Peter - client since 2009
Having a financial adviser is very much about building a relationship. It is the first time I have been motivated again, financially. I am confident in what you are saying to me.
- Habits of the World's Frugal Billionaires
- How much yield is good when investing in property?
- Dealing with Redundancy and the role that Termination Payments Play
- What's Your Financial Quotient (FQ)?
- How does the aspect (which way a property faces) affect the potential value of an investment property?
Should I buy an Old Property or a New (off the plan) Property?
You and I buy a renovator's delight, pay for land value, demolish, build a brand new house on it, and make lots of money. That's being entrepreneurial, and it makes for great dinner party conversation.
Buying a new property, holding it with minimal capital expenditure and forgetting about it for 10 years may not make such great conversation, but it can be a much better way for someone with a day job to invest intelligently.
Not everyone has the time or desire to spend endless weekends renovating a property. If you've got the time, knowledge and dedication, then you're probably wise to stay away from new, but many people either can't or don't want to spend their weekends renovating. If you're one of those people, it's worth considering why considering a new property can be a much smarter, cheaper and more carefree way of investing in real estate.
Let's begin by understanding what goes into the value of a property. When you pay half a million dollars for a property you are buying two things: land, or space, and bricks and mortar i.e. physical structure. The land itself is an appreciating component, assuming demand is fuelled by immigration and other factors. It only becomes more valuable with time. The physical structure, on the other hand, only becomes less valuable with time. It's depreciating. So property has two components: land value and physical structure, one goes up in price and one goes down.
The extreme example is buying something and not spending a cent on it for 25 years. You can imagine how deteriorated it would be. When you sell the property at the end all you are getting back is the land value. But this is not typically what happens.
In reality what happens is the structure deteriorates, and then gets upgraded with a new bathroom, a new kitchen, new floors, and so on. One thing that does not get measured in real estate is the spending involved in keeping a place up to scratch, known as capital expenditure. This is a key concept, because it's a significant amount of money and it's not mentioned or measured in any real estate data.
When that half million dollar property becomes a million dollars, what isn't mentioned is the amount of capital expenditure that went in during the time someone owned it.
In property though, billions of dollars and countless hours are spent, every year, on improving the structure of investment properties, and it is a number that isn't measured or factored in when looking at growth. When median house prices are measured, and their growth is documented, capital expenditure is not mentioned, but it should be.
The costs of owning an old property are big, yet an estimated 90% of people who go out buy an investment property without getting any assistance will buy an old property. Why is this the case? One can only assume that when it comes to choosing old versus new, people associate new with costing more, but not everything is as it seems.
Because of the extra tax benefits you can claim the ongoing holding cost is about three times the cost to own an old property as it would be for a new property of the same value. If you're looking for an investment property around the $500,000 mark, it might cost you $15,000 per year to run if it's old, and $5,000 per year to run if it's new.
If you were an entrepreneur you would never consider new because you?d be looking for the opportunity to add value. But as a real estate investor who wants an ?invest and forget? strategy, new makes sense. Old properties cost more to own, and often require more time and effort to own.
Buying new gives you a property with no capital expenditure for as long as possible. It might be five or six years, sometimes even 10 years if you're lucky, before you really start having to shell out $20,000 for a new kitchen or bathroom.
A new property also requires minimal or no investment of time, and no calls from real estate agents about the boiler or the pluming. If you select well, and you're able to buy a new, rentable property with good yield from day one, and it costs you next to nothing to hold you can forget you even have it, and that's the value you need to consider in buying new.