Buying new over old property has benefits for buyers

One of the many choices facing real estate investors, including those buying property within a self-managed super fund, is whether they should buy new or old property. Both have their advantages, and the expert view is divided.

If you want a set and forget investment then new is likely to be better for you. But if you want to add value to your property by renovating or redeveloping, old is probably the way to go. Renovating within a SMSF has its challenges which we will look at later.

Veteran real estate researcher Michael Matusik is a fan of new property for passive investors. Indeed it is the first of his 10 rules for "lock and leave" investors which he estimates is over 90% of the market.

"There are significant tax benefits in buying a new property versus an old one," says Matusik, who has honed his rules helping over 500 new residential projects come to fruition (see www.matusikmissive.com.au).

He uses a simple example to illustrate his point (see Doing the Sums). This shows the investor who buys the new property is significantly ahead at tax time. Using the same example, the investor who bought the new property would have a positive cash flow of about $54 a week if he or she earned an annual income of $75,000 from their regular job. The old property would cost the investor, earning the same amount, about $54 a week to hold. This can be a very important consideration if cash is tight.

And Matusik points out that independent cost analysis finds the likely costs to renovate a similar older dwelling to the same specifications as a new dwelling in the same area would be at least 20% more than the resale price of the older property. Other pluses of new property is it eats up less time and money in maintenance, it has lower vacancy rates because more people prefer living in new buildings, and the construction is warranted for a certain period.

Buyers agent Patrick Bright, principal of EPS Property Search, says he prefers buying properties with renovation potential as investments for his clients. But of course it does depend on the location and client preferences.

"We then do the works taking the property to its highest and best use, manufacturing capital gains and increasing rental returns along the way," Bright says. The trick is to neither spend too much (over-capitalise) or too little (under-capitalise). "It's a fine line and balance to get it right but when you do it's very profitable," he says.

Several other reasons have prevented Bright from buying brand-new property for his clients or himself over the past few years, including the difficulty of securing a genuine discount on new quality developments, increased problems and expense of holding builders responsible for shoddy work, and dependence on capital growth for increased rental returns.

"You need a genuine discount to buy new as brand-new property is a little like buying a brand-new car in that its value tends to drop in the first year or two of purchase. However, unlike a car it then goes up." And now that the focus of government grants is on new houses and apartments, real estate developers have enough interest and so they no longer have to offer discounts, Bright says.

The argument that the tax benefits of depreciation are a great reason to buy new is narrow and flawed, Bright says, as they are only better in the first five years. Quantity surveyor and investor Tyron Hyde agrees the choice of an investment should never be driven just by tax benefits.

That's in spite of the fact that his company Washington Brown prepares real estate depreciation schedules for investors so they can claim their tax breaks. Hyde says that while there is undoubtedly more depreciation on brand-new real estate, he likes to buy properties 3-4 years old. "I still get a lot of depreciation, but I can see what the re-sale price of other properties in the development go for."

Other benefits of older properties can include lower price tags compared with new property in the same area, and higher gross rental yields. If you are considering property partly funded by borrowings through your SMSF, there are some additional rules that might sway you towards newer real estate.

Basically you cannot borrow to improve your SMSF property, though you can to maintain it, so this rules out "renovator specials" for SMSFs taking out limited recourse loans to buy their property. Even if you use other SMSF funds to improve the building which is subject to borrowing, a breach of the rules occurs where the improvements you make change the character of the property, such as demolishing a house and replacing it with three strata units.

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