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New vs established property

As a property investor, deciding whether to buy an established property via the second-hand market or to go down the new construction route is not always a simple choice.

And with so many differing views and opinions on the matter, it can be difficult to cut through the noise and find truly unbiased insight into the topic to determine which strategy is the right one for you.

With that in mind, given our extensive professional (and personal) experience with both strategies we’ve put together the following as an honest, warts and all exploration of the pros and cons of buying an established investment property versus going through the process of building a brand new one.

key factors

Here are some of the key factors to weigh up so you can determine which of these purchase strategies/experiences resonates with your personal investment objectives, financial circumstances, and risk profile.

THE NUMBERS

The big kicker that favours brand new property is the depreciation deductions that second-hand properties just can’t match.

Depreciation can have a significant impact on property cash-flow and push the investment into positive territory.

The caveat to this cash-flow nirvana is that it applies only once the property is completed and tenanted. The investor will need to cover the home loan repayments on the property whilst construction is taking place and no rental income is being generated.

The numbers

So it’s a case of short term pain for long term gain here. Established property on the other hand should generate a rental return from day 1, albeit without the depreciation edge.

THE DEPOSIT

When building a home from scratch, the investor pays stamp duty on the land component of the purchase only.

Stamp duty does not apply to the cost of construction.

So this can save the investor thousands of dollars in upfront costs and in turn stretch their deposit further if they choose to build rather than buy established. That said, as outlined above this ‘saving’ does come at a cost as the investor still needs to have the funds up their sleeve to cover monthly mortgage repayments on the investment as it’s being constructed.

The deposit

Overall the net result may leave the investor better off with a new property, but the determining metric here is the timeframe for construction and the total cost being out of pocket during this time.

THE BUYING EXPERIENCE

Whilst there will always be exception, generally speaking the process of buying any worthwhile established property will inevitably involve the tangible pressures of other buyers. 

Open homes, expedited due-diligence, auctions, multiple offers, being outbid, are all part of the standard albeit frenzied purchase experience.

Of course it can be very exciting and rewarding when you get a deal over the line, but by the same token it can also be very stressful getting there. 

The buying experience

Building new isn’t entirely different, as the process of securing an excellent block of land to build upon can also require a rapid fire approach when demand is high. But land purchase aside, the process of working with the builder to finalise your home design, facade, inclusions and so on can be done so at a much more leisurely pace. Without the pressures of other buyers you’re clear to take your time to get the property exactly how you want it.

FINANCE

Naturally there are a few more moving parts to the process of building a property from scratch when compared to buying an established one. Typically the process of newbuilds unfolds in two parts; land purchase followed by construction. This additional complexity does require a different approach with regards to the loan to finance the purchase along the way. But overall the end result will be more or less on par with the loan setup you’d expect for any established property purchase. 

Finance

There may be exceptions to this however. Self-managed superfund (SMSF) finance coming to mind here, as these types of loans typically preclude the two step nature of purchasing newly constructed properties.

THE TIME COMMITMENT

Under normal circumstances the time commitment for the process of buying an established property is relatively short. 

The lead time from offer acceptance through to handover can be done and dusted within as little 6 weeks or perhaps even less.

Going down the construction route on the other hand is an exercise in delayed gratification, with a time commitment to the finish line of up to 12 months or possibly even more.

The time commitment

During this time the investor will potentially be restricted with their investment movements as they ride out the construction phase and negotiate any build delays along the way. With that in mind, cash-flow contingency is key with new builds. Of course the trade-off of going through the new build process is an expectation that the finished product is superior to what can be found on the adjacent second hand property market.

WHAT YOU SEE IS WHAT YOU GET

One of the strengths of established property is that you’re getting a finished product. There’s no guesstimation required to envisage what the completed property will look like as there is with a yet to be built home. Whilst this can be reassuring for the buyer of an established property, it can also be somewhat limiting as the property attributes are predetermined. 

Sure, there are renovation and extension possibilities with any established property, but there will always be limitations around what can be done to any given home from a structural standpoint.

Newly constructed property on the other hand can be a blank canvas. It can be designed and customised from the ground up to suit the investor’s needs and local resale market to a tee.

PROPERTY HISTORY

Before committing to buy an established property, obviously you can see it, touch it, and appreciate that it’s weathered the test of time and still stands upright. It can be put through its paces by way of a hands-on professional building inspection so you can buy with confidence.

But unless you’re privy to the full ‘history’ of the home, three’s still a slight chance of problems lurking below the surface awaiting discovery down the track. Of course newly constructed property is not infallible in this regard either, and much faith in the builder is required.

Property history

On the other hand, there’s comfort knowing that the new property will be completed to contemporary construction codes and be backed by structural warranty at the very least.

EXTRA HOMEWORK ESSENTIAL

When it comes to the newly constructed property experience, it’s no secret that the entire process rides on the builder delivering on their promises. With these ‘make or break’ stakes, newly constructed property does demand an extra layer of hard nosed due-diligence for the investor to carry out.

Partnering with a builder with a rock solid financial position, impeccable reputation, and of course a verifiable track record for delivering an outstanding finished product in a timely fashion is essential. Of course all property purchases require thorough due-diligence, however newly constructed property in particular demands a level of trust in a third-party (i.e. builder) that established property perhaps does not.

Extra homework essential

LOCAL SUPPLY AND DEMAND

Simply put, the strategy of building new will work in some locations but not others. Same story with established property. Sometimes the pool of quality listings within the second hand market just isn’t there.

And there’s no point building a brand new property on some greenfield estate on the fringe when established properties in the heart of the action are ripe for the buying.

Conversely, why battle the hordes of frenzied owner occupier buyers paying too much for established properties when newly constructed property provides a better value proposition for the patient investor.

Local supply and demand

Depending on what’s going on in any given property market, local housing stock availability and resale demand will determine whether an established purchase or a new build is the best bang for buck.

APPLES VS ORANGES VS LEMONS

Let’s not beat around the bush here. A lot of brand new property sold through channels targeted at property investors simply doesn’t stack up and is overpriced. Outlandish commissions and inflated build prices can put the unfortunate investor on the wrong side of the buying equation and consequently in negative equity territory from day one.

We’ve all heard the stories that taint the industry and it’s no wonder that many investors are turned off. But this certainly doesn’t have to be the case with the right professional at your side. There are excellent newly constructed property investment opportunities to unearth, it just takes some patience and knowhow to find the truly great ones worthy of your precious investment dollars.

Apples vs oranges vs lemons

WHICH OPTION WINS?

It’s fair to say that there’s no clear cut winner between going down the established property route or the newly constructed one. Both offer certain advantages over the other, and by the same token both have a unique set of risks.

There are certainly no ‘one size fits all’ strategies that suit all property investors across the board at any given time along their investment journey. Just as no two property investors are the same, no two properties are created equal either regardless of whether they’re established or newly constructed.

There can be excellent money making machines in both categories, just as there can be property duds to be avoided at all costs within both categories too. On that basis, first and foremost any property investment opportunity absolutely must stand up on its own merits irrespective of whether it’s old or new.

THE NON-NEGOTIABLE CRITERIA

All of this non-negotiable criteria needs to be met without compromise.

  • Value proposition and growth potential
  • Location and proximity to amenities
  • Land and home size
  • Property type and layout
  • Quality of construction and level of finish
  • Aspect and curb appeal
  • Suitability for the local resale and rental markets

Whether the property is established or newly constructed should be a secondary consideration, the primary focus should be that the property itself ticks all of the boxes.

The key take away is that both can be equally rewarding, and both can have their place in a thriving property investment portfolio.

Ready to get started?

We’d love to discuss how we can help you add a new property to your property investment portfolio and whether new or established is best for you.
Contact us for a no-obligation chat to get the ball rolling!

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