Should I Build Or Buy My Next Investment Property?

When it comes to purchasing a new investment property, you’ve typically got two main options: either build or buy a house. Like most things to do with real estate, there’s no right or wrong answer. Instead, it comes down to a number of different factors, like your overall investment strategy, time constraints and how much it costs to build to name a few. 

Whether you choose to build or buy an established property, each option comes with its own set of pros and cons that you’ll need to weigh up. Let’s get into how these two investment options stack up against one another.

Building a new investment property

Building a new home can be quite the process, so it’s important to make sure you’re prepared for the commitment. Here’s a quick rundown of the pros and cons that come with building an investment property. 

Pros

When you build an investment property, you’re able to start from scratch and create your own vision. Here are some of the key benefits that come with building a new investment property:

• Greater potential for customisation: Building a new property allows you to customise the design, layout and features according to current market trends and tenant preferences. This can make the property more attractive to renters and potentially increase its value.

• Higher depreciation benefits: New properties tend to come with higher depreciation benefits, which can allow you to claim tax deductions on construction costs and eligible fixtures and fittings. 

• Potential for higher rental: New properties often attract tenants seeking the latest conveniences and modern living standards. These modern amenities and designs can command higher rental income compared to older properties and tenants are often willing to pay a premium for a property with updated features.

Cons

When it comes to building a new investment property, you’re often faced with all the challenges that come with construction. From delays and cost overruns to land and development costs, there are also other drawbacks that come with building a new investment property:

• Interest payments during construction: Investors often need to pay interest on their construction loans during the building phase. This can result in financial strain, especially if there are unexpected delays.

• No immediate rental income: Unlike purchasing an established property that generates rental income immediately, building a new property involves a period without rental income during the construction phase. This can affect the investor's cash flow. You need to make sure that you can afford to service your home loan and manage a new build without rental income for a period of time. 

• Lack of rental history: New properties lack a rental history, which can make it challenging to accurately estimate potential rental income. This uncertainty can end up affecting the property's overall return on investment.

• Limited tax depreciation over the short term: While new properties offer higher depreciation benefits in the long term, the immediate tax benefits might be lower compared to established properties with existing depreciation allowances.

Buying an established property

While buying an established property doesn’t come with the same level of customisation as building, it’s still a popular path for many property investors. Here are some of the advantages and disadvantages of buying an existing property.

Pros

Buying an established home as your next investment can be a good move if you don’t have the time to entertain building. It also offers several other advantages, like:

• Immediate rental income: For most investors, the aim of the game is to maximise rental income, so with an established property you’re more likely to get the ball rolling a lot quicker. Plus, if you purchase a home with existing tenants, you’ll be able to obtain immediate rental income. This can help offset mortgage costs and enhance the property's overall return on investment.

• Performance history: Established properties often come with a history of performance, making it easier to assess their potential for returns. The property market might have already demonstrated stability, reducing the risk compared to investing in a new or off-the-plan property.

• Potential tax benefits: Owning an investment property in Australia can offer various tax benefits, including deductions for mortgage interest, property management fees, repairs and depreciation. 

• Lower risk: In some cases, established properties can be easier to finance, as lenders generally perceive them as lower-risk investments compared to new builds. 

Cons

While buying an established investment property in Australia has its advantages, there are also potential downsides or cons that investors should be aware of:

• Limited depreciation benefits: While established properties may have lower depreciation benefits compared to new properties, which often come with higher depreciation allowances, you may still be eligible for some depreciation on fixtures and fittings.

• Tenant preferences: Modern tenants may have preferences for newer properties with contemporary designs and amenities. With this in mind, an older property could face challenges in attracting and retaining tenants unless it undergoes renovations.

• Potential for hidden issues: Older properties can have hidden issues like structural problems, outdated wiring or plumbing and environmental hazards like asbestos. This is where completing a thorough building and pest inspection is important to uncover any potential issues.

• Higher maintenance costs: Older properties often require more maintenance and repairs compared to newer ones. With this in mind, it's essential to budget for ongoing maintenance costs, which can impact your overall return on investment.

So, is it better to build or buy a house? As you can see, buying and building each come with their own unique set of advantages and drawbacks. It’s up to you to weigh up your options and make a decision that suits your circumstances and aligns with your long-term financial goals and investment strategy. 

While we don’t currently have a buy a home offering, we’re working on a little something behind the scenes. For now, you can use our borrowing power calculator to work out how much you can afford to borrow for your next investment property. 

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.

Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.

Unloan is a division of Commonwealth Bank of Australia.

Applications are subject to credit approval; satisfactory security and you must have a minimum 20% equity in the property. Minimum loan amount $10,000, maximum loan amount $10,000,000. 

Unloan offers a 0.01% per annum discount on the Unloan Live-In rate or Unloan Invest rate upon settlement. On each anniversary of your loan’s settlement date (or the day prior to the anniversary of your loan’s settlement date if your loan settled on 29th February and it is a leap year) the margin discount will increase by a further 0.01% per annum up to a maximum discount of 0.30% per annum. Unloan may withdraw this discount at any time. The discount is applied for each loan you have with Unloan.

There are no fees from Unloan. However, there are some mandatory Government costs depending on your state when switching your home loan. For convenience, Unloan adds this amount to the loan balance on settlement.