One of the questions investors often ask is whether an established or a new property will give a better return. As always it depends on many factors but one part of the analysis sometimes overlooked is the tax depreciation benefits of a new property.
Let’s undertake a simple comparison using an investor earning the average wage (Call it $95,000 pa) looking to buy in Sydney Outer West where there is a choice of established or new options around the $850,000 price range and assuming the build cost on a new property is $450,000.
We will further assume a 4% rental return, 5.5% interest only loan based on a 20% deposit and 9% property management fee. Wage growth is 3% per annum.
The only difference between the two scenarios is that the new property allows for a 2.5% tax depreciation deduction ($11,250) each year. The table below shows the difference in after-tax income, including the Medicare levy, in each scenario:
| Year | After-tax income | |
| Established property | New property | |
| 1 | $67,527 | $71,408 |
| 2 | $70,812 | $74,694 |
| 3 | $74,253 | $78,134 |
| 4 | $77,858 | $81,739 |
| 5 | $81,635 | $85,517 |
| Total | $372,085 | $391,492 |
| Amount better off | $19,406 | |
In this case the new property leaves the investor $19,406 better off, in after-tax terms, after 5 years. To achieve the same equity position (capital gains plus after-tax income), the established property will have needed to achieve annual capital growth of 7.35% per annum as opposed to only 7%.
However, as is well known, the great advantage of property investing is the power of leverage. The additional cashflow would enable servicing of a loan approximately 10% greater allowing our investor to take advantage of the increased capital growth afforded by a higher value property, in this case $935,000.
At 7% growth per annum after 5 years the (new) $935,000 property will have increased in value to $1.31 million versus $1.19 million for the established property. After expenses, the established property would have needed to achieve growth of 8% per annum for the investor to be in the same equity position.
This analysis shows that by freeing up cashflow through the benefits of tax depreciation, and thinking strategically, investors may be able to achieve superior returns.