WHY NEW PROPERTY?
Published on October 09, 2015
Over the past 15 odd years I have purchased a number of investment properties, mainly new but a few second hand. So why would I buy a new property and not look for a second hand one which is likely to be cheaper? (In this instance I will disregard location and just compare new to second hand.)
1. Depreciation - A new property will give the maximum amount of depreciation and this makes it more tax effective. This is not just the 2.5% allowed on the building but also 'plant and equipment' (so carpets, blinds, stove, kitchen fixtures etc). The 'plant and equipment' will be depreciated over its effective life. This can be a significant amount of money and it will continue for many years.
Of course this is all tax deductible and is a 'non cash' deduction, meaning it’s a loss the tax office allow you when it has not actually taken any money out of your pocket.
Is this really significant? Last year my depreciation over the portfolio was $35,000. So that’s $35,000 that I claimed last year in depreciation alone. One of the main reasons I paid no tax last year.
2. Builders and manufacturers warranties - A new building gives you a structural warranty for 6 years. This includes water ingress (leaks) and this is a very common issue (ask me how I know! ) Obviously any structural issues on second hand properties older than 6 years are all yours to deal with and can be a major expense. A building report is essential on second hand property but may not always pick up every issue.
All appliances, air conditioning, stoves, dishwashers etc are covered as well by their own manufacturer’s warranty.
3. Tenants prefer a new property – in my experience, all things being equal a tenant will prefer a new property to an older one. You are likely to get a tenant sooner and at a better rent.
4. Standards change over time – New properties will have construction and fittings to the latest standards. With complexes of town houses and apartments you are likely to have better security as an example. An apartment I showed to a client recently had a video intercom to the front door so you could see who was asking to come in and choose whether or not to allow them access. But it also had a feature so that the system kept a photo of anyone buzzing for access when you were not home. So when you came back you could see who had called while you were away.
Not a major issue in itself but just a good example of how standards and people’s expectations change over time. It also applies to stone bench tops and soft close kitchen draws as another example. Becoming normal with new property but very unlikely with older ones.
5. Easier to manage - I can recall buying a second hand property in Annerley (5km out of the Brisbane CBD) about 12 years ago. At the time every other property in my portfolio I had acquired new. A few weeks after settlement I had a gas leak which required an emergency call out with a plumber. Three months later I had a hot water system fail and that cost another $1500 or so. After 12 months I had to set a contract with a pest company to install and maintain termite baits (termites which were not evident on the inspection a year earlier). The following year was a dry hot summer and a couple of large cracks opened up in the walls. I could go on but I am sure you get the idea. The growth on the property was good long term but gee whiz it was a lot of 'hard work'.
In summary I find that a new property will generally be more tax effective, more attractive to tenants, less expensive to maintain and much less drama to look after.
I freely admit that I am a 'lazy investor' and I primarily want my properties to be as 'hands off' as possible so I can do other things with my time. My plans in semi retirement do not include spending hours managing issues with investment property and I would expect many investors would feel the same way.
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I don't recall ever speaking with a wealthy person who didn't own investment property. In fact, most wealthy people will say that property played a big part of their wealth creating plan; that's certainly true in my case.
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Partnering with you for your investment success,
MRD Property Strategist.