Taking a step into property investing

Article Category: Demographics

By Anthony Keane, The Advertiser, 17 February 2009

PROPERTY investing is becoming more popular as interest rates tumble, the share market remains in the doldrums and returns from cash deposits head towards zero.

One of the first questions any real estate investors must ask themselves is whether they plan to buy an established home or build a new one.

Property experts say there are positives and negatives with both approaches. It is important for investors to research and understand exactly what they want.

Is it peace of mind? Is it instant income? Is it bigger tax deductions? Is it long-term growth? Answers to these questions will help shape an investment decision. The type of investment property - residential or commercial - also is a factor.

Real estate author, investor and university lecturer, Peter Koulizos, says there is no right or wrong answer in the debate over whether it is better to build or buy an established investment property.

"If you are looking for hassle-free investment in property, you are probably better off building or buying new because you have very low maintenance on the property and you tend to get a better-quality tenant," he said.

"However, buying established gives you the opportunity to value-add whether through renovations or subdividing."

Investors, however, should expect to be paying more for repairs to an older house.

"Because interest rates are so low and builders are very keen to get work, I think it's a fantastic time to be buying new," Mr Koulizos said.

"There are not many times in the property cycle where there is a situation such as we have now where it's worth building from scratch and keeping it to rent."

A big potential downside with building an investment property is that investors do not receive any income while it is under construction. Including planning approvals, that can take more than a year.

"One of the issues you have to address with your bank or lender is are you paying interest while it is being built, or are you going to let that accumulate?" Mr Koulizos said.

Another downside is limited choices on where to build. Vacant blocks are scarce in most established suburbs.

Brock Harcourts chief executive Greg Moulton said that was a factor investors must weigh up against the benefits of building, such as tax and stamp duty savings.

"The opportunities to build in some of the high-growth areas just aren't there," he said. "If you want a better return and bang for your buck in the short term, maybe look at building, but if you are looking at a long-term investment opportunity you will be going where the capital gains are - and nine out of 10 times that is in established areas."

High capital growth areas traditionally were close to the city, near the beach or in the eastern suburbs, Mr Moulton said.

"One of the advantages with buying in established areas is convenience with schools. A lot of people want to invest close to decent shopping centres and decent schools," he said.

"In developments out further, some of the schools haven't been established long and they don't have a reputation."

Real Estate Institute of SA president Robin Turner said while most property investors bought established homes, there was a good argument for building.

"As with everything, they need to do their paperwork thoroughly and be very clear about what's included in the price, so there's no nasty surprises," he said.

Mr Turner said another benefit was that new homes often were more desirable to live in and had new floor plans and modern, efficient designs.

A drawback when building in a new area was not knowing the structures that were to be built around you, he said.

Rossdale Homes developments manager Denny Havriluk said apart from stamp duty, there were other savings to be made when building.

"There are far greater depreciation benefits on newer homes, resulting in bigger tax savings," he said. "Newer homes can be purpose-built specifically for investment to maximise these benefits.

"Conversely, the depreciation benefits on a 20-year-old home, for example, are halved. There is only so much you can claim in regard to wear and tear."

Mr Havriluk said newer homes often had better growth potential because they gave investors early entry into new developments.

"If you can get in early to a new land division where there is demand for rentals, as the area becomes more established and developed, you're more likely to enjoy capital growth over a longer period," he said.

Hamra Homes marketing manager Gaby Haidar said a key factor in building an investment property was selecting the right suburb.

"Investors need to be smart about their choices and should pick a growth suburb to build, ensuring good returns and maximum capital growth," he said.

Mr Haidar said house and land packages were a popular choice with investors. "Investors are able to see exactly what is on offer from the plans and display homes," he said.

Weighing up the positives and negatives

• There are typically better tax benefits for depreciation on newer homes.
• The 2.5 per cent capital works deduction on houses is worth a $5,000 annual tax deduction on a $200,000 building but only $1,250 on a $50,000 building.
• New homes are usually more energy-efficient.
• Repair bills are generally lower for new homes.
• Modern floor plans and designs can be popular.
• There a limited choices where you can build an investment property.
• Building a home can have construction delays and hidden costs.
• Established homes deliver investment income from the day of settlement.
• The best capital growth traditionally comes from established areas where vacant land is rare and expensive.
• When buying established, you know what the surrounding facilities and other homes are like.
• Value can be added to established homes by renovating or subdividing.