New or nearly new?

Property selection is so much easier today than, say, ten or more years ago. We have internet search engines, online property portals, as well as other research sites to check vacancy rates and prior sales data and much more. However, instead of making things easier, some argue that the choice of properties is now overwhelming as you can search for and research thousands of properties around Australia at any one time.

Narrowing your search down

One decision that some investors make to refine their search is to rule out any property that is not new or nearly new. This definitely narrows down your search and there are sound reasons for this.

  1. Depreciation – Property that is new or nearly new can be depreciated, as can the fixtures and fittings inside the property. The newer the property the higher the depreciation allowances that you can offset against your taxable income. On a two-year old property, purchased for $400,000, you may be entitled to up to more than $10,000 in depreciation deductions a year. This is for non-cash items, so you receive this additional income without having to spend any money!
  2. Lower maintenance costs – Newer properties cost less to maintain. Unless you are really unlucky, the hot water unit is not going to break down, fly screens won’t need replacing and electronic garage doors, etc. will not need to be repaired. Compare this with an older property which needs higher ongoing maintenance as little problems keep coming up regularly. On top of this, you are faced with deciding whether to upgrade the kitchen or bathroom or give the property a fresh coat of paint to attract a higher rent.
  3. Covered by builder’s insurance New and nearly new properties are also covered by the builder’s warranty, so if in the unlikely event there are problems that need fixing, you will not have to pay for them.

Should you ONLY focus on near-new or brand new property?

A popular view amongst new investors is that it would be best to buy old and renovate and thereby add instant equity. There is nothing wrong with this strategy if:

  • You have plenty of time on your hands.
  • You have extensive experience as a builder/handyman.
  • You have discretionary funds available to cope with unexpected extra work you did not anticipate when planning the renovation. You never know what defect will surface!
  • You can extract much better rent compared to a new property, to compensate for the lack of depreciation.

There are no real short-cuts to property selection. It will depend on your own circumstances and the level of research and due diligence that you are prepared to put in. Of course, you can seek professional help, which would be a better strategy than ruling property out ‘en masse’ because it doesn’t meet one of your selection criteria. I personally look at property as a financial product and therefore opt for a buy-new-and-hold strategy.