Let’s take a look at the age-old property question: is it better to build with a buyer-established property? One way to attack this question is in consideration of the property’s depreciation.
Do you have to buy new to get the maximum depreciation? People may not realise that a property which is a couple of years old doesn’t have a big difference in its depreciation than a brand new one.
Construction depreciation of 2.5% is exactly the same every year for 40 years. The fixtures and fittings in that first year or two don’t really age that much so there is not a big difference in the depreciation that you can claim.
From an investor’s point of view, if they are buying a brand new property, they’re more than likely paying a little more than they could pay for the same property if it was two or three years old, but they’ll get the same rental yield as the older property.
Another consideration is that new properties are often built in areas where developers are releasing a lot of new stock, and it can take a while for them to start to gain any increase in value.
Another consideration is that it is hard to establish a new property’s valuation when there is substantial stock being developed within that suburb. When people buy a brand new property, which could be either off the plan or just newly built, the buyers pay what the developers are asking them to pay. This occurs because most people purchasing a new home are buying it with a view to living in it, and are often happy to pay a premium to get the kind of things they want in a home or to get the lifestyle that they are after.
For investors, though, the extra premium paid to get a brand new property is often not seen returned to them in increased yield. They end up waiting for several years for the market to work out what their property is really worth, and the market can stay quite flat for quite a few years.
Another reason to invest in more established properties is that they are going to be built in established areas where there is well-established infrastructure. Tenants like to be in areas where there are good schools and where there are lots of shops and transport. Often infrastructure will not become established for many years until a substantial number of houses have been built.
When you buy a property that’s a couple of years old, it’s already settled, you know how it’s sitting, you know whether it’s going to have cracks. There are many things you can already find out about a property.
Most houses last for more than 60 years, maybe even up to 100 years, therefore, there’s not that big of a difference in the big scheme of things between the brand new one and the five-year-old home. In ten years’ time, a five- and a ten-year-old property don’t look too much different.