Investing in real estate is one of Australia’s most popular ways to build wealth and generate passive income. When it comes to acquiring an investment, there are two main options to consider: buying an existing home or working with investment property builders. Both approaches have their advantages and disadvantages, and the decision ultimately depends on your goals, budget and location. In this article, we’ll explore the pros and cons of building versus buying an investment property to help you decide which option is right for you.
1. Location
Location is everything when it comes to investment properties. Having a house in the right spot will make your property far more desirable for tenants, allowing you to increase your rental income and capital gains. But there’s a big trade off in location when it comes to building versus buying.
If you buy an existing property then you will typically have more freedom to choose a home that’s in the right area. Existing homes tend to be a little bit cheaper, allowing you to shop around in desirable, inner suburbs that have a shortage of vacant land.
On the other hand, new builds commonly occur as part of developments in up-and-coming areas that may be less desirable. Across the lifespan of your investment this can drastically alter how long it takes to pay down your mortgage.
2. Budget
Buying any home is expensive, but budget is a particular concern when breaking into the investment market. The cost of your investment property largely depends on where you’re buying, although established homes typically work out to be slightly cheaper than new builds.
Fortunately, it’s easy to compare the price of each type of investment property. A weekend spent house-hunting can give you an idea of what you’ll pay for an establishing home. And a few calls to local builders can give you an idea what you’ll pay to construct a new property. Just remember that new homes require you to purchase land and pay for the cost of the build, so don’t be fooled by the low land prices that developers sometimes advertise.
3. Rental Income
There’s no two ways around it. Newer homes are more desirable to tenants. That means you can charge higher rents for a newly built home than you could for an older property.
Managing rental income versus your mortgage expenses is a careful balance. While you may be able to charge more for a newer home, you could still receive less overall if it’s constructed in a less desirable neighbourhood. Similarly, an older home might bring in lower rents, but if you paid substantially less for the property then the difference could be manageable.
Be realistic when doing your research into rental markets. Don’t assume you’ll be able to charge top dollar for your home, and remember to account for how an area will change over time. New developments may become more desirable as more services are built in the area. Meanwhile, older suburbs may become more crowded and less popular with tenants when compared to their other options.
4. Desirability
The desirability of your property has a big impact on the viability of your investment. The nicer the home, the more rent you can charge, and the sooner you can pay off your mortgage. In this case, newer homes are almost always viewed as more desirable by tenants, so new builds have the edge over existing homes.
As an added bonus, building a new home gives you complete control over the design, fit and finish of the property. That allows you to build a home that’s perfect for your local market. For example, if you are in a major school catchment, you could build a home that’s suitable for large, young families. That home would perform better on the rental market than smaller townhouses in the same area.
5. Timeframe
The sooner you have tenants in your rental, the better. Maintaining a steady stream of paying tenants is one of the key challenges to owning an investment property. If you buy an existing home then this is usually a quick process. It typically only takes 4-6 weeks to seal the deal on an existing property, and you can start receiving a rental income immediately.
The opposite is true for newly built investment homes. It can take 6-12 months to build a new home – or longer if there are delays. During that time you’ll still need to pay your mortgage. That means you need to be sure you can afford the cost of your mortgage during the construction phase. You may be able to take advantage of options like interest-only loans, but it still presents a key challenge for investors.