Cheaper and Older versus Expensive and New

Q. Are you better off buying a cheaper, older unit or one that’s more expensive but new?

A. It depends if you are just looking for a place to live in and making money is not important to you, or you’re buying for investment purposes and want capital growth

If you are buying an apartment for investment, an older style apartment is best. Let me explain by using a simple example.

Imagine there are two blocks of land in an inner-city suburb. They are the same size and each parcel of land has apartments on them. Each block of land (if vacant) is worth the same, say $3,000,000. One block has a group of 10 apartments over two levels which were built 80 years ago. The other block has 30 new apartments in a six storey building. Assume that both the old and new apartments are the same in size. Let’s also assume that both old and new apartments are for sale at $400,000 each.

Older apartment

  • Land value $3,000,000
  • Number of apartments 10
  • Land value per apartment ($3,000,000 ÷ 10)

New apartment

  • Land value $3,000,000
  • Number of apartments 30
  • Land value per apartment ($3,000,000 ÷ 30)

The fundamental principle that helps explain this situation is that land appreciates in value and buildings depreciate in value. If you want to see your money grow in value, you should be spending most of your money on the land component (which appreciates in value), rather than the building component (which depreciates in value).

If you bought the old style apartment it should grow in value faster than the new apartment because more of your money has been invested in the appreciating component; the land.

However, if you are just buying a property to live in and money is not important, then whether you buy old or new is a personal preference. If you want low maintenance, new appliances, lifts and possibly a gym, spa and sauna on the ground floor of your building, buy brand new. If you like character, solid buildings which don’t have lifts or other facilities that new apartment blocks provide, buy an old style apartment.

Final word: If you are considering a new apartment, beware the body corporate fees. In an old style apartment, they may only be a few hundred dollars every three months. In a brand new apartment block, they can add up to thousands of dollars every three months.

Happy House Hunting!

Written by Peter Koulizos, university lecturer, author and buyers advocate.

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