Consider the pitfalls of investing in new property before you go out and buy.
There are those who love investing in new property, and there are those that don't.
Some like the hassle-free aspect of having a new building that won't need any major work done on it for a while, while others like the challenge of making more money from buying a sow's ear of an old property, and making a silk purse from it.
There are risks involved in both (I've covered the risks of investing in older properties elsewhere on this site), and you need to know them before you dive into investing in new property.
Those risks will depend very much on where you are living in the world, but I can talk about the market in Australia from experience, as well as the market in the UK and the USA from a great deal of research.
Investing in new property in Australia
Here in Australia, it is probably more likely that if you invest in new property, you will make money. I hesitate to promise that you will make money from it because it depends on how you go about it and where you buy.
You might have heard of the Gold Coast Scams of the late 1990s and early 2000s? Stories abound of developers selling "discount" property off the plan, setting up seminars on property investing, offering free flights to the Gold Coast, and then pushing a sale through by making it a "limited time only" offer.
These scams were made famous for the thousands of retirees who lost their savings by investing in new property, only to find that when they put them on the market after settlement, they weren't worth the money they had borrowed. At that time, developers created a glut of housing on the market in many Australian cities, and a lot of people lost out as a result.
Times have changed this a little, but it still pays to beware that you might be offered new properties at over true market value, simply because you didn't know the market in the area at the time. It also pays to be aware that until very recently, many developers were having difficulty shifting new properties because the market was almost completely flat thanks to high interest rates. Some still are desperate enough to push sell you into something you don't want to be involved in, especially if the project has had to change builders a few times.
Play it safe before investing in new property.
Do your due diligence.
Research the market you are buying into thoroughly (for both new and old houses) and invest in new property with the confidence that comes from solid knowledge and not from the sales pitch of desperate developers. One way to play it safer when you invest in new property is to buy it closer to home where you have a better idea of what local properties sell for.
Today, ten years or so on from the Gold Coast scams, Australia is in the midst of a housing shortage like nothing seen since the end of the Second World War. This means that there is a desperate need for people to invest in new property, because many of the Baby Boomers who were investing in property until recently went and cashed in their investment properties to put the money into superannuation while they got a tax break.
The present housing shortage in Australia is growing at such a rate that some sources suggest we could be short by 250,000 dwellings within the next five years. Having been caught trying to find a property to rent in the early days of the shortage, and watched others around me get caught without a place to live as well, I can truly believe it. Thankfully that is no longer a problem for us , but it made me aware that there are many others out there who are not so lucky, even resorting to living in their cars for a while.
If you plan to invest and the only way you can do so is through access to the First Home Owners Grant, then take the plunge and take the full amount you can get for purchasing a new property while it is available. Hopefully it will be extended beyond the middle of 2009, but even after that it is still there as a starting point. You will need to read my page about it before you decide to use this money to invest, because it does come with some strict rules.
There are also other incentives, in the form of grants and tax breaks, out there for investors who build new property and rent it out for 20% below the market rate for the area they build in. These can add up to around $8000 p/a, so developing your own new property, if you have the patience and time to do it, can be the safest way to go in Australia.
Investing in New Property in other parts of the world
Investing in new property in the USA and in the UK can be an altogether riskier business. This is less because developers intentionally mislead buyers (although this is also a problem), and more because the global economic downturn has sent property in countries other than Australia into freefall, with old and new builds losing between 20-40% of their value in the last 12 months alone.
People who invest in new property in these countries have all-but-abandoned the market because they have bought properties while they are still being built and are uninhabitable, only to have to settle under contract and find that they are having to pay 40% more than their property is now worth.
Worse still, the investment market in the USA is currently so oversupplied that landlords are finding it difficult to get tenants, and houses are lying empty for months or even years.
If only we could move some of these surplus houses to Australia cheaply!
So, if you want to invest in new property in the UK or the USA, then you will have to do extra due diligence to make sure that there truly is demand for what you are having built in your chosen area.
Perhaps a safer bet is to make sure that you are buying fully completed properies, in high-demand areas, so that you can get a current market valuation and move tenants in immediately, adding extra incentive for tenants to stay on using some of the techniques I suggest in "Responsible Property Investing" and "Tips for Investing in Rental Property".
Why invest in new property at all then?
Well, I mentioned before that many investors find new property - if chosen well - is much less hassle in maintenance, just because everything is new. As long as you avoid the spin doctors and the shonky builders (I've said it before - always have a full building inspection, no matter what the age or type of property), you can get a property that is really good quality.
Another advantage if you invest in new property is that a new property often has more appeal to the market than an old one. Of course we know that there is a lot to be done if you renovate to improve, but modern houses are also designed for modern living from the ground up, and this appeals to both tenants and landlords by achieving a higher level of return than an old property, and supplying the living spaces that a busy, growing, active family of tenants needs.
Are there any alternatives?It's a bit outside of the range of this site, but an Option Deed is another way to invest in "new" property, partially by investing in old property and arranging for someone else to put their money on it by sorting out development applications or even the simple knowledge that someone can develop a property in a certain way. This tactic requires little or no money down... but that's for another site, or at least for somewhere else on this one!
It's up to you which way you choose to go. Investing in new property to rent out can be just as rewarding as investing in old!
Do you have a story about how safe or otherwise it is investing in new property in your part of the world? I would love to hear from you!