By Neil Vorster
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 000 000 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.
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!
Please comment, we would love to hear and benefit from other perspectives.