I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> This is part three of the expert busting series and today we're going to be exploring new versus old. The nasty truth.
Jeremy. >> Yeah. So, new properties versus old properties. We're going to find out in this presentation just how unlikely it is for a new property to come anywhere near the performance of an established property. And we're going to go over depreciation, uncover the uh nasty truth about depreciation, why it's to be avoided, and finally we're going to figure out the one metric that every property should have for above average capital growth. >> All righty.
So, starting off with depreciation benefits. >> Yeah. So this is one of the biggest selling points of new property. Uh the sprukers of new property, depreciation benefits. The thing is there's nothing beneficial about depreciation. So you stop and think about it for a second or two.
Uh as an investor, you're looking to buy an asset, not a liability. An asset grows in value. It appreciates. It goes up. >> A liability depreciates. It goes down in value.
So, how on earth can depreciation be considered a benefit? This is one of the biggest lies in the property investment industry. Uh, this term I sometimes I still catch myself saying depreciation benefit. There's no benefit about depreciation. So, what is depreciation? It's the loss in value of your property as it ages.
uh as the building gets older, it becomes less valuable. So land that appreciates over time, it gets more expensive, but the building goes the other way. Depreciation is an estimate of the amount of value uh that a property has lost since the day it was constructed. >> And I guess the way you can also in a simpler way of explaining is you buy a car for 50,000. the year after it's worth let's say you know uh 45,000 that's sort of 10% depreciation. It's the drop in value of the vehicle as an example.
>> Yeah. And a lot of uh hi-fi tech depreciates very quickly because technology is evolving so rapidly but yeah it's the building that depreciates the land uh appreciate. So the depreciation uh if you just come back one more slide. Thanks. Uh depreciation is a dollar estimate uh of the loss in value based on the age. And there's this group of people they're called quantity surveyors.
They have a very special skill. They're experts in this this topic. Uh they've learned how uh quickly certain items depreciate. For example, a hot water system versus uh air conditioning versus carpet. Uh there's an enormous number of things, including the building itself, that depreciate over time. And the quantity surveyor can list all of these items of a house or of a unit.
Uh and they come up with what's called a depreciation schedule which shows in dollar terms how much money uh is lost due to aging of uh the building >> and that comes from the Australian tax office. So it can change over time but that's where it comes from. >> Yeah. Now there's this uh fundamental law in tax law in Australia and in many other countries around the world. Uh you only get taxed on net profit. So losses are offset against income to calculate uh net income.
>> Uh for example, if you rent out a uh shop and you sell donuts, uh you don't pay tax on the full amount of money that you receive from selling those donuts. First of all, you've got to uh take out maybe wages and other expenses uh like electricity and water and the rent that you pay. Labor >> and yeah, the labor. And another thing, another expense is depreciation of your doughut machine or your your fridge or your closet or your security camera or your doors. All those sorts of things. Uh they depreciate over time and you pay tax on the net amount.
And it's the same for an investment property. It's just like running an accommodation business. You have property expenses uh which are offset against rental income and the net figure is what you pay tax on. Depreciation is just another one of those deductions that you can claim. Uh your donut machine ages losing a little bit bit of value each year. >> Uh and that little bit can be claimed.
Your investment property ages too. uh there's no leg up specifically to Australian property investors. This is just a standard sort of business law that you are paying tax on the net proceeds minus depreciation >> and you can always talk to your tax accountant about this. So think of it is if it's an incomeroucing asset do those deductions are they associated with that that income producing? So I guess from a property perspective it could be interest, council rates, insurance, management fees, repairs and maintenance. Um and obviously depreciation's the other one there.
So there examples there might be more more there. That's sort of the the bigger ones that we've got. >> Yeah. And uh there's a depreciation schedule an example of one on the next slide. Do you want to take us through this day? >> Yeah.
So what happens is let's say you purchase a property. So let's look at a brand new one specifically. there's typically a 40 uh say like a 40-year term um with for example like capital work deduction. So division 43 and division 43 is that that building component. So let's say um you can claim that at 2.5% perom. So on a let's say you build a property for uh 500,000 what would that equal about 12 a.5,000 in depreciation every year roughly Jez >> 2 a half% >> but they usually uh use the diminishing value approach don't they >> well you can pick I think you've got the diminishing value and you got the prime cost there's two aspects if it's a brand new property off the plan you've got um div 43 which is just the the 40 years that you can claim over time and then div 40 is your other components.
So it could be appliances, carpets, blinds, and they roll it into sort of the one number. So what you do is you get a 40-year forecast from a quantity surveyor. And if we have a look at the the the screen at the moment, you can see that the property was built around sort of 18th of June. So there might be like what 12 days till that end of financial year finishes. And there's, let's say, roughly about 2,700 that you can claim back against your taxable income for work. So, let's say through the year you get your assessable income from the ATO and let's say it's 100,000.
And then what happens is you've got that 2,700. You don't get that back as a full amount. It just reduces your taxable income. So instead of paying tax on the 100,000, it's more like you'll pay tax on what's that uh 97,300. >> So what this allows you to do is all it does is reduce your taxable income which sort of improves your cash flows. But in the following years, you can see here you've got the whole year for the end of I guess um financial year 2020, 2021, 2022 and you're claiming a big chunk of that.
So 15,000 you can claim on the next year. Then 17,000 15,000. So there's a little bit of a spike up here. Maybe I'd have to double check what that might be there. But you can see it's quite consistent throughout. And the diminishing value sort of claim more upfront.
So you're sort of getting that benefit back a little bit earlier, which means it helps with cash flows a little bit earlier. But later on down the track, the prime cost from a cash flow perspective is um you're getting more deductions later on. So again, you have to look at your circumstances and tie in with your accountant. So I would think that you'd want a lot of those deductions maybe earlier on if your taxable income is higher. But let's say for example, you know, I'm only working part-time or two days a week, then maybe I'm happy to go to that prime cost method. So, long story short, you get a report and even if you buy a property, let's say it's only 10 years old, as an example, you might have $30,000 worth of depreciation that you can claim, but you can't go back and claim those first 10 years because it's already passed.
>> Yeah, it's taken from the construction date, isn't it? >> Yeah. Like another example could be like, you know, you buy a new air conditioner. Um, you know, you can claim that over 10 years potentially. So yeah, that's sort of like later on. >> What this uh schedule shows uh one really important point here is that new property depreciates faster in its early years and then it starts slowing down until eventually it gets to a point where it's just not depreciating at all.
>> I think it's um yeah, so the the 40-year I guess depreciation that in claim I think it's for buildings constructed after 15th of September 1987. And so anything before that, you wouldn't get those um depreciations on that building component, but it's already sort of been >> um well, it's coming up to 40 years now anyway. >> But normally, if you buy a property, let's say that's, >> you know, maybe it's been around for a while, it's a 40, 50, 60 year old property, you'd have no depreciation whatsoever. So, normally you'd talk to a quantity surveyor either way and they'd be like, "Yes, you know, we'll give you we'll give you a report based on what we can see or maybe there was a renovation. So, you might be able to claim that cuz that's a capital improvement. You've added value." So, an example would be maybe you extend the house.
So, they might be able to add a value um that you can potentially claim. But yeah, with a lot of these reports, any properties that are established that are older, you wouldn't be receiving these depreciation uh I won't call it benefits. >> I won't call it benefits, but depreciation. >> Yeah. So, if you move on to the next slide, let's go through an example. Uh the numbers for this next slide are made uh specifically simple.
>> So, there's a really important point here. You don't get back everything that you claim. You only get back a portion of it. So, let's assume that you've bought a new investment property and it depreciates by $10,000 in the first year. Now, you claim that deduction against your taxable income and it reduces your declared income by that $10,000. Now, if you're paying tax at a marginal rate of say 40 cents in the dollar, then you'll pay $4,000 less tax because your taxable income has been reduced by $10,000.
Uh, and that means you pay 104 $4,000 less tax. Now, that does not mean you are better off by $4,000. It means you're worse off by only $6,000. So, you lost $10,000 due to depreciation, but because of the tax claim, tax deduction, it's not as bad as 10,000. It's only as bad as 6,000, but it is still bad. In other words, it is still worse than someone who purchased an existing established >> uh investment property that has zero depreciation.
>> So, I think the let's use this as an example. Let's say you've earned 100,000 in the year. instead of paying tax on that 100,000, it would be reduced by that 10. So you're only paying tax on that 90,000 and that's where you multiply it by that marginal tax rate. And we're using round numbers here, so it wouldn't be 40 cents. Let's say you're in that sort of 37 cent bracket, 37%.
You add the Medicare search charge on top, that's 2%, so it be around 39, but we're using rounded numbers here. But the key thing is just if you think that you can claim 10,000, you're not getting 10,000 back, you're only getting 4,000. You're still worse off by 6,000. And I've spoken to some people where, oh, I wrote off my car or I write this off on the business or you realize you're not getting all that money back. You're only getting back what the tax rate is. So if the small business tax is, let's say, 25%, you might have some GST component associated with that.
Also, you're not getting that whole value back. And there's limits on depreciation with cars, for example, within businesses. And the ATO adjusts that every year. But you also have to think if that car is declining at a rapid rate, is there really a benefit there? So you have to do your numbers. Look at the data.
Don't just go, oh, write it off. >> Yeah. Yeah. It's it's you can see that it's not a good thing. It's actually bad. It's something to be minimized, not maximized.
>> Look, we're not tax accountants. did do uh tax law at uni a while back, but obviously dealing with a lot of clients, we sort of know what to look for and the questions to ask. So, we're using our expertise here. Now, new versus old. >> Yeah. So, uh brand new properties depreciate, uh the fastest.
The newer the property, the faster the rate of depreciation. But the rate of depreciation, it diminishes over time. it starts to slow down uh until eventually the property stops depreciating. And according to the ATO, that's 40 years after it was constructed. Not after you bought it, after it was constructed. So you can buy an established property that's already 40 years old.
It won't have any depreciation. All right. So, uh, next slide. >> Land versus the dwelling. >> Yeah. So why is it that uh new properties with high depreciation underperform when compared to established or older properties.
So firstly we need to understand how a property's value is derived. And it's based on two things. The value of the land and the value of the building that's on top of that land. And uh now we have an understanding of depreciation. We can do a comparison of new versus old. And the this is the easiest way to see the alarming difference between the performance of new versus old.
It's by doing the numbers. So, let's start off with two properties. Both of the same value, but one is old and the other is new. Both were bought by investors for the same price of uh 600,000 and at the same time, but they may be in different locations. They may be in the same street. Uh but that's irrelevant.
The point is we've got two investors, both have the same budget. One goes new, the other goes old. Let's see what happens. We'll look at this example and I guess there are instances I just want to bring up where that $600,000 property might outperform that old property depending on the market that you're in. I think it's important to say that. So where I would see this is very relevant is if I'm going into maybe a specific suburb or a cluster of suburbs like a local government area, this is where I think it'd be a lot more relevant because you get a lot of the similar growth rates, don't you?
So then it's you got that new property versus that old at the same price point. This is where you'll see I guess a lot of the value. And I would normally say well that $600,000 brand new property versus a property where I'm getting a lot more land content which we'll talk about land to asset ratio shortly is what is really crucial to accumulate your property portfolio. >> Yeah. So we could assume that these two properties are side by side in the same street. But yeah, let's just uh move forward.
So imagine buying an older property. Uh it could be in a middle ring suburb perhaps not a uh Greenfield estate obviously. Uh and you've got high land values uh much higher than in those fringe suburbs where the house and land packages typically are. Now, the build might be old enough to be considered only worth, say, 200,000. Um, but the entire property is worth 600,000. So, the land is valued at 400,000.
So, we've got land worth 400,000. Dwelling on top of that has depreciated to the value of 200,000. The total value is uh 600,000. We're assuming this property has say uh a,000 square m. And we've calculated the land to asset ratio there of 67. That's uh 400,000 divided by 600,000.
That's the land value divided by the total value of the property. It's 2/367. >> And that where does that land valuation come from? >> So that would be a professional valuer. Uh they usually split up the value of a property into land and dwelling. >> And also you get the land rates from time to time.
I'd say they're a bit more conservative. I think depending on, I guess, the state that you're in, it could be three years, could be four years, but that's how land tax can also be valued. So, if you've got three investments in New South Wales and that land content um or the land value from um the council's high or the local government, you're going to get hit pretty or federal government, I'd say, depending. >> Oh, it's Yes. State, I think, isn't it? >> State.
Yeah, that's it. State. So, you'd get hit um but it's just to be a very relevant, isn't it? That land content value. That 67 is from 400,000 divided by 667%. >> Yeah.
And that's called the land asset ratio. >> Now, let's move over to the new property. So, >> yeah. So, imagine you've bought uh a new let's say it's a house and land package. Now, you've paid $200,000 for the block of land and an extra $400,000 to have a house plonked on top of it. Total value uh is 600,000.
So the land to asset ratio in this case is 200,000 divided by 600,000 uh.33. >> So it's like 1/3 typically. So that land is only 30. Yeah. One/3. >> Yeah.
>> The total value. >> You as an investor, you've paid 600,000. Well, one investor has paid 600,000. The other investor has also paid 600,000. We've got a new property in one case, an old property. Let's see how those two properties perform over time.
Let's let's fast forward the clock. >> And I guess the land size is 327 compared to like the thousand square meters on the previous >> example. >> Yeah. So if they were side by side, you couldn't have one block of land being the same size as the other block of land and being half the price. It would have to be probably a smaller block. All right.
So the older property uh has obviously a cheaper house on its block of land. That's because the house has been there for uh a few years now at least. Uh and that's why the building's only worth 200,000. It would have probably cost more to build it. Uh but the land is worth 400,000. Now the new property is the reverse situation.
It's got a building worth 400,000, but the land's only worth 200,000. So this is typical for new house and land packages. In fact, I remember um receiving an email newsletter from a property developer and they they were uh patting themselves on the back for having a land asset ratio of of uh 30%. And I thought, oh, >> true or not? >> Yeah, they they thought that was great. Uh was I wouldn't touch anything less than say 50%.
But anyway, we'll come to come to that. Let's just compare how these two properties perform. So let's assume that a period of time of 10 years has passed. >> And I think it's important to note that we're looking at purely from an investment point of view, not to live in because there might be um individuals that like, you know what, I want to live in the new house. I don't want to live in a bigger block, have more maintenance. So depending on the amount of new properties in the area, it might um I guess depending on the layout and having that newer home, it might command a higher price, a lot higher price.
And if there's only one or two of them in that suburb, um if it's already in a builtout area, it might just continually command a higher price because it is newer. So it's not to say we're just looking at as a overall picture from a probability point of view, old versus new, which way that we would be leaning towards. >> Yeah. And this is purely from a financial perspective. No lifestyle choices. >> No lifestyle.
I think it's important to say that >> investing. Yeah. All right. So you've heard that land appreciates, buildings depreciate. So watch what happens now when we fast forward by uh 10 years. The old property's land has let's assume that over these 10 years the both blocks of land double in value.
So, the new property's land has doubled from well, let's start with the old property. Sorry. The the old property's value uh land value has gone from 400,000 to 800,000. The new property's land has also doubled. Same rate of appreciation, but it's gone from 200,000 to 400,00 >> I know you get excited with the new versus old, but so we're saying it's doubled in a 10-year period. We're assuming that both of the land values are doubling in value.
>> Yeah. same rate of appreciation >> and the building value though for the older property is also depreciation depreciating by what 40,000. >> Uh yeah. So because older properties depreciate slower than newer ones, >> the older properties depreciated by 20% or $40,000. So it's come down by uh 40,000 from 200,000. 10 years later, the building is worth 160,000.
The land is worth 800,000. So, the old property is now worth 960,000. Uh, but the new property, same rate of appreciation for the land, doubling 200 to 400,000, but the building has depreciated by 30% or $120,000. That's down from 400,000 to $280,000. So you combine 280,000 the building, 400,000 for the land. The new property is worth $680,000.
Now this is after 10 years. Imagine buying the new property and then 10 years later you're looking at a value of around 680,000 whereas you could have bought an old property for 900, sorry, for 600,000 and it's now worth almost a mill. Now it isn't as simple as this. We've got a few other factors to consider, but we're starting off with a $280,000 difference. >> I think the Yeah, the main point there is that that land value is what we really want to target. Like that that asset growth of what, you know, 400 to 800 on that older property because we've got that higher land concentration.
we're getting a lot more of that appreciation because that land appreciates and the buildings obviously depreciate over time where that newer property has a massive depreciation because it's new. >> Sense. >> Yeah. Let's uh let's factor in that depreciation that's claimed. And this is where the proponents of of new start getting noisy saying there's all this depreciation that you can claim. So, uh, you see that the old property owner has only been able, uh, to claim at most $40,000, uh, probably less since it was an established probably property.
And they do have different laws, rules regarding depreciation claims. But let's, uh, assume the investor of the old property was only able to claim half of the depreciation loss, which is $20,000. But remember, you don't get back everything you claim, only a portion of it. And that is depending on your marginal tax rate. So let's assume it was 40 cents a dollar just to make the numbers easier. >> So where's that 20,000 come from J?
That claim,00 >> assumed that the owner of the old property was unable to claim the full 40,000 only 20,000. >> Okay. >> Yeah. Okay. So, um, that's why at 40 cents in the dollar, the tax saving is only $8,000 for the owner of the old property. Yeah.
So, the owner of the old property was able to reduce their tax payment by $8,000. That's over the entire 10-year period. Only $8,000. That's because they've got an old property, but the owner of the new property was able to claim depreciation of $120,000, 40%. Uh, of 120,000, that's their marginal tax rate, is $48,000. >> So, that's what they get back.
So, you don't get back that 120, you get back the 48 after tax dollars. That's what we're talking about. So the difference between 48,000 and 8,000, the difference between new and old in the depreciation claim is a difference of $40,000. So previously the old property investor was ahead by 280,000. Now after factoring in the claim of depreciation, that has dropped to only 240,000. So the owner, the investor who bought the old property is now better off by the investor who bought the new property by only $240,000.
>> I think yeah, in the previous example, that new property, we've got that 120, but I think on the the old property, it's around $40,000. But that's okay. We'll work off the 20. That makes sense. Uh the reason why it's only 20,000 in depreciation is I've assumed that the the purchaser of the old property has not been able to claim the full 40,000 in depreciation because of changes in depreciation tax laws. Okay.
>> So I'm doing everything to try and favor new property versus old. >> So giving a lower benefit to that old property. So put more in the favor. >> That's right. Yeah. so that it's a completely fair comparison and people aren't thinking, "Oh, you guys have got it in for for all us developers." This is the the real the true difference between the two.
>> Because the big argument that I would see with brand new is, "Oh, cash flows. It's only going to cost me $20 a week to hold this property." So, it's very um enticing for investors cuz that's what they want. Oh, I don't want it to impact my lifestyle. It's paying for itself. Great. They don't ask questions.
They just sign the contract. Let's go to the next slide and talk about cash flow. Then >> cash flow. >> So up to here we've assumed that both properties have same income and expenses. That's over the entire 10ear period. But older properties will have higher maintenance expenses than new properties and new properties may have higher rental income like you said.
Uh now adding up those differences. So, what I've assumed here is that there's about $1,500 in repairs and maintenance extra per year for the old property compared with the new property. And over 10 years, that adds up to $15,000 more repairs and maintenance for the old property compared to the new. I've also assumed that the new property is going to have $30 a week more rental income because people prefer new to old. M >> and over 10 years that adds up to $15,600. So you add those two together and the owner of the new property has been better off by $30,600 in cash flow over those 10 years.
>> One thing you're most probably not factoring in, and we don't need to dive into it, is like, okay, let's say there's $15,000 extra in repairs and maintenance over that 10 year period for that older property. Well, you get a deduction for that. So, it's not the whole 15,000. Let's say you take away what roughly 40% maybe give or take. So, it might be around what 8 9,000 or something. >> That's a good point.
I haven't even factored that in. And isn't it interesting the property developers who are selling new property will tell you about depreciation benefits, but they won't ever refer to repairs and maintenance as if they're a benefit. Instead, they'll say, "Oh, you don't want to buy an old property because of all the repairs and maintenance." >> Actually, that was a lot of the push back I used to have when back in the a lot of the consult like three, four meetings I used to have a day with clients. There'd be people coming through saying, "Well, you know, oh, I don't want to buy an old property because of the maintenance." I'm like, "What? Really?" But it was a valid excuse. And then you wouldn't hear from them again.
So, good luck to everyone if they bought that brand new property. But, >> um, and then obviously having that higher rental income. Well, again, you got to factor the tax in. So, you're being you're definitely favoring, I guess, from the the cash flow perspective more on the new property, which is good. Like, you're putting more in the favor of that new property. So, >> another after tax consideration not added in here.
If the uh with the extra rental income, you'll be paying tax on that too. >> Correct. That's been factored in either. So there's two points there that favor new property and it still brings the difference only down to now $210,000. So old is still at this point better off than new by $210,000. >> All right.
So let's move over to vacancy. So vacancy is where I guess um there's no tenant within the property. So I think you're saying well one week of every year on that old property and we're pretending that it's vacant. >> Yeah. So some people would argue that new properties are in higher demand because well they're they're new and therefore would have lower vacancies. Now others might say well because new properties are in these green field estates and they're they're built altogether in a big bunch there's actually higher vacancies.
But uh there is historical data to support that vacancy rates increase with increased developer activity. But I won't bother pushing that point since it makes very little difference to the bottom line. Uh but what I've done here is factored in uh an extra vacancy rate of one per perom for 10 weeks and it's $500 a week rent. So it adds up to 5,000 bucks. So >> So after the vacancy where what $25,000 still better off with that older property. >> Yeah, that's right.
It's still a very significant margin. Now, uh do you want to take us through stamp duty savings? >> Yeah, sure. Course I think with stamp duty um obviously with a lot of the the states have got their own I guess stamp duty that they factor in for a purchase. So it's how the the government makes a substantial amount of money but I think normally with a lot of the land and house packages you pay you can do it two ways. You can buy pay stamp duty on just the land and then you build the building later on.
So you're only paying I guess um yeah you're paying stamp duty on the lower amount. So for that land and house package or the stamp duty is going to be lower and it's a good selling point or at times there is a land and house package you buy and you pay the whole stamp duty. So it gets registered gets built by the developer. But I think what we wanted to mention was well with that original property at I guess that land value of around let's say 600,000 and then 200,000 on the Yeah. So the 600,000 on an old property you pay for the land and the building the whole amount. Yeah, >> I buy a property for 600,000.
I'm liable for that whole 600,000 from a stamp duty perspective. And there's calculators online, you just type it into Google, but the other thing is on that build of that land, you're only paying stamp duty on the 200, not that whole 600. >> Yeah. So, the buyer of the new property purchased $200,000 worth of land. M >> they paid stamp duty on 200,000 but the buyer of the old property bought the whole thing for 600,000. So they paid stamp duty on 600,000.
So the difference between them is the stamp duty on 400,000. >> And stamp duty is different like in every state. So like Queensland's a little bit lower. Then you got New South Wales, you got Victoria, you've got, you know, South Australia. So they're all different. But I've just used 4% as a rule of thumb here.
So, if there was that $400,000 difference at 4%, you're better off 16,000 with that newer property, but you're still better off after everything we've factored in so far. You're still in front with that older property by about 189. >> Yeah, 189,000. That is still a pretty big difference for two properties that were essentially the same in every way except one was new and the other was old. Uh but there could be a couple of other things to be aware of. Uh what about a first homeowners grant?
>> Yes. So it can vary I guess from again state to state. So like not all a grants apply. We've just factored in $20,000 as an example here. Um just maybe as a a grant that you're still better off. Even if we said, "Here's $20,000 because you're a first home owner or a government grant," you're still better off by $169,000 even with that $20,000 benefit.
>> Yeah. So, just recapping to make the comparison fair, uh, we took two properties of the same value, two investors on the same marginal tax rate. Both properties had the same rate of appreciation in land value, so neither was in a better or worse area. And yet after 10 years, there's a significant performance benefit buying old rather than new. And we factored in depreciation, higher rents, uh less repairs, stamp duty savings, everything. Uh even first homeowners grants, and the difference is still way in favor of the old property owner.
But it's not bad forever because the buyers of new once you you've bought a new property it starts aging. So eventually it will become uh an older property and that's when they do start to enjoy the same growth rates as the uh established and the reason is because of the land to asset ratio. All right. So, let me just explain what uh we did mention this earlier, but I'll just explain with some greater clarity what L land to asset ratio actually is. So, the old property had $400,000 worth of land, $200,000 worth of building totaling 600,000. Now, the land is 2/3 the total value.
So, the land to asset ratio 0.67. Uh then years later that land doubled to $800,000. Uh and then there was some depreciation of the building. So the house came down from 200,000 to 160,000. So we get a total property value of 960,000. So if you calculate uh uh 800,000 as a percentage of 960,000, you get 83%.
So or 0.83. So that's the land asset ratio, which is very high, which is great. Now, looking at the new property, it started off with a land to asset ratio of 33%. That's because the land was only worth $200,000. But 10 years later, that has changed. The land has now gone uh that sorry, the land to asset ratio has gone from 33% to 59%.
Hasn't quite doubled. And that's because $200,000 of land doubled whilst the building depreciated. So now more of the investor's money is allocated to something that will appreciate the land. Uh less of their money is allocated in something that's going to depreciate the the dwelling. >> And I think the the other thing to point out which we'll discuss is actually it's going to be on the next slide so we can wait to that anyway. But it's interesting to see as you can see over time the land to asset ratio on both of the old and the new obviously growing because you're receiving that land appreciation.
>> Yeah. Yeah. So what you want as an investor is for as much as possible all the depreciation to wash out of the property before you take ownership of it. >> And I think it's also important to factor with a lot of these bigger block sizes you might have potential to do some value ad be a granny flat or a duplex or town houses way down the track. But it just gives you that option if you just buy a shoe box somewhere. >> Yeah, that's right.
>> U so the next one is I guess why professionals should not recommend high depreciation property. So this is an example. It's um by the um by Crown Group pretty much. So it's on Botney Road in Zetland or Green Square in New South Wales. So you've got the the Green Square Library down the bottom there. But you can see here massive high-rise.
The contract date on this specific um unit number was what 1.079 million in 2015. The build complete was 2019. So you had to wait 4 years and then it was sold about what 4 years after for 1.05 million. So it's a drop of around what 30,000 and let's say from 2015 you did nothing else or didn't invest anywhere else. You'd be behind have all your money locked up. Imagine all those markets you could have bought into.
Hobart, Adelaide, um I guess Brisbane before the moon, boom, and then it's just you can see something like this can really hold you back. So if you, you know, I guess the new versus old isn't new. Like I think there's a lot more education around now. But if you're new to it, this is a very good um I guess series or episode to understand this is why you should steer clear from I guess these spruers. But it's also the land to asset ratio on a unit block like this. It'd be very like what would it be point it' be like?
It'd be 1%. It' be below 1% because you got so many units. >> Yeah. A lot of and that's a big price tag there over a million dollars. But you'd also get smashed with things like the the body corpse too with something like this with these complexes with the pools and the lifts >> probably would have been negatively geared. So it's costing them to own.
They've got a million dollars allocated here to a market that isn't moving for eight years. Uh and then yeah, they they paid stamp duty on this and then they sell it. They've got to pay an agent's commission. >> The the argument I hear with maybe an underperforming properties or something like this is it's putting money in my pocket. It's okay. I'm happy.
But as we've discussed a lot on our um on our podcast is around your ROI is very much limited. So you're better off maybe even having money in a bank or just some high dividend paying index funds and just having it parked in something where the excuse is, oh, it's giving me rent. >> Yeah, that's right. Over these eight years, you could have easily invested elsewhere in Australia and um doubled your money. >> And I think just get consistent valuations if you're worried. look at recent sales and sometimes you need to make that decision and just move away from these specific markets or asset.
So uh another example actually so this again was from our the previous example was our CPA presentation we did did back in 2023 and this is another example. So purchased um a unit another unit block in Docklands. So 2016 purchased for765,000 and 7 years after 630,000 and it's um again negative growth and this can really hold you back from your accumulation phase. And we're not just saying just for me it's like don't listen to anyone blindly cuz there are aspects where I've seen like units um in certain markets where they have had substantial growth like for example a waterfront in um go coast you know over a certain period has done crazy because there's a limited supply of that specific unit and people want to live in there um down the south coast of New South Wales certain areas on that Shell Cove Marina where those units have skyrocketed but you compare it to houses in the area. So even though you think you've done really great from buying one brand new property or unit, how has it compared to other assets in those areas through that time? No one asks that question.
They think, "Hey, I've done great. I'm going to go back to that property developer or buyers agent or whatever it is that sells brand new. They did they made me 100 grand, but maybe they could have made you three or 400,000." Ask that. No one asks these questions. >> Yeah, good point. So, it's all about performance.
>> Yeah. So, eventually, uh, an old property is going to need a rena. Uh, and it is true that a rena will come sooner for older properties than for newer ones. That's obvious. >> Uh, but the need to renovate isn't necessarily a bad thing. It can actually be a bonus.
For example, you could spend $50,000 on a Renault and add 80,000 in value if you do your Renault well. and you're pocketing that $30,000 as profit. Uh you can even knock down an existing dwelling and uh build a brand new one. Uh in this case, you're now the developer. So you're pocketing that profit. You're not paying cost when you buy new.
You're paying cost plus the developer's profit. So the value you add by a renovation or a rebuild, that's your profit. When you buy new, that profit goes to the developer. the time of recording, uh, let's just say December 2025. These days with builders, >> 2024, yeah, 2024, >> where are we? >> December 2024 of the time of recording.
But I guess it's like with renovations, rebuilds >> these days, you sort of got to stay clear from it cuz one, a lot of the the work that's done is a bit can be shony from time to time. Um, like with the contractors and it's expensive also. So, when you're looking at buying an investment that's old, we're not saying just buy any old property. Like, do your due diligence and then make sure that the property's got good foundations that you can get a tenant in there. Um, you're not going to have any hassles with it. I think that's a key component.
We're not saying just buy something that's um on a big block and it's a dump and needs a lot of work because you don't want the headaches. >> Yeah. >> But we're talking more about sort of side by side or similar suburbs, new versus old. >> Yeah. Um and just one last thing after renovator build bill build. Go on to the next slide.
>> Yeah, sure. >> Um this is a peculiar thing about depreciation that a lot of people aren't aware of. If you ever have to sell your property uh and you have to pay capital gains tax in the process in the calculation of determining the capital gains tax that you have to pay, the ATO will claw back every cent you claimed in depreciation. The entire amount that you claimed in depreciation over the lifetime of your ownership of that property comes off the cost base, which is important in calculating how your CGT liability. And what that means is you end up paying more capital gains tax. You pay more capital gains tax the more depreciation you claimed.
>> Oh, well, it's not claimed. It's even if you haven't claimed it, it still actually comes off. So, you need to talk to your tax professional. This is not tax advice, but normally, so let's look at an example. We should have put an example on here, but let's say um the capital gain is let's say let's say the property is you sell it for 500,000, okay? And let's say you bought it for you've obviously got to factor in selling costs, um buying costs, all those type of things.
So that's called like the cost base. So, even though you paid, let's say, 400 for that property, you don't calculate the difference between 4 and 500. You've got to factor in, okay, well, how much stamp duty did you pay? How much you paying to the agent? Um, let's say the capital gain now is only 70,000 instead of that 100 because you've had all these expenses entering and exiting the market. So, let's say 70,000.
And then you got depreciation. So, let's say the depreciation over that period's 20,000. Now, um, instead of, let's say it's 30,000, that's a little bit easier. Now, your capital gains back to that 100,000 cuz you've, you know, you've got those benefits. You've got that higher tax liability from an atto perspective. I think it's only on the the capital component, not the fixtures and fittings.
You have to talk to your tax accountant. It's been a while, but that's how it sort of works. So again, talk to your accountant, but even I've seen instance where a client was actually able to claim depreciation. They never did. I said, "Look, go to your quantity surveyor and go back a couple years." I think you go back maybe two years on your tax returns um and you can get some I guess I won't call it benefits, but you're entitled to that uh depreciation, so you might as well utilize it because either way, the ATO is going to take it off the the cost base. >> The cost base.
Hopefully that's not too complicated for everyone. If not, reach out to suburb data um.com.au. >> All right. >> All right. Ah, yes. The question, how do you get paid?
This is a really good question to ask anyone who you plan to work with in the property investing industry is how do they get paid? If any of the money that you're about to part with uh goes to a developer or one of their partners, uh you're on the wrong side of the fence. So property investors and developers are enemies. They they have opposing goals. So yeah, when you are giving the enemy uh a profit, that's you know, you you just you're hurting me and you're hurting yourself. Uh so we just want to be careful of that.
Just figure out where do people come from. Do they get a commission for uh selling this property for the developer? um do they try and get some sort of group discount? Are they biased in some way towards uh new property? Cuz we don't make any more or less money whether you buy new or old. It doesn't matter.
But we are investors ourselves and we uh would prefer old to new simply because of that uh shocking pro uh performance difference. So okay the you have to think with a lot of developers what are they aiming for to make I guess um margins on doing a brand new build or a unit what 20 to 30%. So think of they've got their cost they've got their labor all their expenses. Do you know roughly how much they're trying to make off every unit that they sell or land and house package let's say 30% the source. >> I don't but but let's go through some hypothetical example in the next slide. So you put yourself now in the shoes of a developer.
How are you going to maximize your profit? Now developers, they make money from adding value, right? They buy a cheap block of land. They build a McMansion on it and flog it off for as much as they can. Land and construction are their big costs obviously. So they want to minimize those and they want to maximize the value ad.
So here's a relatively unprofitable project. You buy land for a million bucks. You build a cheap house on it for say $400,000. That's very cheap. And then you sell it with a $100,000 markup for 1.5 mil. That is a very small profit.
In fact, that's a return of only 7%. So this is a terrible development project. And the reason why is because the land was such an expensive proportion of the total project cost. Land is an expense that a developer wants to minimize. And if you look at the next example, this is still bad. Uh now imagine the same house was built but on a cheaper block of land.
So this is a more profitable project, but it's still pretty bad. Let's say the land is a lot cheaper, half the price and only 500,000. The building, same cost, 400,000. again very cheap but it now represents a slightly higher proportion of the overall project cost. Right? So the the return on investment for this case is 10%.
Bad but better than before. So the value added as a percentage of the total spend is now higher and the developer is of course paying less for the land. So the profitability is much higher in this case but still not not good. And with a lot of these volume builders, they obviously want to get through these pretty quickly because the quicker they get it done, the quicker that they get paid. >> Yeah. Now, have a look at the third example.
>> And normally too is like you said, the block sizes would be super small. So, if you look at these maybe estate areas, they're going to be chopped up quite small. So, if I was looking to maybe let's say I wanted to live in a brand new house and and by that block, I would be targeting maybe that higher block size depending on where it is. Um I guess you can work out maybe how much per square meter it is per dollar. Are you getting more value down the track? Again, you'd have to do your numbers, but I just thought I'd throw that in there.
>> Yeah. So, on that point, here's a much more profitable project. This is the third and final example. So the land, let's assume the land now is very cheap at only 200,000. The build is still 400,000, but that now is a much higher proportion of the project cost. And so the ROI uh comes out to 17%.
Still nothing attractive, but you can see from those three examples how lowering the land cost increases the ROI. So if you're a developer, you want to minimize the cost of the land. The land is an expense. It's a nuisance to the developer. So developers want the lowest possible land to asset ratio to maximize their profit. But what do investors want?
We want the highest possible land to asset ratio to maximize our profit. And this is why investors and developers are completely uh opposed to one another. We are enemies. Uh developers just don't build what we want. Um so don't buy properties from developers. They are very poor investments.
All right. >> From an argument point of view, I guess we've already mentioned it before, Jeremy, I've made 500,000 from this brand new property. uh how did the established properties in the same area perform? >> A good response. >> Yeah. So, it's not impossible to make money from buying a new property and I have heard of people making uh stag profits.
They can they off offload the property after purchasing it maybe only a year or two after owning it. Uh but the point is that in that area there is probably going to be an established property that'll give you better growth, better returns. The way I always frame it is probability. If you look at all of Australia, new versus old, the old properties are going to outperform the new. You might cherry pick these developers or cherry pick these brand new properties. How I've made this much for my client, social proof, yada yada yada.
But if you look at it from a probability Australiawide, that's how you can make that decision that old is better than new. >> Yeah. And the numbers that we've just been going through uh help to prove that. But here's some historical evidence. Uh so that maths was quite compelling. But um what has actually happened is in this uh this data set right here.
So I got some uh some data from this is from the Queensland government. It's on building ages and I plotted the age against growth. So age dwelling age versus capital growth uh in percent peranom terms. uh the newer the property is the worse the growth has been. So that uh bottom horizontal x-axis that is the age of the dwelling. So brand new properties what sort of capital growth have they had historically it's it's less than 4%.
Uh and you can see the trend line as property gets older that's the purple dashed line there. Uh that increases the older the property goes. Now, it only goes as far as uh 15 years old. You can imagine that that levels out. So, there's not a lot of difference between a say a 20 year old property and a 40-y old property. But there is a big difference between say a 10-y old property and a brand new property.
Uh yeah, so brand spanker new property is likely to underperform older properties by as much as 2% peranom on average. But as we mentioned before, as time passes, eventually uh the growth will match that of older properties >> with that capital growth there that you've um that you've got. So those earlier ones um you can see what that is. Is this all of Queensland suburbs? Are you talking is it like >> Yeah. Yeah.
Across Queensland across its history. Um there's something like a million transactions involved here. >> Interesting. All righty. >> Yeah. Over a very long period of time.
>> Conclusion, don't buy new. Yeah, general rule, don't buy new property. Uh performance is going to be pretty poor. Uh you can still make money like you mentioned, but it's just less likely and the maths shows how unlikely it is. Historical data confirms that maths. Uh if you want a new property, build it yourself.
Um knock down your old home and uh and build a new one. Then you're getting that profit margin that you instead of paying a developer for it. Uh but once it's built, you're probably better off offloading it, selling it because over time, you know, it's going to depreciate and quickly, >> unless it's your owner occupier. >> That's the only caveat, isn't it? >> This is all for investment properties. >> Investment properties.
All righty. Well, thanks for tuning in to episode three, new versus old. Hope you enjoyed it. See you then and take care and looking forward to the next expert busting series, episode 4.