As the economy looks set to grow in the wake of coronavirus you may well be looking to invest in property, either for the first time, or to expand your portfolio. One of the first questions you may be considering is whether you should buy new build or a second-hand property? The reality is, there are good reasons to purchase either and it will likely be dictated by your personal scenario and the point in the market cycle at which you are purchasing. Only you can make the decision as to what makes the most sense for you. However, for most first-time investors and those buying offshore property for investment, buying new build makes more sense.
Why buy New Build?
Maintenance Costs
Maintenance costs are the major reasons most property investors buy new build property. Simply because everything is new, it is likely to be several years before any significant maintenance or replacement is required.
Older properties generally have higher costs associated with maintenance. They can have older electrical wiring, plumbing, boilers and other services – which all require ongoing maintenance. Additionally, kitchens and bathrooms can date quickly.
Replacing and or maintaining these items can be very costly and difficult to manage if you’re an offshore investor.
Tax Advantages
Tax is one of the other major reasons that property investors are more likely to favour new build property over second-hand. Quite simply there are more tax advantages for a new build over and above buying older stock. The reason for this? Most countries have a shortage of new housing and they are more likely to look favourably on investors who are buying new build property and helping to create additional housing stock.
For example:
- Australia – property investors you have the ability to claim a depreciation deduction against their income tax expenses. While almost all residential property investors are able to claim depreciation, new legislation introduced in 2017 means that investors in new build property will usually be able to claim higher deductions.
- New Zealand – laws have recently been changed in New Zealand which prevent landlords from being able to offset mortgage interest expenses against rental income. However, these rules will not extend to new build property.
Easier to Rent
From a rental perspective, a new build makes a lot of sense. Tenants want to rent a clean and modern property and will generally pay slightly more rent for newer up to date property. Because they know they are unlikely to have a lot of hassle trying to chase down managing agents or landlords to deal with repairs.
So from a landlords perspective, new build property is likely to bring in more rental each week simply because it is newer. Additionally, it is likely to rent quicker meaning lower vacancy periods and a better return.
Legal Compliance
With new build property, you are most likely buying a property where a huge amount of legal due diligence has taken place when purchasing the land and obtaining planning permission. It is also likely to have a modern long-leasehold agreement in place together with a professional management regime for the way in which the service charge is administered.
Energy Efficiency
New build properties are far more energy-efficient and this will appeal to potential tenants as their running costs are lower. However, more importantly, energy efficiency is likely to be an area of focus for governments in the future and you are less likely to have to retrofit your property in the future. This is likely to become an area of increased government focus in the future.
When second-hand property might make more sense?
Even with all of the advantages of new build property, there may be some scenarios where it makes sense to buy second-hand property over new.
Replacement value
One of the best reasons for you to purchase second-hand property is if the replacement value is more than the potential purchase cost, meaning it would cost more to build a new property than to buy it at today’s price.
This typically happens with older houses when the market is soft or if a particular type of property is very unpopular or difficult to purchase.
When the New Build Premium is too High
It makes sense that there is a premium to pay for new build property. However, there will be points in the market cycle when it does not make sense to buy new-build property because the new build premium is too high and the pricing is just too steep. At this point in the cycle, it can make sense to buy second-hand property if you are desperate to purchase, but my advice is advice simple – do not buy at this time.
Ability to Add Value
There will be situations where you can add value to the property by extending the property or buying subdividing the land on which it sits on. In these, scenarios it certainly makes sense to buy second-hand, assuming that you are not overpaying for the future ability to do this. Additionally, the great thing about this situation is there is no reason why you need to do this straight away. You can wait until some point in the future and do the work then.
However, this will only be practical in some circumstances. If you’re investing property overseas, it will be very hard to coordinate these works from a distance.
Second-hand Property is Cheaper
Second-hand property is cheaper, so if your budget is very tight and you just want to get on the property ladder, a second-hand property can be a good option. However, just remember there is the potential for the benefit to be quickly eroded through maintenance costs.
Less Unknown Information
There is obviously, far less unknown information about an existing property, you’ll be able to apply for a mortgage straight away and have a far better idea of what it will rent for.
On balance, for most offshore property investors, purchasing new build property makes the most sense. But before you make any property investment decision, make sure you analyse the investment opportunity in full, including depreciating the asset (if you’re able to).
