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Buying New VS. Established Investment Properties: Don’t Buy This!

Should you invest in buying new or established properties? This comprehensive guide breaks down the pros and cons of each option, highlighting hidden fees, opportunity costs, tax savings, and potential growth. Avoid common mistakes and make informed decisions with expert insights from Ravi.

Written by
Ravi Sharma
Published on
June 20, 2024
Established property

Table of contents

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One of the most frequently asked questions is: What type of property should I buy?

Should I buy something that's established, or should I go for the new home and land package that just got advertised to me online?

In this article, I want to use logic to approach this, and it may help you in your own decision-making process.

So if you're interested in my thoughts, then definitely keep reading.

Understanding Your Options

Now, what I want to focus on is: Established properties versus new properties.

It is so easy to get caught up in the web of lies that are out there when it comes to the real estate industry, and that's why I want to be here to demystify it and make it simple for you to understand the pros and cons.

Now, you may still decide after reading this article that you “don't really care about Ravi's thoughts” and are going to continue doing what you need to anyway.

However, the purpose of this article is to save at least one of you from making this mistake. 

This is one of those things that: People get caught in, realise 3-4 years later, and then it's too far gone so you try to rebuild. But honestly, the opportunity cost probably kills you anyway.

So let's jump into my whiteboard and cover a few topics now.

The key things that I want to talk about are:

  • Fees
  • Opportunity cost (when it comes to borrowing capacity and equity)
  • Tax savings
  • Rents

Now, some of these will overlap with each other, so we're going to go ahead and really break it down for you.

FEES

Okay, so you get hit up with a couple of ads or you see it on realestate.com.au saying: “House and land, it's so expensive to build but this seems like a no-brainer deal.”

Let me explore further...

To understand how this all works, it's important to note the couple of ways people buy property today.

  1.  Traditional Method

Traditionally, you go online today, maybe straight after this video, and it might be one of these tabs that are open on your phone. You might think: "Okay, I can find something on realestate.com.au. I'll give the agent a call and I will buy the property."

This is traditionally how it's done.

Traditional real estate buying method

  1. Using a Buyers Agent

With the market moving so quickly and the rise of more competition, people have opted to go for a buyer’s agent, like myself.

Using a buyer's agent in property investment

People come to the agency and say: “Ravi, I'm time-poor. I don't know what to look for when it comes to property. I just want to make gains,” or  “Hey, I really love property. I love doing the research but I get analysis paralysis and unfortunately the market is moving way too fast for me. I need you to go and find a property for me that's going to tick all the boxes.”

Then they will say: “Okay, I'm going to pay you a buyer’s agent fee,” which could be anywhere between $15,000 and $20,000, and then you get the property.

In option one, you do it yourself.

In option two, you've outsourced it.

  3. Go to an Advisor or Broker

In this option, you go to an advisor, a broker, or an accountant.

Go to an Advisor or Broker

You may have been hit up with an ad as well by one of these companies, and they say: "Look, don't pay for a buyer’s agent. What you need to do is come on board with us. We'll charge you maybe $2,000, maybe $5,000, or maybe absolutely nothing. We'll do it for free with your best friend. So there might be no fee or low cost, and we'll find your property anyway.

In fact, we'll do it even better than most buyer’s agents because what we'll do is: we will find a brand new property. Whether it's an off-the-plan apartment or a new house and land package, we can find that for you.”

Now, if you are a novice at this and you see something that's old and something that's new, you're like, "There's no upfront fee, there is an upfront fee.”

Naturally, you're going to go for the option that has no fee or low fee and for something that's newer because that's what we were taught—that if it looks good, it must be good.

So you go for this option, and only realise after the fact that there's so much crap that you don't know about.

Some of you guys are lucky where you've gone into the process, realised, or you've seen one of my videos on YouTube or read my blogs  and gone: "Oh, I think I'm getting caught here," and been able to escape.

I know this for a fact because some of you guys have become clients saying: "Hey, this was what my experience was."

Meanwhile, others unfortunately get caught up in this and don't realise the mistake until much later in the process.

Now, what happens in this is: you'll still get a property. EXCEPT, the reason why these places have so many staff and big offices and all of that is they're still running a business, but you're sort of wondering “how do they get paid?”

Well, they’re getting paid from the developer themselves, and they get paid A LOT more than a buyer’s agent would.

No upfront free and getting paid by the developer

 

When I started out on the YouTube channel, I started gaining a bit of attention and I got hit up by a bunch of these developers and companies that would market their projects and say: "Look, you could go down the path, which might be a bit more ethical." (they didn't say that, but I thought in my head)

It might be more ethical, which is to be transparent with your pricing. Go out there, charge the fee to the client and nothing else. Just do what the client wants.

Or, you could just say to the client that: “You're charging a little bit” or “there's no fee” and what you'll do is in the back end:

  • You’ll get developer incentives;
  • You’ll get all this money coming through in the back end; and
  • You’ll make a lot more.

Now, I'm talking about anywhere between 5x to 10x more money if I went down this path.

I'm about to show you exactly why this doesn't work and it definitely does not sit well with me. The reason is because you could go out there and:

  • Purchase one house with a purchase price of $500,000; and
  • Use a buyer’s agent, so it's $15,000 to $20,000.

Now, as a buyer’s agent, I can live with myself knowing that I've charged something like this because:

  • We provided the right service;
  • We got you into the market with speed; and
  • We know that we've done all the data and due diligence like you would outsource for any service.

However, you could go down the other path which is:

  • Buy a property worth $500,000;
  • Go through one of these advisors, the broker, or the accountant saying: "Hey, you want to buy property? Don't worry about that old stuff. I'm going to show you some new stuff through these connections I have”; and
  • Have them charge you nothing upfront but give you a property valued at $450,000

Calculating incentive from buying a property worth $500k

Now, on the surface, you'll believe that the property is worth $500,000.

But, is it really $500,000?

Now, if you think about it—would you buy a house or unit for $500,000 if you knew that in reality, it is actually worth $450,000?

Would you buy a $450K worth unit for $500k

Well, no you wouldn't, because that would be really dumb! You’ve just lost $50,000, but because you don't know about it, you get caught up in this.

I'm going to give you an example of Chris who came to us and said, “This is exactly what happened to me.”

I said in response, “Yeah, I'm going to make a video about this because I think there's more people out there that really need to know about this.”

In 2018, Chris bought a property (a new house and land package) for $600,000.

In 2024, the property is worth $620,000.

So that's $20,000 in 6 years, which equates to about 1% growth every year, and he went with the no-fee model.

1% growth every year with no-fee model

He approached someone who said: "Hey look, here's my ad. Here's something new! You should go and buy it. There's no fee."

So he thought: “Hey, I've always wanted to get into the property market, why wouldn't I do this?”

And in what would be one of the biggest property booms in Australia, his property grew by $20,000. It's not even keeping up with inflation at this point.

After that, he came to us and obviously said: "Okay, I want to buy a property." 

We then bought him one for $450,000 in 2023, and it's now worth $490,000. 

He paid a buyer’s agent fee, but the property's grown by $50,000, which is about 10% growth in the first 12 months.

9% growth with a buyer’s agent

Now, if you knew this information, you would go: "Well, why wouldn't I pay for a buyer’s agent or do it traditionally and do it myself and find an established property versus going for a new house and land?"

When we're talking about fees, which is the first topic here, it's because you're unaware of these things. It's very deceptive and honestly, it's something that really makes me cringe, but unfortunately, a lot of people are doing this without you noticing.

The thing is: the property hasn't just grown from $600,000 to $620,000. It's the FACT that the property was never worth $600,000 in the first place. 

It was probably worth close to $560,000, so it's grown by $60,000—10% over the period of 6 years, which is still not great. That's why it looks like there was no growth in the property.

10% increased for over 6 years

This is a big reason why people need to be aware of:

  • What's transparent;
  • What's not transparent; and 
  • What's being charged to them?

Opportunity Cost

Now the next part to this is opportunity cost.

You could go out there and say: “Okay, I'm going to go and buy this land and then eventually a house will get built on it.”

Guess what? When there's no house 18 months later, there's a house. If everything goes to plan, you'll have a house there.

Opportunity cost part

But for 18 months, you make no income from that because it's just land.

Now, because there's no income, you probably got no tax deductions. You then have a lower borrowing capacity because if the land is there:

  • You’ve got debt; and
  • You’ve got to make my repayments.

However, there is NO INCOME.

Additionally, you’ve also got NO USABLE EQUITY because if the land's there, and I've entered into a house and land combination, I'm like: "Well, I don't know if I can borrow against it."

No usable equity

BUT!

If you went and just said: "Okay, I don't want to wait for a house and land to be built. That's probably going to be like dog poop when it comes to numbers anyway. I could go out there and purchase a property now."

In 12 months' time, you probably have enough equity to go and buy your second property.

You can use the equity from the first one, which allows you to hold more assets, which allows for more growth.

Equity of purchasing a property

When you put it this way, you're like: "Okay, I've only put a small deposit down. It's okay, I don't need to worry about it now. The land's there. That's okay, it's going to get built."

But in the meantime, the market's moving, and you unfortunately got sidelined because you thought it was a great idea to go and buy a house and land package.

Now, chances are that house and land could be worth a lot more in 18 months. But why would you take the risk of not knowing?

If I can go out there in this market and:

  • Buy a property; 
  • Have it in the right location; and
  • Have proven data over a long period of time,

Then that's where I want to be. I'm not just going out and gambling, hoping that this property goes up in value because: “Hey, it might be a new growth area.”

What if there's no demand? And there's no way to tell because the suburb is completely new. 

Now yes, you could go and decipher that based on surrounding suburbs and things like that. However, you could also just go into an area that 

  • Is established;
  • Has a long-term history around property prices; and 
  • Has infrastructure going in to actually boost jobs and things like that.

Tax Savings

Now, what about tax savings?

We've addressed the fact that fees don't really look like what they actually look like. 

We've also addressed the opportunity cost, which is that I could go and build out more of a portfolio faster in that time versus developing something.

Now, it comes to tax savings.

Because the accountant wants to basically reduce your taxes, they'll say: "Look, it's time to reduce taxes, buy property and reduce your tax."

You've probably heard that at some point when you're starting to make a lot of money and you've got tax bills. And they're like: "Oh, I've got a guy."

Tax savings accounting

In that case, you could get looped in because a newer property gives you tax depreciation and that essentially means that: The house itself, the building itself, depreciates.

So it's an accounting figure. It's not the fact that it's losing its value. It's the fact that on paper, the building actually depreciates. Meaning, the wood, the bricks, everything that goes into it, actually loses value. That's why they say: “Buildings depreciate, land appreciates—that's where the saying comes from.”

Now, that looks like it's awesome because you're saving a lot more tax, but on the flip side, banks don't really care about this. They go: "Well, what's your position look like before your tax return?"

You might have negative cash flow and you go: "Well, don't worry, I've got depreciation coming in."

Yes, to a certain extent, that's going to help you with your taxes.

But the banks don't really care when it comes to borrowing capacity. 

So there's a pro and con to this.

Yes, you want to save money, great! But at the same time, the banks don't really consider this when it comes to your borrowing capacity.

Let's use an example here so that we can really drive this point home.

If I buy a new property now, the savings I may get is about $8,000 a year, and it grows by about 4% every year.

Property’s saving and growth accounting

That's a pretty good situation. You're saving on taxes and it's growing—happy days.

But if I was to go: "Well, I could buy an established property and it might give me $2,000 worth of savings but it grows at 7% per year on a $500,000 property," 

That's about $15,000 per year compounding tax-free.

$15,000 per year compounding tax-free

Okay, so let me just say that again…

In the first example, I'm saving cash flow tax-wise.

Yes, I'm negatively geared. Yes, I'm depreciating, I got my tax, awesome!

But if I can grow that property by $15,000, which is almost a 2X return on what my savings would look up front, I'm now in a position where I can grow more wealth faster and that is the end game.

Why? Simple!

It’s because rich people focus on making more, not saving more, and that is always the key driver here.

Rich people focus on making more, not saving more

 

99% of People out there will go:

“How do I save on taxes?”

“How do I save money on this?”

Meanwhile, the rich mindset is:

“How do I have an abundance mindset?”

“If I'm having money flow in and flow out, how do I make more?”

That is the big takeaway here.

When it comes to RENTS and not knowing:

  • Whether going to be rented in 18 months;
  • Whether there's demand in 18 months; and 
  • What sort of rental growth looks like, 

You better believe that when someone's going to buy a piece of land, there's probably like 400 other lots around it, which means: The supply is really high in the short term. 

During that time, vacancy rates might be really high because it's a new area, and people aren't accustomed to actually moving there.

Now over time, that can change, but what you're looking for is:

  • Micro speed; and
  • Macro speed.

So yes, you can't time the market; you want time in the market. 

However, this can significantly stunt your growth because you got sold this dream that: “Hey, it looks new, it's fantastic! Look at the brochures!”

But if you're paying an extra:

  • $40,000;
  • $60,000; or
  • In some cases up to $100,000,

You are actually screwing yourself over. 

So whether you use a buyer’s agent or do it yourself, it is completely up to you. 

However, I just want you to be aware that: When you're going out to these advisers or you're getting advice about buying a property from your broker or your accountant, ask the question: “How much are you making from this deal?”

If their face goes red, it'll just be another reminder to read my blogs and subscribe to my Youtube channel!

I hope you guys have enjoyed this one. See you guys in the next one. 

Thanks, everyone!

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