Before buying, decide what you hope to achieve, writes Kate Robertson.

With a lazy $500,000 to spend, what is the best investment choice? Established property, off-the-plan, newly built or a property with potential to grow in value immediately with renovation?

Lyndon Russell, of Next Level Accountants, says that while on paper a new property seems to tick more boxes, the real answer is, “It depends”.

Mr Russell, who specialises in helping property investors, says the right choice is dependent on each individual’s investment goals and life stage.

Book titles such as The Seven Secrets for Property Investing make him laugh. “I don’t think there are any secrets,” Mr Russell says. “You’ve just got to be well educated. Do your due diligence, know your numbers and know what your own personal investment criteria is.”

Established property can have an edge on capital growth but new properties bring the benefits of depreciation, which can help investors with cash flow.

While renovating a property can increase its capital growth and rental yield, investors have to be aware the interest payments made when their property is being renovated are not tax-deductible because the property is not available for rent. Instead, that period of interest payments is added to the property’s capital value and can be deducted from any capital gain when the property is sold.

If cash flow, rather than capital growth, is the priority, then finding positively geared property is still possible, Mr Russell says.

For example, you can buy a one-bedroom apartment in Docklands for $450,000 and rent it out unfurnished for $480 a week or furnished for $600, because it is in high demand from executives who want to be close to the city centre.

Mr Russell says a common strategy is to buy something established that will achieve good capital growth, which you then tap into to buy a second property with a high yield, so it doesn’t put too much of a strain on your ability to service your loans.

“So, I think, smart investors look at it strategically, after acquiring property, as to how the next type of property is going to complement their portfolio.”

Mr Russell says some investors get into trouble when they buy before sitting down and working out what they are trying to achieve. One couple he helped had planned to buy and renovate in an outer suburb but then bought a student apartment for the positive gearing. When they then decided to sell it, they had problems finding a buyer and made a capital loss.

“They bought it for $180,000 but sold it for $165,000, plus stamp duty, plus agency costs.”
Buyers advocate Michael Ramsay says he always clarifies his client’s objectives in buying an investment property.

“We try to work out whether capital growth or income is more favourable for them or whether the tax deductions are the main thing,” he says.

However, Mr Ramsay is a firm believer that capital growth should be the priority. “There are a lot of articles … about tax benefits and saving stamp duty and all this but it’s buying the right property at the right location that’s going to make you money and not the odd dollar that you save in your income tax.”

Despite the depreciation benefits, Mr Ramsay says he does not promote off-the-plan developments to clients “because only about 5 per cent of off-the-plan properties are worth more when they’re built, so you don’t have any capital growth for two or three years, you have a 5 or 10 per cent deposit being tied up and you really run the risk of not getting what you want.” Investors who buy off the plan often end up being disappointed with the size and finish of their apartment.

“I still look at depreciation; I think it’s great but I think, ‘Let’s buy an established apartment and see what we’re getting and you can see the view and the size and the orientation and the neighbours and the body corporate in the common areas’, rather than risk an off-the-plan purchase.”

Mr Ramsay says new properties suit people who aren’t concerned about adding value and are keen to have tax relief through depreciation. Some clients are also not interested in buying older properties because they are concerned about maintenance and impractical floor plans.

“Mum-and-dad investors often prefer the older styles because they haven’t quite gotten their heads around the contemporary apartments in a block of 30 or 40,” he says. Dealing with owners’ corporations can be a concern for them and they are often attracted to the higher ceilings, bigger rooms and polished floorboards of smaller, established apartments.

“They just prefer the old-worldly charm of an older block.”

Only about 15 per cent of investors are attracted to buying a property to add value and usually they are older, with experience in investing or renovating. Renovating suits “the quieter, astute investors”, Mr Ramsay says, who are not desperate for rental income on settlement. Properties can be vacant for months during renovation

“and you have got to take that into account”.

Mr Ramsay says rental demand for all types of property in Melbourne is strong but for return, townhouses and apartments are the pick, commanding a yield of about 4 per cent to 4.5 per cent, while houses are about 3 per cent to 3.5 per cent.

Five-year projection

Equity: $333,911
Annual after-tax cash flow: $18,151

Equity: $336,909
Annual after-tax cash flow: $16,519

Equity: $333,911
Annual after-tax cash flow: $14,315

Based on principal and interest payment of 7.8 per cent, asset growth of 9.7 per cent, rental growth of 2.5 per cent.

One eye on growth

David and Martha Marsden considered the tax benefits of buying different types of property when they began their search for an investment last year but say their first priority was maximising their potential for strong capital growth.

“We did look at the tax implications and wanted to structure the purchase so it would strike the right balance,” Mr Marsden (above), says. Attracted by the idea of a fixed price and stamp duty savings, they were initially attracted by off-the-plan developments but decided they would prefer to “buy something you can see”.

Late last year, the couple bought a two-storey renovated apartment in Abbotsford that had been available off-the-plan two years earlier. Their buyers’ advocate, Michael Ramsay, secured the apartment after it passed in at auction and it was rented within two weeks of settlement.

The two-bedroom apartment is within walking distance to the city, has a courtyard and two undercover car spaces. The renovation means they get depreciation benefits and they borrowed only about half of the purchase price. Mr Marsden says he and his wife are happy with their decision.

Posted by Kate Robertson – Domain on 26th March, 2011