In today’s show Margaret Lomas, from Destiny Financial Solutions and star of that great show on Sky TV, Property Success with Margaret Lomas, answers our questions about buying an established property or a brand new one.
Kevin: My good friend Margaret Lomas is back with us from Destiny Financial Solutions and star of that great show on Sky TV, Property Success with Margaret Lomas.
Kevin: Good to be talking again. Margaret, the specific question for you today is a question I get asked quite often: is it better to build with a buyer-established property? I guess here, you have to take into consideration depreciation, as well.
Margaret: Yes. Look, I guess one of the things that the spruikers always try to do is convince everybody that they need to buy new so that they get the maximum depreciation. But in reality, a property that’s a couple of years old doesn’t have a big difference in its depreciation than a brand new one, which a lot of people don’t realize.
The construction depreciation is, of course, exactly the same every year for 40 years, which is 2.5%. The fixtures and fittings in that first year or two, they don’t really age that much, and there’s not a big difference in the depreciation that you can claim.
The reason why the spruikers like you to buy the brand new one or to build the brand new one is because generally there’s a fair amount of builder profit in there and they can get a good cut of that in the form of a commission.
I always feel, as well, that from an investor’s point of view, if they’re buying that brand new property, they’re more than likely paying a little bit more than it’s probably worth or than they could pay for that property that’s two or three years old, but they’ll get the same rental yield as the older property.
Kevin: It always strikes me, too, that new properties purely by definition are going to be built in areas where you’re developing a lot of new stock, and it does actually take a while for them to actually start to gain any increase in value, Margaret?
Margaret: Exactly. The reason that is, is because most often when they’re being built in a new area, even if it’s in a suburb that’s already established, it’s very, very difficult to really work out what the true market value of those properties are.
Market value is never really established until a secondary sale takes place. Whenever properties are being sold and resold and resold, then we know what the market value is, because it’s whatever the market pays.
When people buy a brand new property, which could be either off the plan or just newly built, really the buyers pay what the developers are asking them to pay. Very often, they do that because most people when they buy a new home, they’re buying it with a view to living in it, and when we live in a property, we are often happy to pay that bit of a premium to get the kind of things we want in a home or to get the lifestyle that we’re after.
When it comes to being an investor, though, the extra premium that you pay to get that brand spanking new property is very often not seen returned to you in increased yield, and it ends up being, as you say, that you have to wait that period of time for the market to work out what it’s really worth, and very often, it will stay quite flat for quite a few years.
Kevin: Another reason why I tend to like more established properties is because they’re going to be built in established areas where you do have all that infrastructure. If you’re going to be attracting tenants, they like to be in areas where there are good schools and where there are lots of shops. But in some of those new areas, those things don’t happen until you get a fair number of houses in there.
Margaret: That’s very true. The other thing about a property that’s a couple of years old, maybe up to five years old, is it’s a little bit less that brand new car, which by the way, also loses value when it drives out of the driveway. When you get a new car and it takes you that little while to work out the bumps and sometimes when you buy that new car, there can be things that go wrong with it.
When you buy a property that’s a couple of years old, it’s already settled, you know how it’s sitting, you know whether it’s going to have cracks. There’s many things you can already know about a property.
Most houses last 50, 60, up to 100 years, certainly in the olden days, then there’s not that big of difference in the big scheme of things between the brand new one and the five-year-old home. I can tell you in ten years’ time, a five- and a ten-year-old property don’t look much different at all.
Kevin: Very good. Very practical advice from Margaret Lomas at Destiny Financial Solutions. Margaret, we’ll get you back in a few weeks’ time. I want talk to you because I know you’re across all of the Australian suburbs, but I’d love to have a talk to you about what you see are the up-and-coming suburbs if you’d join us again in a few weeks’ time?
Margaret: I would love to do that.
Kevin: Good on you. Margaret Lomas from Destiny Financial Solutions.