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When considering investment properties, forget everything you’ve ever heard about age being irrelevant. If you don’t, you may end up missing out on some serious benefits when it comes to tax time.
Blogger: Cam McLellan, director, OpenCorp
Most people who know me know I champion buying new over old when building your portfolio. Personally, I have done the whole buy – renovate – sell thing, but any profit made is usually negated by agent’s fees, stamp duty, selling costs, the renovation costs and much more.
So for the last six or seven years I have only purchased new properties to add to my personal portfolios and apart from the above, there are a few reasons why.
One of the biggest reasons is depreciation, and maximising my tax benefits. The amount of accountants I’ve seen over the years that have forgotten to add depreciation schedules has amazed me. I read a statistic somewhere that between 50 and 80 per cent of investors don’t claim depreciation – this is crazy! You are pretty much throwing money away if you don’t claim your depreciation at tax time.
Another reason, which you won’t find written in a book, is time. There is a risk when you buy an established investment property that it will take longer to find a tenant to rent your house. Rental increases will also have to be smaller, and probably slower, and so in turn it will take longer for your rents to start covering the cost of your repayments. If you have a brand new house, guess what guys? It’s shiny and sparkly and all the potential tenants in the area want to live in your house.
Think about that for a second and you’ll know I’m right – if you’ve got two properties on the market, that are exactly the same but one’s a few years older, 99 per cent of tenants will want the new property every time. So if you own the house that’s older, what do you have to do? You have to start dropping the rent. This means you’re negating the growth right from the start.
You’ll also have to deal with more frequent maintenance issues. If your portfolio is based on a strategy that promotes low cost to hold (which it should be), once you throw maintenance issues into the mix your holding costs skyrocket and that’s money out of your back pocket. Do that with a few properties in your portfolio and…well, I think you’re getting the picture.
Generally when you are starting out as a property investor you set yourself a pretty tight budget. You know you need a certain amount of money to live off, and then another amount will go towards your investment portfolio and so forth. Now if you get unforeseen, unbudgeted expenses such as needing to replace toilets, sinks, hot water units, heaters etc. you’re blowing your budget, which isn’t going to help you grow your portfolio.
The final and equally important thing to consider is the builder’s construction warranty. I’m not a builder myself, and even though builders may just do a quick fly through, on a new build they have to provide you with a building construction warranty. If something goes slightly wrong with your property in a structural sense, it’s as easy as calling your builder back out to your property (which I have done in the past), and getting them to fix whatever is the issue. However, if you’re buying an old property and you start finding structural issues, there’s a pretty big chance that it’s going to be big coin out of your back pocket – ouch!
At the end of the day it’s up to you to decide whether new or old is for your portfolio, but hopefully this blog has given you an insight in to why I’m only buying new these days.