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New vs Old

Discussion in 'Real Estate' started by Nigel Ward, 31st May, 2006.

  1. Nigel Ward

    Nigel Ward Team InvestEd

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    I've been thinking a lot lately about whether it is better to:

    a) buy old properties with renovation/redevelopment potential but fairly low depreciation

    OR

    b) buy newish properties with high depreciation allowances but limited value add potential.

    Option A advantages are:

    1) greater upside potential
    2) chance to buy well where run down or vendor can't see potential
    3) bringing the property up to "as new" gets a higher yield and builds "sweat equity"

    Option A disadvantages are:
    1) until reno is done rental yield typically low/below market
    2) reno/redevelopment is a hard cost which must be funded out of your cash/LOC
    3) in a tough market you may not get the rental uplift and revaluation you had hoped
    4) you may overcapitalise
    5) there is risk in developing (and I suppose renos too) if you don't know what you're doing/lack experience or don't know what you don't know
    6) it takes time for you to either do the work yourself or project manage it. If you don't do either of those things you have to pay someone to do it for you or you end up paying way too much :eek:
    7) delay from councils! :mad:

    Option B advantages:

    1) easier/safer option
    2) quicker
    3) higher starting yield
    4) nothing to spend up front by way of reno costs
    5) depreciation is something for nothing i.e. no cash outlay for a deduction (at least if you don't intend selling)
    6) younger property should equal lower repairs and maintenance
    7) possibly lower vacancy due to "newness"

    Option B disadvantages:

    1) no extra upside apart from usual property growth
    2) may not be in as good a suburb (altho I think you'd try to target the same suburbs as for older property)
    3) less price flexibility - at least I think people would be less inclined to negotiate
    4) boring
    5) slower? due to no equity kicker unless you can buy really well. Essentially just relying on the market to do its thing over time

    I've always bought older places and renovated. But I'm wondering if a change in strategy may be in order due to ever increasing demands on my time.

    Anyone able to add to the debate? :D

    Cheers
    N.
     
  2. KevinH

    KevinH Well-Known Member

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    I have always bought properties that had subdivision potential or had to be renovated.
    Its become like a bad habit.

    They're great for getting some instant and sometimes sizable equity jumps, but I know someone who only buys established properties, and he has had a dream run by buying Perth property over the last four years.
    Just by revaluations, and tapping the equity increase he has managed to build this into quite a decent property portfolio.

    I have compared the merit of the two different strategies, and I can conclude that one is passive, and no fuss, and the other one can be a real hassle and stressful.

    In the end, they reflect the mindset and character of the individuals involved. I can't honestly say one way is better than the other.

    Kevin
     
  3. TryHard

    TryHard Well-Known Member

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    We have one of each at the moment. A 'typical' lowset brick we built new and has had excellent tenants for 2 years who look after it better than we would, plus a doer-upper where the tenants have changed over once, and needs a few odd jobs every now and then.

    Having one of each lets the time savings from the low maintenance new one get spent on the jobs needed at the 'old' place :)

    But Nigel if time is the major consideration, the new place has certainly been 'set and forget' for us.

    To me if you have the cash reserves to tip in, and older property with decent land value if usually the better option. In 20 years you can always knock it down to build 2 or 4 new places and claim the depreciation allowance then :)

    Mind you there must be plenty of areas with high rental demand from good tenants for the newer places and still reasonable land value (round military bases for example) if that suits the strategy

    And maybe to address the time poor issue you need to be clear with property managers what you expect them to manage ? I know ours has been bl00dy hopeless at co-ordinating repairs, yet strangely right on the ball when deducting their commission each month ;-)


    Cheers
    Carl
     
  4. Jacque

    Jacque Team InvestEd

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    Nigel: one word makes all the difference here.
    POSITION
    If there is no vacant land, no new dwellings, no rundown knockdown properties available in the street/area that you wish to invest in for optimum return, then you are indeed limited to established property. With some popular areas or streets full of particular types of buildings (eg; think renovated Queenslanders in Paddington or semis in Sydney's Crows Nest) your choice is restricted. Don't forget, too, that some types of established character houses are worth far more than your copycat replicas or whiz bang ultra modern box type homes.

    I lean towards established properties, mainly due to their value adding capacity and positioning. Depreciation on fittings and fixtures can be almost as good as a new property, with furnished places yielding fantastic deductions. Granted that the 2.5% building depreciation is missed out on, but there's not many years left to run on that one now....

    I would also disagree with your thinking that newer property provides higher start up yields. A good reno on an older property can achieve similar, if not better results, depending on the property's location and level of rental demand. Strata fees on newer properties, especially those with top notch extras like gyms/pools/lifts etc can easily kill off cashflow as well.

    Newer housing estates tend to be on smaller and smaller blocks of land as well, with compromises made in building construction that may not always be evident when you buy brand new. New eventually becomes "old" as well :)

    But I see what you mean about time- maintenance issues that continually crop up on my IP's, though part and parcel of ownership, can become frustrating and even I occasionally glance at the gleaming new McMansions and wonder if I should.....
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I suspect that many of these newer dwellings, while shiney to start with, might develop bigger and more costly problems much more quickly than some well built properties that have been there decades all ready. That is a generalisation I know, and very dependent on circumstances - but huge pressures to build more houses more quickly and at a lower cost will surely lead to shortcuts.

    My argument is that if a 50+ year old property is still in good condition today, it will remain in good condition for quite a while longer (provided you take good care of it).

    In my house hunting experience, I've seen some properties built in the 70s and 80s that look worse than the 1920s/1930s houses I prefer.

    So many variables though, and each case needs to be judged on its own merits.
     
  6. Jacque

    Jacque Team InvestEd

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    I know exactly where you're coming from there, Sim'
    Bathrooms, especially, seem to have a shorter lifespan in some 80's and 90's houses than their older counterparts.
     
  7. TakeStock

    TakeStock Well-Known Member

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    Well said Kevin. I find that people can be quite polar regarding new/old property purchases. I look at each individually and try to forecast future yields and capital gains. If it appears to be good value and I can get it for the right price - done deal.

    BTW, great summary of pros/cons of new/old properties Nigel!
     
  8. Barracuda

    Barracuda Active Member

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    I think it depends on your situation.

    To get the most out of option 2, you need a decent income against which to offset depreciation expenses. The location, of course, is another factor.

    For example, we've just bought (well, more accurately in the process of buying) a new place in an area (Brisbane) where the restrictions on redevelopment of existing post-war properties mean that there are very limited opportunities for new houses to be built. In this instance, a "new" property has a uniqueness value of it's own, allowing a higher yield than competing products in the area. Couple that with some of the other benefits you mention and we are happy.

    Another benefit of buying new is that (IMHO) they are much easier to manage remotely - ie, the process of performing or managing significant renovations from interstate made the option much less feasible. I'd be much more comfortable following option 1 on a local property where the option to "drive by" is available, even if not doing the reno myself.

    Of course, the above is an exercise in positively reinforcing our current actions.... and a way to get rid of that damned invitation to post!

    Cheers, Barracuda
     
  9. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Welcome Barracuda,

    Was wondering when you'd finally get off your you-know-what and start contributing to InvestEd too! :p

    Welcome mate, and that IP of yours will be a winner for sure, don't sweat it.

    Cheers,
    Michael.
     
  10. Jacque

    Jacque Team InvestEd

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    Well done Barracuda on your purchase :)
    Bulimba is a great area- naturally I'm biased as I hold an old postwar in nearby Balmoral. Nice suburb- gentrified with cafes, cute shops and a village ambience. I see your point about holding new property interstate as being easier but I have no regrets about my postwar being in a area that allows demolition :) I have an eye on each neighbouring property for future dvpt purposes.... ;)
     
  11. D&K

    D&K Well-Known Member

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    Jacque,

    Balmoral is nice. We have two newish townhouses in Balmoral. Advantages have been lower holding costs due to depreciation (after tax time) and rents have been pretty good. But if you've got an older house sitting on ~800m2 then you've probably done a lot better on the CG side.

    So does the best of "old" or "new" come down to your personnal situation? That is, if you can cashflow the property then go for as much land as possible, if you have the equity but less cashflow go with the newer property (on a smaller block), but position is the top priority for both at the end of the day? :)

    Dave
     
  12. Jacque

    Jacque Team InvestEd

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    In a nutshell, according to my humble opinion :)
    There are also some investors who just won't touch established property. Simply too much hassle maintenance wise.
     
  13. D&K

    D&K Well-Known Member

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    Jacque,

    We have had new, old and middle aged properties, and I'm not sure that new always means less hassle. New properties can have teething probelms, old houses don't have insinkerators for catching forks when stuffing things down plug holes, new dishwasher hoses blowing off and flooding the kitchen "floating floor" an lounge room carpets while people are upstairs unpacking. No you can get hassles in new properties too, old houses don't have the monopoly!

    Dave
     
  14. Jacque

    Jacque Team InvestEd

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    Hehehe :)
    Gives new meaning to the product, doesn't it?
    Actually can sympathise with this one, as a friend just finished installing a floating floor and the washing machine (in kitchen) flooded it first use.
    Buckled boards, water damage, not much fun :eek: