Real Estate Old vs New
When it comes to investing in real estate, why is it often better to invest in newer properties?
Depreciation Benefits
Brand new properties have several distinct advantages over established properties as far as tax benefits are concerned. The main one is depreciation.
All income-producing investment properties can be depreciated at a rate of 2.5% per year over 40 years, under Australian tax law, but newer properties attract higher depreciation rates on chattels.
For instance, a new property might be depreciated at a rate of $10,000 this financial year, while a 15-year old property might only attract depreciation of $3,000, or even less to none, depending on the properties age.
As an example, a property that is 3-4 years old would, for most people, be considered a new home. However, given the fact that the majority of tax depreciation benefits happen in the first five years, that 3-4 year old property would cost you between $40-$80 per week more* compared to a brand new house and land.
At tax time or through a weekly Tax Variation, this amount can be used to offset your income tax payable. So, the difference between an old and new property can have a huge impact on your finances every single week.
Tenants
With a newer property, you may attract a higher quality of tenant compared to an old property and they’ll usually be willing to part ways with a higher rental fee each week.
In general, new properties always achieve a higher rental return than similarly located properties that are in their original condition.
Also, tenants will often stay on in a new property for several years, as they have less reason to move on if they’re living in lovely home with very few maintenance issues.
Stamp Duty
When you buy your investment property as a house and land package, you save on stamp duty, as it’s only payable on the land component of the purchase not the house.
Most people don’t realise that a fully licensed and skilled financial planner can structure the finance so that the construction is funded by a Capitalised Loan. That way, the investor isn’t burdened by huge mortgage repayments during construction when there’s no income coming in.
Buying an established property attracts stamp duty for the total price of the house and land, stamp duty is not tax deductible until you sell the property in the future. The savings on these fees can be as much as $10,000 to $15,000.
Maintenance & Upkeep
The fact is, all properties require maintenance to keep the home humming along smoothly, but an older home generally requires more upkeep than a brand new one.
Compare it to buying a car. If you buy a new car, you know that the tyres will need replacing every so often, and it may need the odd wash and polish, but you wouldn’t expect to find rust or major mechanical issues.
The same goes with a brand new house. Everything in it, from the carpets and cupboards through to appliances and doorframes, has just been installed.
With an older property, you may be forking out cash every other month to replace the water heater, repair the stove or fix the leaky plumbing in the bathroom, but with a newer home, this is far less likely.
*Depending on your personal income tax scale.