fire’ sale), then they will value the property very conservatively and only lend 80-85% against it – requiring a lot of savings contribution. However, for house and land valuation, they will typically look at what similar sized blocks of land are selling for at the moment and add the build contract price (if it seems reasonable) to it and then lend 80-85% against this total. Since land developers never discount blocks of land, this leads to a more stable and predicable valuation, so the buyer often puts in a lower amount of savings.
Established properties offer a faster path to a property being available to rent and hence earn cashflow. Whether potential tenants wish to rent and for how much is a different story – as the layout, property age, maintenance requirements, energy efficiency all may lead to lower desirability and hence lower rental yields. Plus, there might be no deprecation available on the property to the landlord to lower their taxable income.
New properties are often highly desired by tenants, who may even be willing to pay a premium to the market for a property with desirable modern features and inclusions (such as voice-controlled home automation, electric vehicle fast charging, or resident only amenity within the estate, etc). Plus, the property and its fixtures and fitting may all be eligible for deprecation lowering the tax payable by the owner.
Final verdict: What’s Right for You?
Established properties often have charm, and the advantage of seeing exactly what you get – but this also means that you are competing with more people (especially at emotionally charged auctions). However for most foreign buyers and especially for any investor, a new property has many advantages especially the building warranty and the depreciation. Which ever path you take, owning investment property is a journey that will take your life on a different path.
Disclaimer: This article is for general information purposes only and should not be taken as advice. Always seek professional advice from suitably qualified professionals familiar with your situation and goals.
Steven Molnar is Head of Research and Education for Resimax group. With over 25+ years in property and finance in Australia and internationally, he brings a unique perspective to his blogs with interesting property insights.