Existing v new property: Which is the better investment?

The question of buying new versus old can have different answers. When it’s appliances, new is usually better. Meanwhile, if we’re talking wine, it’s generally believed that those that have been aged or older are better. But when it comes to buying a house or apartment – can you draw the same conclusion?

While new properties offer potential tax incentives and might have more appeal to a tenant, established properties are also great for investors who are looking to add more value or boost rental return through strategic renovations. 

We’re in the business of settling age-old questions in real estate, so we’re here to help you decide whether a new or established property is the way to go. Here are the pros and cons of both options to know which one best fits your investment goals. 

What are the pros of buying a new property?

If you’ve watched the How I Met Your Mother series, you’ve probably heard one line from the infamous Barney Stinson: “New is always better.” After all, it’s easy to think that buyers want new and shiny things. 

But is this adage applicable when it comes to property? 

When it comes to real estate, buying a new property can give investors certain advantages over established properties including:

• Depreciation benefits. Did you know that the newer the property, the higher the amount of depreciation you can avail? According to guidelines set by the Australian Taxation Office (ATO), investors can deduct 2.5 per cent on the property itself for 40 years, which can lead to a significant tax deduction. Appliances, including air conditioners and dishwashers, generally have a high rate of depreciation. For more information, read our article on how rental property depreciation works. 
• More appealing to tenants. Typically, new dwellings are perceived to be of higher quality, which means you may have greater tenant appeal. This is because newer houses/units tend to have modern amenities, appliances and technologies. If your property offers these conveniences, this also means that tenants will be prepared to pay a premium. The ability to attract high-quality tenants could mean that you lower the risk or frequency of vacancy periods for your investment property.
• Low maintenance costs. When you buy a new property, you can benefit from the convenience of not having to spend money on repairs or ongoing maintenance. Things break or need to be replaced more often as they get older, and these costs are considerably higher on older homes or properties. 
• Protection. In Australia, the law requires builders of new properties to take out home warranty insurance, which can protect owners in the event of a major building defect and, in the process, save them from unexpected costs. Additionally, most items for a new property are under warranty, which means you can minimise your ongoing costs.  
• Government incentives. There are stamp duty concessions and grants available for first home owner grants when buying new properties, which could significantly lower your upfront and ongoing costs. Read our complete guide for grants and assistance in each state and territory. 
• Modern living. Newer houses are typically built for modern living as they often offer energy-efficient heating, smart appliances, smart locks and security system etc. Oftentimes, luxury amenities such as swimming pools, ensuite bathrooms and theatre rooms are pre-installed, which can be costly to add to an existing property.

What are the downsides of buying a new property?

 While new properties have their perks, there are also drawbacks to buying one: 

• Less affordable. Depending on the location and the property type, new dwellings are typically more expensive than established properties. This means a higher upfront cost (e.g. deposit) and higher repayments on your home loan. Additionally, since both foreign investors and first home buyers are attracted to this property type, the high demand can drive up prices upwards even further.
• Limited value-adding opportunity. There is little opportunity to add value to a new property once you’ve purchased it, as it’s difficult to make renovations/improvements for this type of real estate, so it may take longer to achieve capital growth.  
• Greater market risk. Historically, the values of new properties are the first to decline when the property market softens. Meanwhile, established properties will either maintain their price value or see a minimal adjustment over the long term. 
• Limited land component. Because of the comparatively limited land component of newer properties, subdividing the property or adding a granny flat as an extension is usually not possible.  
• Possible delays or extra costs. When you’re planning to buy a property off the plan (committing to a property that is not yet built) or a house and land package, there is a risk of delays in handing over the finished product and potential variances in the agreed price. In some cases, you may also get a lower quality than older buildings. Make sure to get a solicitor to check the sale contracts of new properties and choose developers carefully and run background checks on associated parties. Also, check out our full guide on how to buy house and land packages in Australia. 

What are the pros of buying an existing or established property?

While buying something that is considered “old” can be off-putting for some people, established properties offer significant benefits, such as: 

• Affordability. One primary advantage of buying an existing property is the lower cost. Of course, this will still depend on the location, the property type and other factors, but established properties are generally more affordable than a new property, which means that you may be at less risk of facing mortgage stress levels. 
• Potential for adding value. Another major advantage of buying an established property is that owners can add more value to the property through renovations and improvements, which can boost your equity. Even a simple makeover can boost the value, rentability, rental return and depreciation of an older property – something that can’t be often be done with a new property. The best part is that these renovations are often tax-deductible.
• More value in the land. Older properties tend to hold more value in the land than the property itself. This is because land tends to grow in value, while building loses value over time. Additionally, established homes are concentrated in the inner-city suburbs, where land is highly valuable due to its scarcity. 
• Capital growth. A well-bought established property will generally outperform the averages over the long term and see higher capital appreciation, which can impact your long-term cash flow positively. 
• Easy market comparison. Because established properties are usually in established neighbourhoods, they can be easily compared to other similar sold properties – which can give you an estimate of the property’s value. Established properties also have historical data that will give you an idea of how the property value has changed over time, which can help you make an informed and data-driven decision.
• Next to established infrastructure. In the same vein, older properties tend to be located in areas with more established infrastructure such as transportation, schools, and hospitals, which can be drivers of property growth.
• More room for negotiation. When you buy an established property, you have room to negotiate for a fair price compared to when buying a new one.  Vendors of established properties often have a motivation to sell relatively quickly, so you can use this to your advantage to negotiate a bargain.  

 What are the cons of buying an old property?

While established properties can be easier to predict in terms of growth potential, there can be risks and hidden costs if you don’t do your homework.

Some of the downsides to purchasing an established property are:

• High maintenance. Owning an existing or older property means setting aside a financial buffer for potential upgrades, maintenance and repairs. This could impact your cash flow as it could be at risk of being negatively geared. Additionally, it could mean a loss of rental income if tenants need to vacate the premises due to safety concerns. 
• Lower rental return. Older properties have lower rental returns compared to newer units. If the property is run-down or it does not offer modern amenities and features that tenants are seeking, the rental yield will typically be lower compared to a new property.
• Less appeal to tenants. As we’ve mentioned, most tenants want everything modern and working and full of lifestyle features. As such, generally, older properties have lower tenant appeal. Moreover, established properties usually have less appeal than new properties as they may have an outdated design. But if you’re planning to renovate your property, here are six design trends set to dominate 2022. 
• Lower tax write-offs: Since the changes to tax legislation back in 2017, property investors can’t claim depreciation on used plants and equipment found in second-hand properties.

Buying new or old: Which is right for you?

As with any investment decision, we recommend aligning your purchase with your financial situation and investment strategy. 

It’s also a good idea to keep in mind that the benefits of both new and existing real estate are magnified tenfold if the property is well-chosen. No matter what type of property you choose, you should still be conducting careful research and consulting experts to ensure you buy the right type of property in the right location to maximise your capital growth potential and/or rental return.

If you’re hungry for more data-driven discussion about this age-old question, you can check out this episode of The Property Nerds podcast, as data nerds Arjun Paliwal and Leigh Paliwal tackle the biggest property and finance myths, including the old versus new debate.  

Disclaimer: This is a general guide only and is not intended as a substitute for financial/investing advice.

If you want to learn more about the latest industry expert insights on the property market and other general information that will help you along your investment property journey, check out our amazing podcasts. Also, make sure to check our News Section for the latest property market reports, insights, news and useful tips and strategies for investors.