Which is a better investment an Existing Property or a New Build ?

With the recent tax changes, I have received a number of enquiries from clients questioning which is a better investment, an existing or a new property?

By removing interest as a tax-deductible expense and increasing the bright line test on existing property purchased as an investment, the economics of property investment have changed. Whilst these tax changes do make New Builds more attractive, investing in brand new properties is not for everyone or all investors. Investors who heavily renovate properties or who engage in flips can’t run these strategies effectively on New Builds. But some long-term buy and hold investors who previously invested in existing properties will now find their previous strategy may be less profitable. These investors may find that New Builds with their significant tax advantages will better suit their property portfolios from now on.

New Builds require a lower deposit.

Under the new Reserve Bank LVR rules trading banks will require an investor purchasing a New Build to have a 20% deposit as compared to a 40% deposit required for existing property. Based on a $800,000 purchase price that’s an extra $160,000!

Investors with a limited amount of equity can make their money go further when investing in New Builds.

Note: there are some non-bank lenders who still only require a 20% deposit on existing investment property.

New Builds will have a better cash flow

The removal of interest tax deductibility for existing property will result in increased tax bills for some investors. An investor with a $500,000 mortgage will pay approximately $6,000 extra in tax a year by the time the changes are fully implemented.

New Builds less affected by interest rate rises

Interest is tax deductible expense for a New Build but not for an existing property. Thus, the effect of any increase in interest rates is reduced by the investors tax rate for a New Build. In practice this means New Builds have a cheaper interest rate than existing properties. As interest rates start to rise, the difference in profitability between New Builds and existing properties starts to grow.

New Build properties meet all of the current Healthy Homes rules

As the property is brand new it must meet all of the current building regulations. If you are considering purchasing an existing property, you will need to allow for any improvement that may be required to bring the property up to standard.

New Builds can be more expensive.

The up-front cost of a New Build versus an existing property can be higher and may not suit every investors budget. However, you do need to think in terms of the total cost over the length of time you will own the property. One of the biggest costs investors face with existing properties is long-term capital maintenance. This is when things like the roof or a hot water cylinder needs replacing or electrical work needs to be redone. Because everything within a recently built property is brand new, investors avoid these one-off and unexpected costs. That comparatively decreases investors’ risk and medium-term maintenance costs.

New Builds tend to be more attractive to tenants

Because the property is new and “shiny” these properties are more attractive for tenants. This can mean that investors secure longer-term tenants, decreasing vacancy and the potential for lost rent in the downtime between one tenant moving out and another moving in. As the rent will be higher to compensate for the higher purchase price the tenants tend to be of higher quality, who will pay the rent on time, look after the property and who can also afford to pay future rent increases.

New Builds do not have any renovation or subdivision potential.

An “active” property investor who focuses on increasing the property’s value by undertaking significant renovations should not invest in New Builds as you would tend to over capitalise. New Builds are also built on smaller already sub divided sections so there is no opportunity to add value by changing the nature of the property title.

Most New Builds tend to be purchased off of the plans.

Whilst signing up for a property now that may not be completed for 12 to 18 months does give you the benefit of any capital gain during the construction period, it does also come with a “finance risk”. That is, any bank approval for finance has a time limit and may expire before construction has started. This will require you to reapply for your finance. If your circumstances have changed, or the bank changes their lending criteria, or as we have seen recently the Reserve Bank changes the rules, you may not be able to obtain finance to complete the New Build.

Who are New Builds the right fit for?

New Builds tend to be best sorted to people who see themselves as an “Investor” rather than a “Landlord”. They tend to want a hands-off, straightforward investment with low-maintenance and who have long-term buy and hold investment strategy.