This is a question that every residential property investor needs to ask, but unfortunately rarely does so.
For those who are seeking some clarity on the pros and cons of buying new verses second hand townhouses, I have listed some of the major advantages and disadvantages in this article. Every attempt to compare apples with apples has been made, to help you decide before you sign that next contract.
New townhouses – the pros
- Normally developers include the transfer costs in their purchase price, and the banks accept this to be the correct price of the property. They will therefore apply their percentages and offer you a 90% or 100% bond on the full purchase price. The net effect is that you can finance an extra 4.5% (This is what the bond and transfer costs on a R1 000Â 000 townhouse costs.)
- The obvious one, it will be new! Brand new and smelling of concrete and new carpets.
- Buying new units is easy. Pick up a brochure at the traffic lights, call the developer or drive to the building site and in the comfort of an office you make your choice and sign on the dotted line.
That’s about it, I can’t think of any more advantages.
New townhouses – the  cons
- The minute your first tenant moves in, it becomes second hand!
- Immature gardens detract from good rentals initially.
- You get an immature and inexperience body corporate – you may be lucky and they will do a good job!
- The big one – Price! You will always pay a premium on brand new units from a developer. If you were going to live in it yourself, then you may be prepared to pay this massive premium for all new kitchen surfaces and fittings. Developers are not very negotiable on price, and bargains are out of the question.
- Size. Very often buying new involves buying off plan and very few people can look at a developers marketing plan and discern the size of the living space. Surprises may await you when you finally see the shoebox you paid a million for.
Second hand townhouses – the  pros
- What you see is what you get. Not many surprises in store for the thorough buyer.
- The seller is often negotiable, and there is always a bargain out there if you look hard enough.
- You get an established body corporate with a measurable track record. The financials are available for scrutiny before you buy.
- The conditions of the buildings and gardens will provide an instant impression of how well the complex is being run.
- Mature gardens and living space attract good rentals.
- The big one – Price!  Generally you can expect to save 30% to 50% off the price of a new comparable townhouse!
Second hand townhouses – the  cons
- Your kitchen fittings, carpets and cupboards may be showing signs of wear. This can be mitigated by a thorough inspection and problem areas can become negotiating points! I have seen R10 000 worth of repairs  enable nearly R 100 000 worth of discount off the market value.
- Buying second hand townhouses requires a bit of effort. You may need to scour the local estate agencies or the internet, find some potentially good deals and then set up appointments to view them. This involves serious effort, but can be very rewarding when you find that excellent deal.
- That’s about it, I can’t think of any more disadvantages.
In summary
To the investor all of the above pros and cons come down one thing and that is money! The factors that influence return on investment are purchase price and achievable rental (immediate rental return on investment) and future price and rentals (rental growth and capital growth).
By buying second hand and therefore at a lower price in a good suburb an investor really sets himself up for good growth in both rental income and capital.
In the last few months our Organic Growth Investor Club members have scooped up nearly a dozen  good second hand townhouses in Northriding at prices of around R6 000/m² (That is around R600 000 for a 100m² townhouse), while new developments in the area are being marketed for R11 500 – R 14 000/m²  – This is not a typo!
I have copied a sampling of new developments in Northriding, Douglasdale and Bryanston below to show you what prices are being achieved by the developers. Up to 60% of these new developments are bought off plan by investors!
I wonder who these investors are getting their advice from?
North Riding, Occupation early 2014
Douglasdale, Occupation early 2014
Bryanston, Occupation early 2014
It makes interesting reading doesn’t it? Especially in the light of second hand units costing between R 6000/m² and R 7000/m² in the same suburbs!Â
Please comment, we would love to hear and benefit from other perspectives.
Have to agree with everything you have said. When you consider that property is a long term asset then a couple of years really makes little difference. Understandably the developers’ risk finds its way into the pricing. Provided that 2nd hand sales are in the offing then it seems silly to go new but perhaps sometimes investors are unable to find stock and would go for new stock under such circumstances. In built up areas, existing stock inevitably represents better location too and often better (or at least tested) build quality.
Thanks Marc, very well said.
2nd Hand properties are always available, they just need a bit more effort to source.
Organic growth Investors Club, understand this problem and source good 2nd Hand properties exclusively for the club members. Details on the investor club can be found here https://organicgrowth.co.za/ogic-sp/
Your point on second hand properties being in built up areas is especially true. New developments are often,by necessity on the outskirts of established areas.
Well Done Neil, Great Article!
Just some food for thought:
The law states that you either pay VAT or Transfer Duty (never both).
Most developers are VAT vendors which means that their purchase price will include VAT at 14% and even though VAT is bondable (can be included in your mortgage bond), you will technically still be paying the 14% VAT (plus any interest on your mortgage bond for the VAT portion).
However, if you purchase a second-hand townhouse, you will not pay VAT but rather Transfer Duty.
The downside to this is that you can’t include this amount in your mortgage bond and will need to pay it upfront.
The upside is that the first R600 000 of the purchase price of the property has NO Transfer Duty. Transfer Duty goes up to 3% on a sliding scale (with the maximum being 8%), but it never goes as high as 14% (cost you would be paying for VAT).
Therefore, Transfer Duty will turn out to be cheaper than VAT and don’t get tricked by a developer when they say there is no Transfer Duty because in the end you will be paying VAT.
Just another reason to buy a second hand townhouse!