Apartment Property Investing: new vs older properties.
When choosing between properties to purchase your decision shouldn’t come down to which one is newer. There's no right or wrong when it comes to newer versus older properties - it all depends on that particular property and price.
New properties are very attractive to renters, especially executive renters as everything is pristine and clean and often they have the very latest technology, gyms and pools. Developers that sell brand new apartments are professional vendors though and so often the property is priced well and unlikely to go for a steal. Depreciation tax benefits are very helpful to your cash flow which is another great benefit if cash is tight although you should always concentrate on the underlying investment. Calculate what the investment is worth now and by how much it's likely to grow in the future. There is little opportunity to add value to brand new apartments as they have been designed to be the best they can for the space.
Older style properties, on the other hand, are typically sold by Mum and Dad owners. Not being professional sellers, they don’t go to the extremes of decluttering and styling the property ready for sale, so second-hand properties typically have a better chance of being bought for a more realistic price. Second hand properties may not have as much depreciation benefits of newer properties but buyers can then add value through renovations as often the properties haven’t been upgraded in years.
If you want to maximise the amount of people that would rent or buy your property you should do what many investors do and concentrate on buying property around the median price. In order to get the best possible long term capital growth for the least possible risk investors should look in suburbs 5 – 15 kilometres from the CBD. Going further a field may get you a hotspot that goes through a massive surge but do your research and weigh up the chances of it actually happening.
Whether you purchase a unit or house depends on what is priced at the median in the area you are looking to buy. I would prefer to buy a unit in Sydney or Melbourne (and a house in Brisbane or Perth). The housing squeeze in Sydney and Melbourne means that units are hardly ever over supplied in suburbs 5 – 15 kilometres from the CBD. CBDs can become oversupplied from time to time as these can be the only place that developers can keep building upwards. This means there is really no limit to the supply but demand is finite.
1 Bedroom/Studio Apartments
Buyers also have to be weary of the notion, ‘the cheaper the better’. Whilst one bedroom and studio apartments cost less money to buy they can be typically more expensive per person to rent and that can limit the market of people that want to rent or buy them.
The table below shows that it's very expensive for one person to rent a studio or one bedroom apartment; whereas it's much cheaper for two people to rent a more expensive 2 bedder as they can split the weekly rent two ways. Three bedders are cheaper rent again however there are fewer people that want to share between three. While your decision will ultimately depend on the suburb and its demographic, a two bedroom apartment is usually a good choice.
rent - I person
rent - 2 people
rent - 3 people
Prestige High End Apartments
By definition prestige apartments are only affordable to the top 10-20% of the population rather than the 80% majority. As prices get higher, demand gets lower, and the rental return starts dropping to as low as 1 – 2 %, which makes it harder to achieve cash flow if you have a large mortgage. Capital growth can be good as buyers don’t have the same affordability concerns as the lower end but it can be more volatile, especially in very tough times. Some investors choose to furnish their top end investment apartment and rent it as an executive rental. This can increase cash flow but can be very volatile and is dependent on the economy.
There are pros and cons to every investment option and off the plan is no exception. If the market is growing rapidly you buy at today’s price but then settle in a few years time when the price has ideally grown at 10-20%. If it all works out, and the 80 % the bank lends you on settlement is more than the purchase price, you could end up with an apartment with no deposit down. On the other hand, if the market moves against you, you could be putting down a 20 % deposit on the current cost plus the amount the unit has dropped.
Deposit bonds and bank guarantees make it easy to buy for little initial cost but many people have over paid for units and ended up losing a fortune when they can’t settle. The best advice is to hire your own independent valuer to assess the price being charged and then get some independent research to suggest where the market is heading. You should also have plenty of equity to protect yourself in case the market does change.