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BATTLE OF THE DECADE – NEW VS EXISTING, WHICH ONE SHOULD I CHOOSE?

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BATTLE OF THE DECADE – NEW VS EXISTING, WHICH ONE SHOULD I CHOOSE?

Some of you may have a goal this year or the upcoming year to purchase an investment property, so I thought I’ll tackle a question that has been ongoing for a while – shall you buy new or existing?

 

Here is my 2 cents worth:
1. Disregard buying new or existing, buy a place with as much land component as possible
If you can, buy a house with land component. Over time land appreciates and building depreciates, so you would want to buy a place with as much land component as possible. For example, if I’ve stretched myself earlier and bought two houses in Sydney I probably would have gained another 400K easy equity (thanks to the latest Sydney boom!)

 

2. New house & land vs existing house. A couple of pros and cons I can think of (not extensive):

Pros of new H&L:
– Minimize on outgoing maintenance cost as everything are shiny and new
– Able to claim lots of depreciation for the first couple of years to offset your taxable income and extra money to go against mortgage :)
– Can usually achieve a higher rent which again helps cover the mortgage

 

Cons of new H&L:
– You’ll be paying a premium price as it’s a brand new finished product – so essentially you’ll be paying for developer’s profit
– Need to make sure there is rental demand as you could be up against hundreds (if not more!) of other new builds especially if it’s a new estate that’s been released
– Usually sits on a smaller/already divided block of land

 

Pros of existing house:
– Usually have more room to negotiate on price depending on the market and condition of the house – much easier to negotiate below market value
– Usually sits on a bigger land component and if the land has future subdivision potential – bingo!
– There is an opportunity to apply the technique of manufacturing equity via different methods – such as cosmetic reno like a lick of new paint, new carpets/floor boards to more major changes such as adding an additional bedroom or build out downstairs (if it’s two level). This can potentially improve the property value (and therefore potentially increase your equity if you get it re-valued), become more attractive to tenants and usually commands higher rent.

 

Cons of existing house:
– May require more maintenance fund such as fixing broken taps, or even bigger items such as replacing hot water tank or air conditioner
– Cannot claim as much depreciation in comparison with new build. For existing houses that are over 20 years there will be literally no depreciation
– Less attractive to tenants in comparison with new build (but can do cosmetic reno to improve this)


 

3. What about New vs Existing Apartments?

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Apartments are generally OK but depending on where. For example you wouldn’t want to buy an apartment in Brisbane as there simply isn’t that demand right now. Whereas apartments Sydney have been accepted as part of the city’s landscape, so you do need to understand what type of dwelling is in demand for each city and go from there.

Finance permitting, I would choose a house with land component over any apartments any day.

 

Pros of new apartment:
– Minimize on outgoing maintenance cost as everything are shiny and new
– Able to claim lots of depreciation for the first couple of years to offset your taxable income and extra money to go against mortgage :)
– Can usually achieve a higher rent which again helps cover the mortgage

 

Cons of new apartment:
– You’ll be paying a premium price as it’s a brand new finished product – so essentially you’ll be paying for developer’s profit
– Need to make sure there is rental demand as you could be up against hundreds (if not more!) of other new builds especially if it’s a new estate that’s been released. This is even worse for apartments as depending on the staged release they could come in as hundreds or even thousands around the neighbourhood area.
– Some high rises are built on main/busy roads, which means noise will definitely have an impact on how attractive your place will be for rent.

 

Pros of existing apartment:
– Usually have more room to negotiate on price depending on the market and condition of the house – much easier to negotiate below market value
– There is an opportunity to apply the technique of manufacturing equity via different methods though limited in comparison with what you can do with a house. However apartment limits to mostly cosmetic reno such as new paint, new carpets/floor boards etc. Low cost but high impact. This can potentially improve the property value (and therefore potentially increase your equity if you get it re-valued), become more attractive to tenants and usually commands higher rent.

 

Cons of existing apartment:
– May require more maintenance fund such as fixing broken taps, or even bigger items such as replacing hot water tank or air conditioner
– Cannot claim as much depreciation in comparison with new build. While apartments will still have building depreciation, as they age there will be literally very little depreciation after 20 to 30 years
– Less attractive to tenants in comparison with new build (but can do cosmetic reno to improve this)

 

So all in all the concept is quite similar to houses, however if I get the choice today I will always pick something with land component. Even townhouse/duplex has more land component than apartments, so I would go:
1. House with biggest land component, then
2. Duplex with as much land component as possible, then
3. Townhouse with as much land component as possible, then
4. As a last resort, apartments.

 

As usual, if you have any questions about any of the above content feel free to leave a comment or contact us directly.

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