Property is one of Australia’s highest-performing and most stable investments. If you want to grow your nest egg, building an investment property is one of the best things you’ll ever do. But investing in property is a big decision. It’s important to end up with a property that provides steady rental income and capital gains. That means the choice typically comes down to buying vs building. Each type of investment has its own pros and cons, and in this article, we’ll discuss some of the things you need to look out for when talking to investment property builders.

Pros of Building an Investment Property

Building an investment property is a great way to get exactly what you want. If you have a specific vision in mind, or if your local market prefers new builds, you can benefit from:

• Build to meet demand. Building a new investment property gives you the freedom to design a home that’s perfect for the local market. That can significantly increase your rental income and shorten the amount of time it takes to pay off the mortgage. For example, if you live in a major school district, you could prioritize building a large family home that would appeal to your ideal tenants.
• Tax deductions. Investment properties all benefit from certain tax breaks that make them an attractive option. If you build an investment home then you can also benefit from the tax deductions that apply to new builds.
• Capital gains. A quality home that’s built in a desirable location is likely to appreciate faster than an older property. There are no guarantees, but new builds typically appreciate faster, and that can allow you to refinance your mortgage at a lower rate.

Pros of Buying an Investment Property

Building is an attractive option, but buying an existing home is a quick and efficient way of breaking into the investment market. When you buy an investment property you can benefit from:

• Desirable locations. New developments often happen in less desirable outer suburbs. When you buy an existing property though, you will often be able to find a property in a more central location for the same price. This can dramatically increase your rental income and help you pay off your mortgage faster.
• Lower deposit requirements. Buying an existing property often works out to be cheaper than building a new home. That’s good for your long-term finances, but it also reduces your initial deposit. If saving a deposit is a struggle, the lower cost of buying could be the right choice for you.
• Rapid turnaround. It can take as little as 4-6 weeks to settle your purchase of an existing home. That means you’ll start seeing rental income sooner!

Cons of Building an Investment Property

Building a new investment home comes with a few major cons you’ll need to keep an eye out for:

• Limited build areas. Most investment properties are built through developers. That allows you to access bulk pricing and shortened schedules, but it does limit where you can build your investment. You will typically be limited to building in large-scale developments that are occurring in up-and-coming areas, rather than building in desirable, established suburbs.
• Design limitations. There are always limitations that come with building a home. When it comes to investments, you will usually be limited to certain inclusions and styling packages. These packages are designed to reduce the overall cost of each build, but they can limit your ability to craft the perfect home.
• Budget and timeframe blowouts. It can take anywhere from 6-12 months to build a new home. In recent years we have seen materials and labour shortages cause serious budget and timeframe blowouts that can be a real challenge to building a viable investment.
• Delayed rental income. Potentially the biggest con of building investment is a delay in receiving rental income. You will be required to carry the mortgage for the duration of the build period with no rental income to supplement the expense. Even after you receive the keys, it may take weeks or months to place a tenant in the home.

Cons of Buying an Investment Property

Finally, there are two common pitfalls when it comes to buying an existing home as an investment property:

• Renovation requirements. Older homes aren’t always move-in ready. Especially if the previous occupants lived there for years, you will likely have to update the property to make it ready for tenants. That might mean renovating, overhauling gardens, performing repairs, and installing critical systems like smoke alarms.
• Older homes are less desirable. There’s no two ways around it. Older homes are less desirable to tenants. This can reduce your rental income significantly when compared to newer homes. When deciding to buy an investment you’ll need to carefully consider whether the rental income will offset the cost of the mortgage.