What Are The Benefits Of Building A New House As An Investment Property, Rather Than Buying An Existing Home?
Beatles vs Stones. Holden vs Ford. Building New vs Buying Existing. Some topics are debated no end.
There are two passionate schools of thought when it comes to the question "Should I build a new home as an investment property, or buy an existing home?". Here, we round up the arguments so you can decide for yourself.
The Pros of Building an Investment Property
Building a new home as an investment property enables you to depreciate the costs of construction of the building, but also the fixtures and fittings inside the home. Because these items are brand new, you can claim maximum depreciation for them.
This can mean that a negatively geared property can shift to become positively geared. Or if the investment is positively geared it can save the amount of tax payable.
This aspect should of course be discussed in detail with your accountant for professional taxation advice related to your situation.
2. Guarantees and Warranties
New properties can be a relatively low risk way to invest in property given there are limited costs for unexpected repairs and maintenance.
A newly built home will have a builder's warranty for approximately 6 years. Additionally, appliances including dishwasher, stove, and oven will generally have an appliance warranty of 1, 3 or even 5 years.
This allows the investor to more easily forecast costs and anticipate cash flow.
3. Build An Investment Property To Match Rental Demand
When building a new home, you have the ability to decide what property you will take to the rental market. Researching and gaining an understanding of what is in demand for prospective quality tenants in your location enables you to build a brand new home which will be highly desirable on the market.
This can assist in maximising the rental return achievable for your property, reducing time vacant, and securing higher quality tenants.
4. Potential For Dual Occupancy
If the property is being newly built, you may have the ability to construct a home which could house more than one tenant, maximising your rental income. Alternatively, pending appropriate layout and size of land, there could be potential to subdivide or build a granny flat in future, even if this is not within scope straight away.
The Cons of Building an Investment Property
1. Ongoing Development In The Area Can Slow Growth
If the land you build on is in an estate where additional land releases will be coming to market in future, capital growth of your investment may be slow and desired rental return may be difficult to achieve. The reason being, as supply of rental properties continues to grow in the area, demand may not keep up. This results in slow growth (or worse - decrease) in rents over time.
It is also worth considering that in areas where future land releases are pending, your rental property may downstream be 5+ years old and competing with newly built homes.
2. Waiting For Completion of the Build For Income
Without the completed home, you don't have a property to generate rental income. This means that in addition to covering your own mortgage or rent ongoing, you need to cover the costs of the investment property build without any income being generated from it.
It is important to remember that even if you have secure a fixed price contract with your builder, there could be issues outside of your (or their) control which delay completion. You need to be sure that you have the ability to see the build through without unmanageable financial strain, should there be an unexpected delay.
3. Limited Locations to Invest
The locations you could invest to build your new investment property will be limited. A block of vacant land is very difficult to come by in existing established areas, and the costs of demolition of a building on an existing block may be prohibitive.
In Conclusion (if there is such a thing!)
There is no definitive answer to which method of property investment is better: building new or buying existing. The ideal approach will need to match your objectives, appetite for growth, ability to handle risk, and many other factors which vary greatly from person to person.
If you are looking to build a new investment property in Newcastle and the Hunter, contact us for an obligation-free discussion. We can put you in contact with one of our preferred referral partners best-suited to your needs.
Carnelian Property Management Newcastle NSW
We are a family-owned and run Newcastle real estate agent offering expert property management across Newcastle and Lake Macquarie.