When searching for an investment property, you're inevitably going to come to a point where you need to decide between purchasing a new build or an existing property.
For a lot of old-school investors, the shift from old to new can be quite daunting because they have always been taught that existing homes have more land which equals more capital gains.
This isn't strictly true.
Although buying new builds (especially townhouses) does tend to have a lower land component, this doesn't mean they will fall behind in capital gains.
In fact, historically, the only property type that hasn't performed at the same level as houses & townhouses is apartments, which do lag behind in the capital gains metric.
The main point, however, is that the government has introduced 3 key incentives that make new builds much more attractive to investors instead of buying existing properties:
Interest deductibility
Lower deposit requirements
Shorter bright-line period
Let's consider all of these in more detail...
Interest Deductibility
Perhaps the biggest factor at play currently, without interest deductibility, properties become a lot more expensive to own.
At present, interest deductibility on existing properties is being phased out which means the cost to own an existing property will rise significantly over the coming months and years if they are purchased as an investment.
So, what is interest deductibility and why is it so important?
Interest deductibility refers to the ability of investors to deduct the interest cost of a property before taxable profits are calculated. When interest costs are deducted, the taxable profit on a property is very low which means the tax bill investors will have to pay is low. On the other hand, if interest isn't deducted, the taxable profit is high so investors are obliged to pay more tax.
In the past, interest costs are deducted before you are taxed on the profits - this is consistent with new builds.
Whereas now interest costs aren't considered before you are taxed which results in a bigger profit. Normally, a bigger profit is considered a good thing but in this case, it isn't because your tax bill is significantly larger when you can't deduct the interest so you will end up paying more tax.
In practical terms, new builds are more efficient to own because your taxable profits are smaller and therefore you pay less tax.
Lower Deposit Requirements
Purchasing a property requires you to put a down payment on the house, known as a 'deposit'.
Currently, the deposit requirements for investors are 20% of the purchase price for a new build and 40% of the purchase price for an existing property.
Here's an example of an investor considering two different properties:
Property 1 is a new build and is purchased for $650,000
Deposit required: 20% of $650,000 = $130,000
Property 2 is an existing property and is purchased for $650,000
Deposit required: 40% of $650,000 = $260,000
A lot of investors use the equity in their properties as a deposit so they want to use as little as possible so they can have more freed up for additional purchases (see the related post named 'Deposit Requirements to Invest in Property' for more information).
While they cost the same, property 2 requires double the deposit and investors won't want to/won't be able to invest this amount of capital into one investment property.
In fact, if the investor had adequate serviceability, they could buy two new build investment properties for the same deposit as one existing property.
Shorter Bright-Line Period
The bright-line rule dictates whether or not you have to pay tax on capital gains on your property when you sell it.
Although there are many implications for homeowners, the most important one to note is when you would have to pay tax on an investment property if & when you sell it.
For existing properties, investors would have to pay tax on any capital gain they make within 10 years of purchasing the property. For investors buying new builds, this bright-line period is only 5 years so the taxable period is halfed.
Even though property is considered a long-term investment, any reduction in the time investors have to hold property to sell it tax-free is a positive because you never know what changes could happen in your life or the investments that would dictate you to sell the property.
Further Benefits
It's pretty evident to most investors that buying new builds is a much better option, but investing in property is not a one fits all approach.
Although it might be a different concept for some investors, the change into new build investing will positively affect your portfolio growth into the future as easier rules allow investors to keep going when others have been hamstrung.
Other, more practical thoughts should also be made when weighing up between new or existing. For instance, newbuilds are built to meet Healthy Homes requirements and come with 10-year warranties.
With both of these factors comes a lower maintenance bill too which is great news for existing investors who will be used to putting in a lot of their own money to cover maintenance costs.
If you're considering the best avenue to take for your next investment property, talk to an expert team who can point you in the right direction and give you advice on how best to expand your portfolio.
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