New vs old investment property

A potentially profitable strategy available to you is to invest into an older property, not in peak condition, and add value to it. We’ve all seen or at least heard of the TV show called The Block.

This strategy is, however, higher risk that often requires greater capital input than what was initially thought. Fluctuations in markets has seen many property renovators invest their time and capital only to sell at a loss. In such cases it is the person who bought the renovated property, with all the depreciation, who was the real winner.

Shows like The Block can make what is a very difficult and risky exercise look like a ‘walk in the park’; but it is not.

A positive worthy of highlighting is that buying old and renovating to add value (i.e. increase equity) and improve income yields (i.e. rental income) is an opportunity unique to just one investment asset class - property.

The huge attraction to property investors investing into brand new property can be summed up in a word - certainty!

When you buy new you know what your costs are going to be (give or take a little). There is a structural warranty on the building and the appliances are covered by their own warranties. A new investment property will attract a better quality of tenant that is prepared to pay a higher rent.

By the time a brand new investment property needs to have its carpets replaced, a new coat of paint or a kitchen renovated; say in seven to 10 years time, there ought to be an increase in the value of the property (i.e. capital gain) resulting in an equity pool that could perhaps be accessed so that renovation costs didn’t have to come from cash flow.

MRD was established in May 2002 and in that 13-plus years we have witnessed many cases of property investors being caught by the spiralling costs associated with (but not budgeted for) an older property they invested into. If they had held the property since it was first built, one option could have been to refinance the property and draw out from equity the money needed to do the repairs. This is, of course, subject to them qualifying for the increased funding from a bank or non-bank lender.

By engaging a professional building inspector prior to agreeing to the purchase of a secondhand investment property you may be able to avoid nasty surprises, however, such an inspection cannot accurately report on everything - such as when a hot water system is likely to break down or the state of wiring behind walls etc.

It is a case of buyer beware and gathering the right information to allow you to make well informed and responsible decisions that will take you closer towards your wealth, lifestyle and retirement goals.


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