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The pros and cons of investing in a brand new house and land package

Wednesday, 2nd Apr 2014

house and land

It’s easy to see the appeal of investing in a new house and land package.  Not only does this type of property look amazing in the brochures, it’s an easy option and comes with a host of advantages. However, do these benefits outweigh the negatives? Let’s look at the main pros and cons.

The Main Pros

Tenants love new homes

Tenants typically love brand new property and, let’s face it, why wouldn’t they; everything is in perfect condition, with up-to-date features and modern floor plans. For investors with this type of property, finding a tenant can be fairly easy (depending on the overall supply in an area) and rental returns can be strong.

Maintenance

With new property, there is none of that dreaded maintenance, at least for the first few years. You don’t have to worry about something falling apart after buying the property.

Depreciation benefits 

New properties will generally get higher depreciation deductions than older properties, given the high starting value of the building, fixtures and fittings. More deductions means the out-of-pocket cost to hold the property may be lower.

Stamp duty saving

When investing in a new house and land package, you typically only pay stamp duty on the land component, which could mean saving thousands of dollars.

Flexibility

When building a home you can often tailor certain elements to suit your specific needs or to maximise the investment potential.

The Main Cons

Paying for someone else’s profit

When you buy any brand new property, factored into the price is the developer’s profit margin and a proportion of the high marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.

Compromised location

The majority of home and land packages are located on the outskirts of the city, in areas often with abundant supply of land, weaker economic drivers and a lack of infrastructure. Capital growth is therefore often harder to come by.

Uncertainty

When buying off the plan, you really don’t know whether the quality of the finishes will meet your expectations, or what the surrounding facilities and other homes will be like. There is also the uncertainty that the final bank valuation won’t stack up. Also you won’t know how many other similar rental properties have been sold to investors in the area.

Land value

Logic dictates that when investing you should seek out a property with a high proportion of land value, as this is what will drive capital growth. With new property, however, most of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.

A 30 year old property on a good size block in the middle of suburbia might not look too glamorous when compared to a brand new property, but chances are it will make a far better investment over the long term.

Paying without receiving

When building an investment property, you don’t receive any income while it is in the planning stages or under construction. But you will be paying interest on any money you have borrowed by that point.

Building surprises

Building can be a nightmare at the best of times, with construction delays a fairly common occurrence. The biggest surprise for many first-time builders is the amount of extra money that needs to be spent to get the property ready.

Inability to add value

Smart investors know that adding value to a property through renovations is a key strategy for accelerating the wealth-creation process. This option is rarely available with new property.

Conclusion

The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to weaker capital growth. If you are looking at a long-term investment opportunity, more often than not, your best option will be a second hand property.