"IP - new or old, better?"



From: Todd Dick

Thanks everyone for your responses from yesterday’s question (to buy 1st place as an owner-occupier or to rent – from advantages of each, which one outweighs the other? Currently investigating some of the responses provided.)

I have another quick question – for IP, is it better to buy new or old?

A few arguments that have been suggested are:
1) Fairly new IP – this allows larger deductions / depreciations to be made and that the property has fairly low maintenance
2) Older IP – with a little renovation (borrowing costs above the purchase of the property) can greatly improve the value of the property and improve rent return to help neutrally gear the property.

I know that buying either new or old IP may be fairly debatable with each offering both pros and cons – but can someone reply as to why they think new or old is a better approach.

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"IP - new or old, long string?"

Reply: 1
From: Gee Cee Cee

How long is a piece of string?

As you mentioned a new property has higher depreciation. Very limited amount of maintenance. It also usually attracts a better class of tenant that may do less damage to the property. (New places are usually a set & forget for at least 5 yrs)

A older property will of course always require more maintenance. Re; old stove, plumbing, sewers, roof leaks, wall cracks, painting etc. It will also not have as high a amount of depreciation.If the building is old the tenants may not be as good and therefore the maintenance such as re-painting, carpets, yard area, etc could be higher.
(All this dips into the cashflow and lowers the nett amount you receive.

It all gets down to which will have the higher capital growth in the end.

As well as if you can stand the constant calls from the agent for repairs and maintenance work to be done.

Gee Cee
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Reply: 2
From: Mr S

Old or New?

Hi TD,

This question of old versus new has racked my brain as well and I think I've got an answer that suits me anyway.

I've decided to purchase both for the following reasons. New = Biggest tax concessions for at least the first ten years. I do not intend to pay this IP off any quicker or re-finance...simply use it's tax concession power to dilute or off set any quicker positive gains from older properties that I'm now looking at to purchase and renovate.

I'm working on the theory to keep purchasing at todays money and carry the shorter term debt of the older ones until they are neutral or positive geared and then direct more funds to the next one in sequence until it too is neutral or positive... and so on.

I will then continue to purchase old / renovate and push it neutral or positive. Eventually when the tax concessions of the original new IP is reduced or exhausted I will again buy another brand new to create another tax concession buffer and push funds into the original IP and also push it neutral or positive.

I will then continue the cycle.

Hopefully then within 10 years (15 Worst case scenario) with capital growth and alot of positive geared properties I'll be able to quit working and though still in debt live off the difference between what my properties generate and what they cost.

Naturally I'll continue to invest in this way but the good news will be no more getting up on Mondays... and I know that as the years pass, the difference between what I owe and what the IP's generate will result in my income steadily climbing.

My initial aim is $2 Mill worth of property within 5 years and I'm over a quarter the way there and only started 4 months ago.

Good luck and cheers - Martin
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Reply: 2.1
From: G V

Hi Martin,

When you say

"My initial aim is $2 Mill worth of property within 5 years and I'm over a quarter the way there and only started 4 months ago".

I would like to know what type of old property you bought and where. Did you borrow 100% + other cost or did you borrow only part of it.

If you want to + +vely gear a property in sydney i am not sure we can do it by financing 100%. i would like to know if it is possible.
any input would be appreciated.


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Reply: 2.1.1
From: Mr S

Hi GV,
Thanx for your question.
I'll try and be brief but can go into more detail if you want.

Basically have known about the priciples of Negative gearing etc for years due to Real Estate courses etc but never acted.

My father always insisted I invest in land due to massive rises in the sixties that he missed... anyway I bought a block way back when in Mittagong.

Years later I used the equity in Mittagong and bought another block - Campbelltown - eventially sold Mittagong, got married and intended to build - Campbelltown. Got caught up in Olympic fever and GST madness with builders and couldn't proceed.... Well decided not to because the prices were unreasonable.

Anyway as I'm stubborn I said to my wife I'm not ready to sell the block, we'll just use the equity and buy existing and renovate.

We did just that... and then my younger brother asked all about Neg gearing... and went mad and bought 3 properties.

I thought ... this is too easy... and read and read and read and decided to focus on nothing but wealth creation and changed my thinking and now look at everything as either an asset or liability...And thus money pours into property either passive asset (house) or true asset...rentals.

Anyway due to renovating within 11 months we insisted the bank re-value our house and block of land... and bingo... money available. Then bought a brand new apartment Bankstown... With great tax concessions due to Quantity Surveyor.

And effectively we are holding over 580K comfortably.

Now the land is on the market... yes CCT will be payable but it will drastically reduce non concessional debt....house and free up equity and liquid cash (Land payments)... Upon sale I'll go shopping and buy old cosmetically challeged houses... up to 3 initially. renovate and sit back... Meantime all rents filter through House loan first before kicking out to investment loans... I will continue to pay as much as I can on the house loan until cleared... also borrowing sleep money on rentals and having it sit in house loan... and then shift funds to next property and so on in sequence...Eventually you still owe a fortune but they are kicking off so much cash that you live on the difference and continue to invest and continue to watch it grow and constantly rise...Pay rise for life.

My aim is to get 25... but at least 10 in the next five years... always carrying the debt.

With the nature of rising property prices over the next ten years and rising rents I figure that the renovated jobs will kick possitive within 3 to 4 years each... thus one less problem to deal with. And though the new ones take 16 years to kick possitive... with creative re-financing you can achieve possitive within 7 years... but less than ten.

You see...I dont look at these loans as Oh my god I've got to pay the property loans... I pay myself first... I love sticking money in to these... cause its going to keep spitting it out in the future... I just have to wait... but by pushing everything in now... I reduce the time I have to wait to be free. Its just a state of mind.

Cheers - Martin

Ps... Thats why I hate interest only loans...In five years they have a balloon effect...I cant understand why anyone wants to pay more for something in 5 years rather than pay less for it in 5 years... I know you can re-finance blah blah blah... But at least I own some equity...Yeh I hear you... but values will go up in 5 years and so everyone with IO loans will have equity as well... BUT ONLY IF EVERYTHING GOES UP

And I dont want tax deductions all my life... I want to be earning so much that I have a tax problem...
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From: Paul Zagoridis

Hi Martin

Thanks for that post. Can you please clarify something in your post? You say
>With the nature of rising
>property prices over the next
>ten years and rising rents I
>figure that the renovated jobs
>will kick possitive within 3
>to 4 years each... thus one
>less problem to deal with. And
>though the new ones take 16
>years to kick possitive...
>with creative re-financing you
>can achieve possitive within 7
>years... but less than ten.
>Ps... Thats why I hate
>interest only loans...In five
>years they have a balloon
>effect...I cant understand why
>anyone wants to pay more for
>something in 5 years rather
>than pay less for it in 5
>years... I know you can
>re-finance blah blah blah...
>But at least I own some
>equity...Yeh I hear you... but
>values will go up in 5 years
>and so everyone with IO loans
>will have equity as well...

I don't think you intend to contradict yourself, so I guess I'm not understanding you.

Negative gearing strategies assume asset values must rise greater than the loss. I/O loans only people believe values must rise greater than the opportunity cost of funds.

So how can you accept one argument and not accept the one predicated on lower rises?

I'm very interested in your answer as I suspect it will give me something I hadn't thought about before.

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From: Mr S


I guess I'm looking at a 10 to 15 year cycle where Im more confident of rising prices.

I have had experience of no rises in property values for 5 to 6 years running and because of this I am not keen on IO loans. Also because if situations change and you must sell in this period factoring costs into the equation you may actually lose. But if you have Princ Int loans at least you have some equity.

One example was my brother owned a block of land 5 blocks away from my block in the same street.

He bought for 63K as did I. He held for 5 years and sold for 71K... After costs, rates, interest etc... no profit really.

I held for the magic 7 years. Its on the market for $170K... Ok it might sell for much less but I think I'm still miles in front.

Now with an IO loan on an IP, yeh you got a Tax deduction for 5 years but not much else.. but with Int Princ Loan you've got your tax deduction and true equity should the prices have stagnated like my brother situation and you could'nt hold any longer. An enforced saving which would normally go else where.

Anyway getting back to IP's... I've now decided to get serious about earning an income from Rentals. Yes Capital Gain is a sweetner and helps the bottom line and borrowing situation, but it's only part of the reason I'm doing this. I dont intend on selling any rentals ever. What do I do with the cash... spend it on toys?

No I want to keep re-investing until the income generated allows me to quit working in the formal environment... ie it pays me enought to invest and continue to live well without being in the rat race.

You see you only have to listen to old people to realise that if you do not have constant high cash flow... life becomes a burden. Just because you are old doesnt mean you no longer want to buy a new lounge or car or go on a holiday... but on the average pension or super scheme most people are still Just Off Broke.

Anyway I hope this sort of makes sense... It works for me. Cheers - Martin

Cheers - Martin
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From: GoAnna !

Hi Martin

The way i see it is like this.

The argument about interest only versus P & I is nothing to do with whether you want to pay extra off or not. It is about cash flow. Which as you agree is highly important.

Just because you choose a 30 year loan doesn't mean you can't pay it out in 10. Just because you have an IO loan doesn't mean that you can't make extra repayments. But it does mean that you have minimised your commitment to the bank and you only need to make extra repayments when YOU choose.

Also P&I may be fine for a couple of investment properties but it will become very painful should you try to buy 5 or more. This means that you cannot sit on as many properties. Lost opportunities : (

Martin, I used to think like you and it was my biggest hurdle to overcome. I still have a desire to pay down debt as I see it as risk exposure. However I see unnecessarily high monthly repayments as a risk as well.

Look forward to your thoughts.

GoAnna !
(aka Anna before she got real)
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From: Ric1 .

Hi Martin,

Instead of paying P&I, why don't you pay IO, and the money you have saved on those repayments by not paying P&I you invest in a managed fund or some such, earning maybe 15%? If you are paying P&I, you are only effectively saving 6-7% (whatever your loan rate is) on that proportion that is paying off Principal. If down the track you are unfortunate enough not to make much capital growth with your property, at least you have nice little cash kitty stashed away.

Do you see this as being a viable alternative strategy?

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From: The Wife

Agree with Goanna,

Find your goal,

and the best way to get there,

sometimes the best way is I/O, sometimes its P/I, sometimes its a mix, and perhaps in a few years, you will need to rehash the whole thing again,

BUT, stay flexible, and stay focused on the goal.

~Life is a daring adventure, or nothing at all~
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From: Mr S

Thanx for the responses,

I am not interested in Managed Funds at present... and maybe I'm missing something but by paying down debt faster dont the properties become neutrally geared faster and thus begin to stand on their own?

And then you effectively no longer inject your own cash and simply re-direct it to the next property in sequence until you've achieved the same status... and so on.

And because you have bought in todays money and continued to buy over the ten year cycle you soon find yourself very very loaded with enough positive cash flow to first replace working income... and then watch it continue to increase as the debt shrinks. And you can re-invest to minimise tax as well?

You see for example... I buy a 220K property with none of my own money down and Neg Gear it. Princ Int for my own security needs ha ha

Personal outgoing are about 5K a year. Now in 5 years you re-finance for another 30 years. Re-payments reduce due to extended time and it's neutral in another 2 years. Effectively I've only paid a maximum of 35K of my own money into a 220K property.

Its just keeps paying itself out and increasing the the amount of extra free cash it sends toward me.

Now this may only be 1K in the first year, but I've continued to do this to several properties and eventually this keeps growing and continues to grow. Compounding Interest effect in my favour)

I dont know maybe I'm missing something, but I believe the more I'm prepared to pay in now and the more I'm prepared to hold now and add to as others eventually stand alone, then the more they will refund me later and sooner.

Cheers - Martin
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From: Sim' Hampel

Do your sums and you will find the return on investment is markedly reduced the more cash you put into the deal yourself.

Also, if you buy cashflow positive property you do not have to put in any of your own money to service the debt.

If you can buy property that pays for itself, the less of your own money you have to put in, the more you have left over to put towards additional properties, each of which pay for themselves leaving you with no requirement to service any of the debts out of your own pocket.

If you are having trouble doing the sums yourself or do not know how to, ask your accountant to explain it to you, see a good mortgage broker, buy a copy of PIA from the Somers, or ask me and I'll put together a simple spreadsheet for you.

As for how to find cashflow positive properties, you should do some reading of posts on this forum... this has been discussed many times before.

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From: Rolf Latham

Equity is King

If you have assets you can ALWAYS get a loan to buy more assets, regardless of your serviceability position.

Preserve equity. 95 % loan with capilaised LMI wherever possible. P&I or I/O ? Who cares, if you can afford P&I reduce your debt !

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