Both new builds and established homes can work as investments in Melbourne’s South East, but the best choice depends on whether you prioritise rental stability or tax minimisation. Established homes in mature Officer precincts and established Pakenham streets tend to show stronger long-term capital growth than newer estate stock.
New builds: the tax benefits
Maximum depreciation deductions with a new build can significantly reduce your after-tax holding costs. Builder warranties also cover defects for the first few years, and there are no immediate maintenance costs to factor in.
New builds: the risks
Be aware of the builder insolvency risk during the 12 to 18 month construction period. You won’t receive any rental income until completion, and there’s a risk of a valuation shortfall at settlement if prices soften.
Established homes: immediate returns
Established homes offer immediate rental income and a known condition, with no construction risk. They also provide certainty on price and move-in date, unlike a house and land package.
The honest reality
Two recent rate rises have made the cash flow picture tighter for investors. Most properties in Officer and Pakenham will be negatively geared, and the shortfall is larger than it was a year ago. Gross yields of 4.0 to 4.5 percent are better than inner Melbourne, but you need to model the actual after-tax cash flow.
Questions to consider
- What is the actual after-tax cash flow for this specific property, factoring in current interest rates and potential rental income?
- How comfortable are you with the risk of a valuation shortfall if property prices decline during a lengthy construction period?
- Does the potential for higher depreciation deductions outweigh the benefits of immediate rental income and capital growth in established areas?
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Market information is general in nature and reflects conditions
at the time of publication. For advice specific to your property,
contact KR Peters.