Buying established or building new - what's best for investors?
Buying established or building new - what's best for investors?
It’s a conundrum faced by many property investors, and making the right or wrong choice can make or break a portfolio. We take a look at the pros and cons of buying an existing home or building a new one for investment purposes.
Big tax benefits, generous government grants and a boatload of builder incentives have made a new build a compelling option for investors as much as owner occupiers in recent years.
But do those advantages outweigh the many benefits of investing in the certainty of an established home?
Building the case for established homes is buyer’s agent Lachlan Vidler, who told Australian Property Investor Magazine that he would never under any circumstance recommend any of his investor clients to build a new property.
And stepping in to bat for new builds is John Sheehan, the general manager for Australia’s biggest builder’s newly established investor-focused division, Invest by Metricon.
Mr Sheehan said anecdotal evidence from Metricon’s developer partners indicate investor interest in new houses had steadily risen over the past 12 months, now making up around 25 per cent of sales in greenfields land estates in Victoria.
He said Invest by Metricon aimed to de-risk a new build for investors, with home designs developed through consultation with rental agencies and tenant advocates to ensure it is fit for purpose.
“Because there are a lot of customers that have bought and built before and have made mistakes along the way, we want to make it really simple for investors,” Mr Sheehan said.
“There are a few things you look at when you are tailoring something more to an investor market.
“You want to know that the property maximises its rental returns, so if you are building in a certain area you find that the renters are looking for a certain type of property, so you want to make sure that you hit that mark.
“But more importantly, at Invest by Metricon we are doing full turnkey, affordable, rent ready home and land packages at a fixed price.
“The word turnkey is thrown around the building industry willy nilly, but for us when we say turnkey we are talking rent ready, so when you get the key, a tenant can move in straight away.”
Mr Sheehan said the biggest factors attracting investors to new housing were tax related - with investors attracted to new builds because of their higher tax offsets and depreciation benefits.
Investors who choose a new build can claim depreciation deductions for all eligible plant and equipment assets on the property, a tax benefit that was removed for investors who buy established in 2017.
Those who build new can also claim a deduction for the cost of the build over 40 years, whereas those that buy established can only claim the remaining years.
Mr Sheehan said building new came with the added benefit of drastically lower maintenance costs as compared to an existing property.
“Buying new you are de-risking the investment as well, because you are limiting all of the maintenance costs that you might see when you buy an established property,” Mr Sheehan said.
“The oven or air conditioning might be on its last legs, so by buying new you not only get the depreciation but you are also de-risking the chance of having any potential issues down the track.
“Having a lifetime builder’s warranty with a builder like Metricon is a big thing, if you have any structural issues.
“When you buy an established home you get building and pest inspections and whatnot, whereas with a builder’s warranty it gives you peace of mind that you’re buying something solid and you don’t have to worry about it.”
Mr Sheehan said there could be other benefits when it comes to renting out a new house as opposed to an older home, if an investor is careful in choosing location.
He said Metricon’s experience building new homes for investors in Melbourne’s south western suburb of Werribee had unearthed some interesting results.
“Werribee would have a part of the suburb that has been established and been around for 20, 30, 40 years, and then you have your newer pockets where developers like Lendlease, Peet and Risland have bought up parcels and are developing in these areas,” Mr Sheehan said.
“You will find that the newer homes command a higher rent than the homes in the older areas.
“If you partner up with the right developer and builder partner who can guide you towards the right estates and blocks of land, where you are buying pre-infrastructure, you have got more of a chance of capital growth as well.
“If you know that you are going to buy somewhere that’s going to have a train station coming up soon or a new shopping centre or a new school is about to open, you can often get into that estate at a better price than if it’s an established suburb when you are buying post-infrastructure.
“While it could be still good, it might not be as good as getting in there before that stuff gets built.”
But all those factors add up to nought for Mr Vidler, who is a passionate advocate for investing in the established housing market.
Mr Vidler, the founding director of Sydney-based buyer’s agency Atlas Property Group, said the biggest reason an investor should choose an existing home was value.
“The first, easiest and simplest reason to buy established is that you don’t have a developer’s margin,” Mr Vidler told API Magazine.
“Developers will typically add 10 to 15 per cent to the price, because they need to line their pockets too.
“Fair and below market prices can only be secured by purchasing existing properties.”
Also making a new build less attractive, according to Mr Vidler, is that the vast majority of house and land packages sold in Australia are in far flung locations on the outskirts of major cities.
“New builds are pretty well always in quite inferior locations, if you think about those big master planned communities, they’re not popping up in the middle of Brisbane or Sydney, it’s all on the outskirts,” he said.
“They are not around the big city centres or big employment hubs because there isn’t enough land available at a scale the big developers need.
“I would say avoid master planned communities at all costs, take a very pragmatic and methodical approach to analysing a more niche-type development or consider buying established.
“You’re not always going to get it right of course, but if you are erring on the side of caution and trying to decide between building new or buying established, I would be leaning towards established probably 9.9 times out of 10.”
More than anything, Mr Vidler said the biggest reason not to build new was capital growth, which he described as subdued for new builds as compared to an existing house, which are typically situated on larger blocks.
“The value is in the land, not the house itself,” he said.
“This is why house and land packages are sold on significantly smaller pieces of land with minimal front and back yards.
“If you go buy an established house on an 800sqm block, probably 600sqm of that is land, then it’s only 200sqm or 300sqm that the building is constructed on.
“Whereas if you flip it and buy a house and land package in a master planned community, they are often only on 450sqm blocks, the house takes up 300sqm of it and there is only an arm’s length of yard that goes around the edge of the property and that’s it.
“Developers know that the value is in the land so they carve it up as tightly as they possibly can.”
And while Mr Vidler acknowledged the sales pitch of a maintenance-free home could be compelling, he said buying a new house actually constrained an investor’s ability to make improvements.
“If my shower is leaking or there are things going wrong, not only will I have the opportunity to fix it, I can also improve it and raise the equity in that house,” he said.
“If you put in $1,000, you might get $5,000 back out of it, if it’s a strategic renovation.
“Whereas in the new houses, they are all cookie cutter, they all look the same, there is no way to make improvements and you’ve already paid a developer’s margin going in.
“That sort of house is realistically not going to have a dated look about it for at least 10 to 15 years, so you have no way to raise the equity yourself over that 10 to 15 years.
“In today’s market, it’s not so much of a big deal because everywhere is going bananas, but in a couple of years’ time when we go back to normal and some markets are up, some are just plodding along in neutral and some are down, the places that you can make changes to and improve will go up in value when the neighbours’ houses won’t.”