New properties are attractive to passive investors who are time-poor.
Strategy suit time-poor passive investors
Time-poor passive investors like properties that requires very little effort on their behalf. There is usually lower maintenance. The builder or builder’s insurance should cover the cost when there are defects after completion.
New properties appeal to tenants
New properties have an appeal to tenants. They may have lots of light and space. These properties may come with other amenities such as swimming pool and gym, especially in new apartment complexes.
New properties may have lower capital growth
Newer properties tend to achieve a higher amount of rental income and lower capital growth.
Tenants with good incomes are often prepared to pay higher rent for new properties. This is so if they are situated close to their work, amenities or transport.
Good tax depreciation
New properties offer higher or longer depreciation benefits from fixtures, fittings and capital works. It is possible for investors to use these tax benefits to assist with their monthly cost.
Beware of building issues
New properties generally come with a building warranty period of six years and six months. The builder is obligated to fix any defects found within this period.
The main disadvantage of purchasing new properties is that the cost to purchase may be higher than an old property as developers have profit margins of up to 20 percent.
Beware of inflated prices
The price for new properties may have been significantly inflated with promises of rental guarantee or buy-back. A rental guarantee is a promise to pay an agreed sum for an agreed term. It is not a promise to get a tenant, nor a guarantee that the property can attract the amount of rental income specified in the guarantee. A rental guarantee is funded by adding a few thousand to the purchase price. Ask for a discount if you do not plan to take up the rental guarantee.
If investors have paid an inflated purchase price for the property, it may take longer to realise capital growth.
Beware that the retail price of new houses can include many inclusions that will add-up from the basic price, which could be 1.5 to 2 times the initial quoted price. Builders will hook first-timers with a low base pricing without fittings and inclusions and sell all the extras based on emotional appeal.
Capital growth impacted
Capital growth is affected when properties are sold at the same time in a brand new development.
A few hasty re-sales can affect the values of all the properties in the immediate area.
This can have an impact if you are trying to sell a property or if you are trying to release equity from the property.
Market value of your property is impacted when other properties are sold at lower prices.
Beware of emotional purchase
People purchasing new properties may make emotional rather than business decisions. This is so when they have fallen in love with the look of the place and how it makes them feel.
Note that you are not staying there; tenants do. Think about your potential tenant’s requirements and needs, not yours.
Not much room for value adding
Brand new properties do not allow much room to add value. The developer has done all work. Unless an investor has purchased the property at well under market value, they will need to wait for natural capital growth to occur.
Changes to the Australian Building Code mean that new properties must meet stringent energy efficiency requirements. They are fitted with some of the most power-saving appliances and gas, water and electricity systems on the market, which is a boon for owner occupants and future tenants alike.
Beware of new homes in new housing estates
Land appreciates in value. Investors buying in new outer suburban or fringe housing estates may have the mistaken belief that properties are cheaper there.
Residents here have less disposable income compared with people living in inner city suburbs. While they may be great places to live and bring up a family, new or outer suburbs may not be good location to invest. One of the big factors that enhance capital growth is land scarcity. This is something missing in outer suburbs because there is vast vacant land available for future development.
Land release controlled by developers
Developers tightly control future land releases. They control the price and supply, thereby stimulating capital growth over time.
Many cookie-cutter properties may look the same. There’s another new development near by with similar houses and more land.
Look for unique designs or points of difference that are cost-effective. They have to appeal emotionally to owner-occupiers and valuers.