Hi All
I am currently looking for some opinions. Our household has a Single Income with 3 dependents (Wife and 2 kids). I am limited to around $380 000 purchase price. I am entitled to the FHOCG as well as being a first home buyer so stamp duty exempt. I have $15 000 saved up so far. My dilemma is new build .vs existing house. Here are my thoughts
Old House
1. More likely to get a larger land size than a new build so better potential to increase value over time if bought well
2. Will look to buy an older house with potential to be improved however limited on funds once house purchased so this will likely take time however has a chance to release equity if done well to fund next purchase
3. Will take at least another 6 to 12 months to increase existing deposit sufficiently so only able to purchase around mid to end 2014
New Build
1. FHOCG will add to $15 000 too deposit already in place. i.e. $30K to $35K. Mortgage to be Interest only
2. Live in property while continuing to save. Once i have sufficient deposit look to buy next house and convert this into IP. Based to basic calculations i have done so far it will be cash flow positive but only slightly and would also be able to use rental income to increase serviceability for next purchase
3. Able to purchase a property now and move in by early next year. Current rent is $1950 per month. $400K @ 5.25% around $1750 per month. $200 savings!!
4. Greater depreciation as newer property when converted to IP
Can anyone else add any thoughts to this and how they would move forward. Still learning so am aware i don't know what i don't know
Thanks in advance
Neil
OLD vs. NEW? This a decision each investor needs to consider based on their own tolerance for risk and how they see the upside.
Overview:
Owning investment property is a business, and at the end of the day it needs to make a profit for its owner. Like running a business, the owner needs to balance managing risk vs. creating wealth. The risks with NEW are manageable and mostly known vs. those of OLD which have many unknowns, and can’t be fully known prior to taking ownership.
Pros:
Old Property
• Possible to add value by renovating.
• Lower purchase price for OLD compared to NEW of the same size, location, etc.
New Property
• Rent demand for NEW property is far greater. NEW is more likely to have less vacancy.
• NEW is more sort-after by tenants. On a square meter by square meter comparison, NEW rents for more.
• Depreciation credits for NEW far outweighs the price premium NEW has over OLD.
• Repairs and maintenance expenses are low and predicable for the first 10 years.
• NEW property attracts better tenant due to the higher rent than the OLD property.
• Lower stamp duty on NEW House & Land investments.
Cons:
Old Property
• OLD has many potential unknown maintenance issues. Extensive due diligence, building reports are required prior to purchase.
• With apartments special levies can be sprung on owners without any notice. Major repairs may have potentially been overlooked and not yet recorded at body corporate meetings. Once a special levy is called, owners have no option, but to pay the levy as directed.
• No depreciation credits for property built prior to 18 July 1985.
• OLD properties rent for less, and tend to have a higher vacancy rate than NEW.
New Property
• 3% – 5% more expensive than an OLD comparable.
• With apartments there can be many similar properties on the market for rent at the same time at completion.
FOLLOW this link to view a comparison depreciation table between OLD & NEW.
We create a 20 year cash flow for each IP for our clients, they can then see the "what if" options they have going forward.
“You’ve got to think about big things while you’re doing small things, so that all the small things go in the right direction.”
― Alvin Toffler
Modernity Investing
Email MeAgreed with Mark.
Personally i purchased my first home 9 months ago and opted for a 35+ year old brick and tile place. building and pest came up immaculate. I even had my brother who is a structural engineer laser-level measure the block and the house had moved 4mm in 30 years. We just had the driest winter in a while on the Gold Coast and now im dealing with structural movement in my house + recent down pour pulled off my guttering and discovered cracked tiles. all up a $5k fork out.
luckily it is my PPOR not IP so i can pace myself and space out the work, but with tenants they would be down your neck for repair ASAP.
The upside of NEW (with everything… don't even get me started on my car) is building warranty.
We rented in a new estate before buying our own place and the actual builder had a full time maintenance guy in that area for the first 12 months to fix anything (almost the same day) – no expense to the owner as apart of the build warranty. ie. we had cement and crap clogging up our pipes weeks after moving in and it was fixed the same afternoon we complained about it… and was told no expense to the owner.
But flip side:
we bought in a growing area on a 600sqm block with subdivision ability so long term it will be good for us.
I guess the risk with OLD is cash flow and ability to meet unexpected expenses.
Good Luck!
Jimmy86 | Future Assist SMSF Specialists - Bris | Melb | Syd
http://www.futureassist.com.au/setupansmsf
Phone MeSelf-managed super specialist administrators and advisers
Give me an old property that can be tarted up quickly and cost effectively for an instant equity gain any day of the week.
Unless my state govt. had some really attractive concessions on offer for new builds and the rest of the deal stacks up – then new can be worth considering.
This obviously a very general statement though. There's so much to take into account and Mark's post is a good start.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Mark,
Thank you so much for the very detailed response. Put things in a much clearer format for me to understand. At this point i think the New build offers more pro's and will more likely be my starting point. I may still consider an older property later on as my PPOR as looking for something i can stamp with my own identity and grow into, also gives me more flexibility with regards to expansion as the family grows. Was also unaware that only the land component has stamp duty applied if it's a new plot / plan / build
Regards
Hi Jimmy
Thanks too for your input. As stated above i agree with Mark from an investment point that there are more pro's for a new build but like you I will more than likely purchase an older house for our PPOR as will give us more flexibility with regards to expansion / renovation / subdivision
Regards
Hi Jamie
I also agree with your statement but think my final plan will be too pronged. I think i am leaning towards buying new builds as part of the long term property plan and older properties with renovation potential in the short term. Ideally looking for properties that will allow for some profit after a renovation but ideally subdivision would be the best result out of these purchases.
Regards
Have you looked at key start loans? You've got more than enough for a deposit presently, they only require 2% and stamp duty. So we're talking $20-30k including FHOG.
I think that because you plan to make your first purchase your PPR to begin with and and then IP I would look at an older house first. Buy doing this you can manufacture some growth and give your self more leverage when you go to make your second purchase. It may also help you to make that second purchase a lot faster. Then once you are ready to make the second purchase you may then look at new builds. New builds dont allow to manufacture growth as much as existing houses. This strategy will get you your first IP faster and give you more leverage to buy you PPR which is where you want to get the best you can get which often translates to spend as much as you can.
Yep. New houses in new developments are typically capped for growth for the first few years (and up to 10). It has taken our first IP on the Gold Coast (Coomera) up to 8 years to see any real growth at all. (obviously GFC affected though). The main benefit for this has been good tenants, neutral-ish rental return and depreciation and tax benefits being directed back into our PPR.
Go for an oldee first and do some renos and watch it grow.
Corie said it for me – I was about to offer a few "pro's" of purchasing an older dwelling…..
The point made by Corie re "manufacturing growth" in an older place is well made.
As well as that, existing homes often don't have any "wait and see" points associated with things like – neighbours, infrastructure, "tone of the area", etc. The area is already established, and you can see what you are buying. Buying new in a new subdivision doesn't have that same certainty, yet buying new in an existing area can (e.g. old house knocked down, land carved up and 2 or 3 homes built). And yes, by buying new, you are also buying a bit more peace of mind, but not overly likely to get much of a bargain.
Re not having enough deposit for existing, there have been ideas from tommytucker, and I'm fairly sure some other lenders can still do a 95% or 97% lend. Of course, THESE loans will depend on the purchased old home meeting their valuation, so that forces the need to buy at a discount anyway. Perhaps spend a few months just looking (in your chosen area) for all property that is on the market and start sizing up what kind of numbers will work for you.
You might even make friends with a few RE agents – who knows, they may have one or two properties that others don't want to touch, but you can maybe clean up quickly – deals like these can assist you in getting really solid property for discount prices. We bought one many years ago – no-one else wanted to touch it, so was on market about 12% below comparables – it had an old tired kitchen, drab carpet, red walls in some rooms…. Nothing wrong structurally. I took two weeks off work, and bought a new "seconds" kitchen on my credit card, painted, re-carpeted, and had it rented (at a 15% gross return) just as we were finishing up the reno. Bonus !!
I think it is often said "You make your profit when you BUY" – and it becomes far easier to get a positive rental return when your outlay is lower. Good luck – you might find a similar diamond in the rough (but you have to be looking to spot them….)
Benny
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