Should your first investment property be brand new or already lived in?
Looking to buy a first investment property? There are plenty of decisions to make, but today we’ll start with the big one. Should you buy an established property or one that’s ‘off the plan’?
There are pros and cons to both. An off plan property comes with significant tax benefits that a secondhand property won’t give you, lowering your taxable income and making it more likely for your investment to be positively geared, putting dollars in your pocket each week. But they are generally apartments that have slightly slower capital growth than freestanding homes.
So it comes down to your strategy—are you playing a long term or short term game?
If you’re not sure if off plan or established is for you here are a few questions to get you thinking.
How long do you need to get your finances sorted?
With off plan purchases, you have a lot longer to come up with the full deposit. You generally need a 5% deposit to secure the property (although different developers might offer special deals as low as $1000) and then you don’t need to come up with the rest of the deposit until settlement.
Depending on where in the construction process you are, that can mean you have another two years to save. For investors, that means you can keep your money in other investments for longer or have more time to sell an existing property without bridging finance.
“Banks are taking longer to approve finance applications these days, especially for investors. All financial institutions look at investment loans through the microscope, which takes time. Off plan purchases mean you’ve got longer to get your paperwork in order so you can shop around for the best deal,” says Mark Wolens of Independent Woden.
If you’re using the equity in your existing home, you may not need much of a deposit for your first investment property. An obligation-free check in with a mortgage broker such as Clarity Financial can give you an idea of how much cash you need to save.
Should you lock in a price early?
In a rising market, off plan purchases offer investors a chance to make a profit even before they’ve outlaid any cash. Let’s say you’re buying a $500,000 apartment with a $50,000 deposit. Fast forward two years, when settlement is due, and the property could be worth $550,000. You locked in the original price of $500,000, meaning you’ve already made back the cost of your deposit.
If your investment strategy involves buying and selling for a profit, off plan can be ideal.
Of course, it’s possible that prices will go down during this time instead. While overall the Canberra market has posted a profit even in the past few tumultuous years, there’s never a guarantee that prices will always go up. Be prepared for this and decide whether it’s a risk you’re willing to take.
“There’s definitely a sense of security that comes with established property,” says Mark. “You know that the price you’re paying is the current market price. But property prices go up and down all the time anyway: if you’re not planning on a quick sale soon after you’ve purchased, it really doesn’t matter.”
Are the tax advantages of newer properties a priority?
As a property investor, you can deduct the costs of owning your investment property from your taxable income. Most people know that you can deduct ongoing costs like mortgage repayments and strata fees, but did you know that you can also deduct the decline in value of the building and its contents? This is called depreciation, and it recognises that your property, and the items inside it, decrease in value as they age.
There are two main types of depreciation: capital works and plant and equipment. Both of these are available to off plan and established properties, but recent changes to the law mean that new properties offer much greater scope for deduction as depreciation on second-hand fixtures such as carpet and appliances can’t be claimed.
“While owners of any income producing property can claim depreciation, building or buying a brand new property for investment purposes will usually provide higher depreciation deductions”, says Bradley Beer, Managing Director at BMT Tax Depreciation. “They won’t get caught by the legislation changes passed in 2017, which stop investors from claiming on second hand plant, and they can claim a deduction for the entire cost of the building structure for forty years.”
The capital works allowance covers the decline in value of the structure and fixed items. That might include your roof, balcony, kitchen or bathroom.
You can claim capital works deductions for off plan purchases and established property. They’re claimable at 2.5% per year for the first forty years after construction, so the newer the better. If it was built in 1990, for example, you can claim for the next 10 years. If it’s brand new, you can still be enjoying the deduction in 2060.
Jess and Sally have just settled on an off plan apartment costing $500,000 which they will be renting out. Their annual capital works deduction is 2.5% of $500,00, or $12,500. Each of them can claim half of this amount against their taxable income, giving them both a deduction of $6,250 every year.]
The plant and equipment deduction can be claimed on anything that can be easily removed from the property, including carpets, blinds, air conditioners or kitchen appliances.
Since 2017, only new plant and equipment can be claimed. If you buy an established property and completely renovate the kitchen, you can claim those appliances. If you don’t make improvements, the plant and equipment are considered second hand (even if the previous owner has done extensive renovations to sell it to you) and not claimable.
For off plan properties, all the plant and equipment is claimable.
Between the capital works deduction and the plant and equipment deduction, the difference can be significant, as the following table demonstrates.
Brad explains “Over five years, the new property will allow the owner to claim almost double the amount of the existing property. While the second-hand property still offers lucrative deductions for the owner, there are clear benefits to owning a new investment property.”
If you buy an off plan strata title property, you can also claim a proportion of the depreciation on common property, including fencing, roofs and common areas like a pool, gym or lobby.
Do you want to customise the property?
If you’re buying off plan, you can customise your property. If you get in early enough, you can choose between a more desirable (and pricier) corner apartment or a more affordable one in the middle, as well as size and layout options. Once you’ve signed on the dotted line, you can usually also select your finishes and fittings.
“The developer will offer a range of options and colour palettes so you can really make it your own,” says Mark. Those include kitchen cabinetry, flooring options and blinds.
However, you might find that the finished product isn’t exactly what you’d pictured. “Sometimes developers will change finishes or tweak the layout slightly during the construction process. That might be because they’ve found that the plans need a slight adjustment, or they’ve changed suppliers. Your contract limits how much they can change, but it’s best to be prepared that there may be some tweaks”.
When you’re buying an established property, none of this applies. What you see really is what you get. You may prefer to be able to see the finished product ahead of time rather than customising it to suit.
What's your strategy? Are you buying to sell?
Different investors have different investment strategies. If you’re buying an investment property to sell, timing is everything.
Buying an established property with the intent of selling it on quickly is known as ‘flipping’. Flippers often look for fixer-uppers which can be renovated fast and sold for a profit. But while The Block makes it look easy, flipping has its downsides. You’ll need to be very sure that you can recoup the money you’re spending on renovations plus the costs that come along with buying and selling.
“If you can find a property that’s selling under market price, and you feel confident in your ability to manage a renovation, by all means go for it,” says Mark. “Don’t get caught up in the TV glamour, though. If you don’t know what you’re doing, you could end up with a budget blow out.”
What about off plan properties? Many investors take advantage of the fact that you can lock in an initial price, settle two years later when property prices are higher and immediately sell. That can be a great strategy, but beware a flooded market.
“With large developments, there are a lot of people settling at once. If your plan is to settle and then sell at the same time, you might find yourself competing with other investors. If you can settle and then rent it out for even six months, you’ll avoid the crowd and avoid risking a price war,” Mark advises.
Don’t forget to budget for ongoing costs
No matter whether you choose off plan or established, owning property takes a bite out of your monthly budget. All buildings need to be maintained and repaired, and those costs are charged to the owner in one form or another.
If you’re buying off plan, make sure you’ve taken strata fees into account. They pay for building insurance, maintenance of common property, shared utilities (for example the electricity you use to maintain elevators or lights in common areas) and professional management fees. The more amenities your development has, like a swimming pool, gym or 24 hour concierge, the higher those fees are likely to be.
You might compare that to an established property and think you’re better off with the latter. But not so fast. Established properties come with a very similar set of costs —they’re just more hidden.
“It sounds obvious, but all buildings need maintenance”, says Mark. “Your hot water system will need replacing eventually, or your roof will need repairs. When you’re creating your budget to see if you can afford a home, make sure you put some money aside each month for maintenance and repairs. Otherwise you’ll find yourself with a bill of several thousand all at once. With strata properties, those maintenance costs are built into your fees so you don’t have to worry about it.”
Interested in exploring off plan property? Find out more here
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Make sure that your strategy matches you goals, that you’ve run the numbers and that you’ve done your due diligence. No matter which you choose, planning is key to choosing your first investment property