Episode transcript
Mudit
Hi Madhid, how are you? I am good, Parang. How are you? Going very well. Going very well. Good to see you again. Good to see you again. I'm so excited. This this topic about established versus new is so close. Almost every day we discuss with somebody, right? So
Parag Dixit
100% 100% Such a such a barbecue topic. It's become now
Mudit
every day. There's at least one discussion happens around it, and I've been waiting to record this podcast since last few days. Since we discussed that, let's talk about
Parag Dixit
it. Yeah, absolutely. Let's talk about it. It's it's important to bring it out in the front because right now, you know, you see when new property, those investment property advisors and sellers, when they come across the property sellers, will talk to you and say, "Oh, buy this brand new house and land package, and this is so good, and you'll get depreciation benefits. You will get, you know, taxation benefits. The government will pay the loan for you because they are going to return the money back to you. You have negative gearing, new regime, all that stuff keeps on coming in, and it looks it's on your face. You feel, oh my God, this is so nice. It's it's so good. Let me let me do this rather than anything else, and you're blinded. Yeah,
Mudit
yeah, it becomes a no-brainer at that time. It feels like free money, but the question is, there ain't no such thing as a free money.
Parag Dixit
Absolutely right. There is no such thing as a free money. You're paying for it. You're paying for it yourself, and that's the main question which we should discuss today. That's important one. Is buying a new property much more financially savvy decision than buying an established property, and that's a good important one to do because we need to remove the hype and understand and do a detailed analysis and understand. Um, say let's take Sydney as an example and historical data around Sydney, say Melbourne, Perth, and all that to see whether it makes sense to get into an established one, or it really, really makes sense to buy the new one, new property there in these times, right? No,
Mudit
absolutely, and it is even more important because if we look at last, let's say 1015, 20 years history, during the 2010 to 2000 to 2015, there was a massive push towards new properties. The simple logic was depreciations, tax write-offs. After that, COVID came. Home builder grants again. Cheap loans, equity growth. All of that was pushed towards it. Correct. Now we are talking about a new new changes: the taxation, the CGT, and the negative gearing changes. So there has always been a constant push. The important point to understand is: is it mathematically based on the real fundamentals, based on supply, demand, growth? Yeah. Does it make sense?
Parag Dixit
Does it make sense? Absolutely right. the The gift package looks shinier now, but it has the same thing: same tax benefits, same negative gearing benefits, but it says put the tax savings before the property, and that's not the right thing because property fundamentals are the right important thing. Your investment property, which you buy, is actually not a brick and mortar tax tool. You know that's not the thing. What it is, it is an asset which needs to grow. Yes, it should increase in wealth. It should help you get capital growth. It should help you get profits. It should help you get savings. It should help you move on. If if it doesn't help you do all of these things and gives you a few $1,000 in tax benefit, you're not going anywhere with it. And as an important thing, see, I think we should really see it in the way an investor sees. What does an investor want? Investor say wants capital growth in a property, and when they're looking at capital growth in a property, I think we should. We I would want to ask you about these things about some established properties versus new properties bought in the same time, know the suburbs. But I'll ask you this question a little while. Second, I think what I also look at is cash flow when I'm trying to find out about investment property, how the my cash flow stacks up, and then tax benefits. Definitely, one part is tax benefit, but that's not the only part. And when we're looking at all of these three things, these three things come together. Yes, come together in the form of a strategy.
Speaker 1
Yes,
Parag Dixit
and that strategy should fit in. And definitely, hope is not a strategy. 400% And whatever times I've done, that has never been a strategy. Any real estate agent, they say, is location, location, location. That's the whole bit. And when you're buying a property in a nice location, you don't think of it as a new street, nice street, or near a mall, or near a school, or near a playground, or something like this. It actually means that location word means where is the demand, where is the supply, where is the land scarcity. All of these data and fundamentals are more important versus any of these things. So when you buy a new build in a fringe area, then you don't buy with data. You buy with a hope.
Mudit
Yeah,
Parag Dixit
you buy with a hope that okay, there is a train line which is going to come one day. There is going to be a council which is going to build some nice roads there, a good park there. Is going to build some schools there. I know areas which have don't have a school last after last 15 years as well. Now large vacant lands near you. We hope it doesn't have 500 apartments coming in there in one shot because then it's not it's not where it's going. Take us. Hope is never been an investment strategy. Scarcity and value growth is where an investment strategy comes in, right?
Mudit
100% correct. It is about going back to the fundamentals: demand, supply. Yeah. What is going to happen in the future? Just trying to understand what developments can happen. Yeah. Not just purely based on hope. Absolutely right. Now I want to look at some data here. Okay, if we compare some established suburbs versus new suburbs which have come up, I think one fundamental to understand is that when we talk about new construction, it a lot of new construction happens in new areas, right? Because in the existing areas, there's very limited land supply. So new constructions, there's a very limited scope of new construction. New constructions mostly happen in fringe areas. If we compare Sydney, for example, let's go back 15 years. There was new areas getting developed. There was box hills, Schofields, and let's at that time what you could buy there versus at at that time what you could buy with the same money in an established suburb, say a Bockham Hills or a Glenwood area, right? At that time, in in Box Hill, you could buy a house and land package for roughly 494 500k, right? At that time, was a little bit higher, 20% higher at 606 50k. Similarly, Glenwood at 540k, right? Yeah. Now, if we track these suburbs, because that time Box Hill and Scofields were brand new, okay? If we track the data from 2012 till 2020, yes, there was property price appreciation in Boxella also and Schofields also, which was to the tune of somewhere between 60 to 70 percent. But at the same time, an established suburbs like Bocker Mill or Glenwood they grew more than 90 percent in the same period. So when these were get these were new growth rate that time was smaller, was lower. Okay. Yes. So eventually, but and after 2020 to 2026, if we track if we track these times, the growth rates have been almost in the similar range. Okay. Still, the established ones, Bocker Mills and Glenwood, have gone at a higher pace. Yeah. But still closer. By that time, eight years from since they started, they were already moving towards becoming more established. More establisher, right? So, if you had invested there, then a property in Box Hill would have you would have made money on that roughly to the tune of let's say 800k. It would have gone up from 500k to 1.3 million. But during the same time, a property in Boca Mills, which was 600k at that time, has gone up to roughly two $2 million, which means gone up by $1.3 million. So, which is half a million price cap in today's terms between huge amount of money. And if you are an owner occupier, this is 100% CGT free. If you're an investor, you're still making 300 400,000 net out of it after paying tax. We non we non amount of money to just leave it on the table. Correct. Absolutely correct. And and this is not only about Sydney. If you look at multiple cities, similar data. If you talk about Melbourne again, there were Tarnate as a new suburb. Manor Lakes again. You look at 2012 versus now. At the same time, you could have bought a property there for let's say 300, 350k. Same time, there were some established suburbs there, including like Derrymore, Hoppers Crossing, their property prices were similar. Now growth happened across both the places. It's not that growth didn't happen, but again, during the first 10 years, the growth in Tarnate Manor Lakes was in the tune of 50 to 60% for from 2012 to 2020. While Delhi Moot Hoppers Crossing they grew by almost 80 percent. So overall, if you look at again 2012 to 2026. We are talking about 14, 15 years data, right? We are not talking about two years, three years up and downs. Yeah, yeah, correct. In the same period, if Tarnate and Miner Lakes grew by 300k in terms of capital growth, Derrymode has gone up by 450k. So, which is like one and a half times growth.
Mudit
So, you're talking about still with the same amount of money capital that you had at that time, you would have made 150k extra, so it's not. We are not talking about $2,000 extra, $1,000 saving here and there. We're talking about hundreds and 1000s of dollars. So, so you need to notice the pattern here that almost every major market established properties they didn't just edge the the new ones by $2,000. Yeah, hundreds of 1000s of dollars of decisions. That is what we have to understand,
Parag Dixit
and that's what we understand. And that's not small money. That's a lot of money to leave on the table. That's a lot of money to not worry about. And these are not just lucky figures. That okay, this suburb was there in that council or this council. There are fundamental reasons why this has happened. Like you rightly put up that when we want to understand what's happening in a location, we have to see what what are the factors which are really making an established or a newer suburb move in a different way. In the end, they are houses. Of course, very important part. When when you're looking at a new suburb, it is mostly in the fringe areas, whereas all the established ones are closer to the city. When you're closer to the city, you're closer to the social fabric. You're closer to what other stuff is happening. You already have all the amenities. You have employment opportunities. You have schools. Everything is in there. But when you're looking at a new one, it doesn't have all that. You you you have hope. It will have. But it does have. Obviously, it does have. But a lot of time it takes, and that's where the slow. Happens then, if you're looking at if you look at a new suburb, it'll always have a lot of land supply available. Lot of it is still coming in, so you will have rental growth being lower if you are investor or owner occupied. You will have a lot of such new houses keeping on coming, so there's enough land available for the price to not grow up. So this kind of remains stable. Whereas when you're looking at an established suburb, you have limited land supply. It's pretty hard to get new houses. You can see the new direct ones, which are now getting into subdivision and all that, because there's no land available, and so subdivision with a smaller land becomes even more premium in value. There's so much of low supply which is there, which is which is important because that is what is not allowing the in the newer ones, it's not allowing the growth to happen. Whereas in the established ones, that's what is allowing the growth to happen, and that's what is giving a kick to the movement ahead. Right? No,
Mudit
absolutely. And when these marketing gimmicks happen, a lot of times, how much supply is actually right now building up, and how much future supply is going to come? Yeah. These are not discussed.
Parag Dixit
These are not discussed. These are never discussed.
Mudit
These are facts which are never discussed. It's only about this particular house and land package is coming at this price. Correct. But at the same time, the whole suburb is developing. There are a few 100, a few 1000 such house and land packages being stored at that point of 10 100% So these are greenfield projects. A lot of supply. So that's a big risk. That's a huge risk. That how much supply in the next 235, 10 years is going to come, which people need to take into account before thinking about whether yes, that's a good opportunity or not.
Parag Dixit
Absolutely correct, and that is what chokes away your capital growth because there is enough supply coming in. You're not never going to get something very quickly.
Mudit
Absolutely. Now, just on the fringe areas, there's been another study which was done over over a period of 1993 2000. Again, a 2025 year period. This was done by the Infrastructure Australia analysis based on the NSW valuer general value data, and it was a study done to understand where is the growth happening. Okay, they divided Sydney into three parts: inner CBD, middle, and outer. So inner means less than 15 kilometers from CBD, then 15 to 30 kilometers, and more than 30 kilometers. Over a period of 25 years, the study and it was more about the what kind of capital growth happened in these three broad areas. Okay, now there was growth across all, no doubt about it. But had you invest, had you have you had let's say half a million dollars in 1993 and invested in inner or middle or outer, that half a million would have become five and half million in the inner suburbs for a period of 25 years. Okay, there were it was more than 1000 plus percent growth. In the middle and outer, it would have gone up to 3,000,003.1, $3.2 million. Okay, okay. So, in terms of growth, middle and outer grew similar, but inner grew at a much faster pace. And
Parag Dixit
that's a lot of difference. It's a huge amount of difference.
Mudit
3 million versus five and a half million over a 2025 years 40% difference. It's a huge difference. Now, now fundamental reason the supply is limited. Supply is constrained. Yeah, there is demand there, but the supply is limited. So I'm not saying that always buying near the CBD is the best approach. Always, no, not that. It's not a one formula fits all, but it's always about that you have to go back to the fundamentals. You have to go back to supply demand. What's going to happen? How much land is available? What kind of? Why is the owner occupy demand going to increase? What is the business opportunity? Why is migration going to happen? What opportunities can become? How? What infrastructure is happening there?
Parag Dixit
100% You're so right. In the end, the fundamentals of demand and supply do not go away, and that's fundamental to any business, and is even more fundamental to investment in property, whether you're living into it or whether you're going to invest into it. Because as an as demand is clearly generated, it's coming through from people, from people who are going to live in there, the employment which is going to happen there. How is the population going to grow in there? How is the owner-occupied demand? Because owner-occupiers are always going to pay more and and have more emotional value into it. What kind of schools and infras and all that stuff coming in there? If that's not mapping out, then you can have as shiny a house you want, but it's not going to go anywhere. If the supply, if the supply is limited, scarcity always gives you a capital growth. Abundance never gives you capital growth. Whatever is abundantly available is have no value. Scarcity in future supply will always protect your investment, but abundance will you will be there. You may get a good cash flow, or you may get a good rent for some reason, but that also will be capped. We will find other parts of the city running much faster, much much greater in value, whereas your part will be small, will be slower because there are so many other houses. A tenant can leave your house and go to a new one in every two years, and your house has no value. All of these things are important. Another important thing will be a property type.
Mudit
That's an important one, Parag, because location 100% That I think when you talk about location, the rental yield, right? So one is the capital growth itself because of oversupply. Also, a lot of times what happens is because there is so much supply, the rental opportunities are a lot for people. So you don't get that kind of rental growth at a lot of times.
Parag Dixit
Yeah, yeah.
Mudit
And if it is. Farther away from employment opportunities, then it there is relatively lesser reason for people to so aggressively move there. But when we talk about, I think that's the other big thing that when we talk about type of property, there's a big trade-off between established and the new ones.
Parag Dixit
Yeah, yeah. The
Mudit
new ones, yes, generally you will see that the configuration is better. It will be probably in a swankir house, let's 532 configuration. While a while an old house in the same price, in an will be three bedder, right? But there are there are let's look at there are I think four or five different parameters. What is the land size there? What is the config there? What is the general appeal?
Mudit
What are the risk factors and what is the purchase price? Right. These are five things, yeah, which are
Parag Dixit
important. Yeah.
Mudit
Now land size-that's an important one. If you look at the new one, generally you will see that the land size is very small compared to a similar price as tapstage property. Okay. If that one is at 500 square meters, this one will probably be 250 square meter or 300 square meter. So land size automatically becomes smaller. Appeal-wise, yes, the new one has higher appeal.
Parag Dixit
Yeah,
Mudit
the old one it has its own charm. Yeah, it's in your premium server, scarcity. But another point there is that new definitely by just being new, it doesn't become better because new are always mostly they are also cook cutters.
Parag Dixit
Yeah,
Mudit
they are cookie cutters. Correct, 100% They are cook cutters, and older ones have their own characteristics. They have it. I love that. Yeah, they have their own character, but I think important point there to note is that new construction, new when it is new, construction quality by default just being new doesn't mean it is better. Yeah, there has to be caution. You have to do the proper proper understanding behind what the const the the building and pest inspection. You can't go away from it because it's new. A lot of times, because the construction costs have gone high.
Parag Dixit
Yeah,
Mudit
builders have been going.
Parag Dixit
Yeah, I mean,
Mudit
the less we talk about the construction industry, the better. Yeah, but the costs have gone high. There have been builders have been cutting corners. Yeah, variations can add to it. So, if you're looking at constructing constructing a new one right now, there are certain things that you need to keep in mind regarding the the risks of constructing of
Parag Dixit
the property, correct, correct, and obviously then there's this all of these bring a difference in purchase price as well. When it is shinier, it is always sold at a much higher price. When it is established, and you say, okay, this looks like an older house, and I will pay a bit lower. But in the end, you're getting much more value into it, and that value is important because when you are buying, you are buying to create value for yourself. When you are buying, when you you want to create capital growth for yourself, so we have to understand the fundamental important knowledge about property investment that land always appreciates, building always depreciates. In these newer ones, you will find land component is smaller, building component is higher, which means you will be buying a land for say $250,000. You're constructing for $350,000. Now eventually that 250 has to rise. It will rise in that proportion, and 350 will keep on going down. Whereas in an established suburb, you're on the completely opposite side. You will have a 404, 50 kind of a land price on the same element, and the building will be depreciated already, and would be reaching about say 150. So this land keeps on growing. So your value keeps on growing there, and this is important to understand why and how the the growths come through in an established or a newer a newer built thing, because 10 years down the line, both of these houses will look similar. The newer one, the brand new one, it would have gone down after the cosmetic. You know, shiny stuff would have gone down. It will look similar. It will in those fixtures, those things which look nicer today will be out of fashion. Then they will all, they both will look out of fashion. Old and older is not out of fashion. It's old. Everything is old, so you don't compare the same way. So your prices are now going to rise in the same manner. A person who comes to look at your house after 10 years to buy will not know whether yours was 10 and the other one was 15. They they won't they won't give a different value to it. They will give a same value to it. So when whenever you are wanting to buy a property like that, you need to understand what component you are giving how much to, and what component is not letting you grow. Because land will, as I said, land will keep on growing. It can double, it can triple, it can do all that. Building will not do unless you keep on substantially renovating the building up and up again, up and up again to make it newer, as for the trends, as for the times, but then they're spending a lot of money, which eventually takes you back. So you're spending out of your capital growth. So in a in a buyer, as a buyer, when I'm looking at buying a property in a 10 year time, my 10 year old house will be like any other 1520 year old house, the premium which I had paid 10 years ago, the 15 20% premium I would have paid 10 years ago on buying the shinier house, that's gone.
Mudit
That's gone. That's gone.
Parag Dixit
That's I I might as well write it off because that's my sunk cost. That's my sunk money. But I'm not get get going to get any return out of it and. That's the biggest point when you're buying between an established or trying to construct a new one, on what happens there and how it works out there in in between these things. Because you can buy it for the tax benefit, but the tax benefit only holds for a little period of time, not for all the time.
Mudit
Oh yeah, I think instead of tax benefit, let's call it tax trap, and let's understand what what the tax, how does it work actually, right? Because in fact, it is even more important today when the whole marketing of the new properties is around the negative gearing, capital gains tax, depreciation, right? Now let's do the actual math there. That what is the exact benefit, right? Now let's let's say if you buy a new property today, and the the rental income is let's say $600 a week, that will amount to roughly $30,000 in a year. If you have if you include all the expenses, the interest and the maintenance and the council and property management, let's say it's another $40,000 of expense. So you are running $10,000 loss, right? $10,000 loss mean that in this year you can, based on the negative gearing, you can get a tax refund of roughly 3030 $700 if you are in a tax level of 30 37% right? So if there was a 10,000 loss, you still are paying $6,300 tax on this because your refund is $3,700. So it's not first of all, it's not that the tax is the the the losses are gone? It's not that the government is funding your losses, right? Yeah. You're getting 30 35% tax benefit, 40% depending on your tax lab. Yeah. That is the important point there. Second important point to understand is, if it was an established property, would you not get anything? I think that's where a lot of people have not understood what the legislation change has been about.
Mudit
As per the legislation change, its negative gearing for established property is not gone. It is deferred. That means that if after three years, five years, seven years, whenever the property becomes profitable, positive cash flow, which is what happens in a lot of cases, or whenever you sell this property and you get capital gains tax, you can carry forward these losses over a period of time. If this year this was 10,000, next year, 7000 after that, 5000 after that, 4000. Let's in five years you had a loss of let's say $40,000, right? Now in new property you would you would have got the tax benefit every year, but if it is an established one, and if you say choose to sell that property after five years, the 50,000 40,000 loss that you have, you will you will subtract it from your capital gains and then pay tax, so you're still getting that negative gearing benefit. It's just that it is not on a yearly basis, so it is not helping you on the cash flow. But eventually, you still get that money back.
Parag Dixit
Yeah, yeah. So
Mudit
you would, and and and we need to understand that this is we're talking about 3000, $4,000, $2,000, $3,000 kind of benefit tax cash flow benefit on a yearly basis. We're not talking about $150,000 kind of benefit. I mean, when we are comparing, so we need to compare. We can't compare apples and oranges, right? So we have to compare in the in the right context. That if I'm getting a $3,000 extra cash flow right now, yeah, that's a benefit for somebody who just cannot afford it. Yeah, yes, it's a good cash flow, but eventually, what is the trade-off? The trade-off is you're probably letting go of a six different kind of capital growth.
Parag Dixit
Absolutely right. Now, in what you another important point is what you said. I'm just picking up from there. If you are having 10,000 loss and you claimed say three and a half 1000 or something in your tax benefit, you lost out on the rest of the six and a half 1000. But in the newer regime, you're able to adjust all the 10,000 at the end, so you're getting a slightly more benefit, which is from there. Now, this combined with CGT gives you a very different outcome, and I'll just talk about that. But one thing which we have to very very clearly take out from what you've just said that in the end, when I'm going to retire, I'm not going to retire from my tax benefits. I'm going to retire on my equity, and that's my game. That's why I'm investing. I'm investing to make money to create wealth, not to have tax savings, and that is what's important. So when when I when you combine this with the CGT benefit, which have come in, and when indexation comes in, obviously indexation is not going to work out if you are selling your property within a year or two. It's not in your benefit. Those days, that ways the previous regime was good, but in the newer regime, which is now there, if you are buying something and you're going to sell it off pretty quickly, then what you are going to get as a benefit is it's not too much because a lot of tax will go there. But if you're going to hold on for 810, years, then all this negative gearing, which has been accumulated, gets adjusted in full, not 1/3 or whatever, 1/4 or 30% or 40% then after that you pay tax. After that, the the property price from purchase price is indexed to what it would have been now, and then you pay the pay your capital gains on it as per your tax lapse. But then that's not bad. That's not bad because whenever the longer you hold a property, the more tax beneficial it is becoming, and eventually you are not off in tax, which you pay by more than five, 7% or maybe 10% But that's that's there. That's a part of the game. In the end, you will have a capital gains tax only after you have a capital gain. If you don't have a capital gain, there's no tax. And if the whole objective is not the tax, the whole objective is. Capital gain, and that is why we are all investing into it. The all of these things come into the picture, which gives you a benefit. All of these things are important when you even as taxation, negative gearing, capital gains very important. But again, it's also important which you picked up, and I want to pick up from there that the quality of construction, that quality of construction is also going to determine one important bit, which is your maintenance expenses. Maintenance expenses sometimes in your properties are way higher because of inferior construction quality. Because a lot of times properties are constructed with an investment in their mind, not in in their eyes, in these new fringer areas, and not as an owner occupier, which makes them very difficult to to maintain after some years, and they they get too much into wear and tear, and then they are they create a problem for a person. No, no, absolutely right.
Mudit
Parag and and and sometimes yes, sometimes on the contrary, sometimes older property do have a little higher maintenance also. Let's not. Let's. I mean that happens. But how much buffer do you keep for it? Maybe let's say extra maintenance will be let's say $2,000, a half $1,000 a year, right? We are talking about maybe two, $300 a month kind of buffer for that. But the question then is that if that is extra, then I need to keep a buffer for that, but what again? Again, it comes down to the the trade-off, right? The capital growth versus my extra, let's say, $2,000 a year kind of buffer for the maintenance extra, plus my tax benefit, which will anyways which will eventually happen in both the cases. Similarly, depreciation, depreciation is also being marketed a lot, but again the same thing, right? If if my depreciation, if I'm claiming depreciation, it's again 234, $1,000 in a year kind of thing. But eventually, again, just like the negative gearing, when you sell the property at that time, by that time, if you are talking about new property, it would have the asset value has depreciated, depreciated. So your capital gains increases in that case. So
Speaker 2
you
Parag Dixit
eventually ultimately pay that pay capital pay the the taxation on that also. That as well. Anyways, you pay that on that as well. Pay on that also. So both depreciation and negative gearing in both the cases, it's not they are saving you more money compared to an established one. It's just that in both the cases, it is just differed. It is not helping in the cash flow. 100% So earlier regime was more short-term focus. The newer regime is more long-term focus. So, if you're long-term focus, it kind of gives you similar benefit when it comes from there. But again, an important part on moving on from the taxation bit, because a lot has said about been said about taxation. So, but what not has been said is the risks and benefits of when when should you buy a established or a new property, and what are the risks of buying a newer property? Established, we know you can do a building and pest, and you'll know exactly what's happening there. But in a newer property, there are a few key risks. The new construction is key risks which someone has to take into account, which don't exist in established ones. The first important risk is holding capacity. So when you have typical processes, you buy a land, it settles, and then the construction starts off. So when you are buying a land, and that land settles, then you get the council approval, and the construction starts off. Takes you about year, year and a half. If you're making a luxury house, two years something sometimes to construct. Now you're sitting on a property for about two years when you're paying interest, which you can't claim if you're invested or owner-occupied. Then you're paying rent plus this interest, so it's a bit of a thing, which is a huge cost which comes on to someone, and it it starts impacting your borrowing capacity on everything.
Mudit
And if there are delays, if there are delays in construction, then it even compounds
Parag Dixit
further. Fixed force, 100% Then this loss of opportunity comes as a side thing to it because sometimes people will book a land and which is going to register in a year from there, year and a half from there. Now you're stuck. You're stuck because you it's uncertain, so you don't know what's going to come in between. Rates are going to go up. Something will change, or something may or may not change, and you are in the bind about whether I can find some good opportunities or don't find. So you're restricted there. So that's one bit which is important. Construction cost escalations-it's-it's-it's historically proven that it's there, and now post-COVID variations are as common as anything in the contract. And because material costs are rising, even rising today, and what can a poor builder do? They will have to put that across. They they can't pay money from their pocket, so it goes up and ups and up. And now, as a benchmark, when we when somebody comes and talks to us about why we want to do construction, we tell them that please assume at least 20 30% up whatever price you were taken. That you just assume that you're going to spend more than that. So you make allowance for that. If it doesn't happen, good for you. If it happens, so be it. At least you're prepared for that.
Mudit
And even this, sorry, but even services, tradies, cost, everything, including raw material, everything has gone up. Compared, my understanding is that compared to how it was, like say five six years ago, the construction costs are up by anywhere between 40% to 70% which is
Parag Dixit
huge, which is huge, which is huge, and this. This is a big risk which comes on to you because if you are not able to complete the construction, and we've had numerous examples in the COVID times where people could not, and they had to shift between builders and builders, and get sometimes get it done from their own hands. Half completed houses they were sold at so many times, and I still get examples and cases from people who want to buy something because the existing guy could not complete the construction, and they got stuck. So poor guys, they all get stuck into all of this. This is a huge risk. And third, in another critical risk, which is an unseen risk till now, is that the property's value, which you're buying, the new one, the brand new one, home, home and land, or some other package, has an inbuilt commission which has flowed around in this system. There are phenomenal amount of monies which are paid out to sales groups by builders by thing which can amount to 30,000, 40,000, 50,000, 70,000. What all kind of money floats in there? You can't even imagine. And all of these eventually lead to either shorter valuations, or even if you get a valuation by some magic, you will find that you already substantially paid the money of of your capital growth away to someone. It's gone from your pocket. Who pays for it? Gone from who
Mudit
pays for it? You are paying for it. Security, right? Yep, absolutely right. No, and a lot of times when they talk about rental guarantees, some kind of guarantees, again, it can't come for free. It is built into the price itself. That's where the guarantee is coming from.
Parag Dixit
Yeah, absolutely correct. It's built into the price, and it eats away from your pocket. And that's what it's. It's become. It becomes a pain for someone to see. Okay, whether I should get into this or I should not get into this. But these three, four risks, everyone should always keep into account when you're looking at buying a established or newer property, newer construction property. Established don't have these issues. Established properties, the risk there would be kind of mitigated when you do a building and pest inspection. Otherwise, it has an existing infra around it. You can go online, you can check what's what the suburb is kind of like. You know the crime rates. You know the the people living there. You know the socio-economic flavor of that area. You know the schools, infrastructures, parks, everything. You know you know what's going to come in. Most of the times, government is already investing into getting more upgraded infra out there. So you know what's there. The huge uncertainty in the construction bit is becoming worse and worse nowadays. So these these two these few risks you have to take into account when you're looking at choosing them. But I would also want you to maybe Mudith, tell tell us what are the times where you should actually look at buying a home and land or a newer construction, and when should you actually look at buying an established profit?
Mudit
Okay, okay. See, home and land. There are eventually there is a lot of gap between, like we have said, capital growth, and there are trade-offs between the two. Right now, if I am somebody that I don't have money to date, let's say deposit at all, because for established property I have to put in the money today. Let's say if I don't have any money today, but I still want to buy something, my money will come in, let's say, one year, one and a half years, two years time frame. If that is a scenario I am in, and I desperately want to buy something today and book something in, then yes, house and land package can give you an option where you can book it now, and you will get the money after two years, let's say. But then you need to understand that these are the risks. That is one scenario I can think of. Second scenario I can think of that where I say that this $3,000 of tax saving that I'm getting on a yearly basis, that the the the negative depreciation, the cash flow. If I'm completely completely choco chock a block on my cash flow, and I just can't do without this $3,000 coming back to me in a year, right? The depreciation benefit. So if my cash flow is completely running so tight that I can't manage without that 1000, 2000, $3,000, then yes, then this can possibly help you in that front. But then eventually you have to realize that what are you for going? Because you have you can't get everything in one property. You will have to let go. Then you are saying, okay, I am okay to take these risks. I am okay with the lower capital growth, but because of my condition right now, financials that I can't afford two $200 extra going from my pocket on a yearly basis, monthly on a yearly basis. Then you go for it. Then yeah,
Parag Dixit
yeah, yeah. And I and and when should you actually aim for an established property? What should you be thinking? I think the the
Mudit
answer is right there. We are talking about that if you're looking for growth.
Mudit
If you're looking for fundamentals, that where the of course, not every established property is growing. You need to do your market research. You need to do understand that why will demand come in that area? Is supply constrained in that area? You will need to because not every established property in the country will go by the same price. So you need to do that research. But if you're looking for fundamental growth, you're looking for good capital growth. You you do your research to figure out where the chances are higher, so that you can optimize on your growth.
Mudit
if you can, and if you're okay with a little bit of yes, it's an established property. Let's say if it is a 10-year-old, there will be some maintenance cost. It it is of course not possible that there will be no maintenance cost, but even new ones can have that. So you need to have some buffer for that. But if you're looking at the fund. Intel's wealth creation. You need to look at the data, historical data that we've just discussed. A few case studies has proved also that overall established suburbs have been have shown much higher capital growth overall period of time. And we are not talking about five-digit numbers. We are talking about six-digit numbers here. So if you have the bandwidth where you can manage the cash flow, but you're looking for growth, wealth creation. That's the way to go.
Parag Dixit
That's the way to go. Okay. So fundamentally, if I were to just talk about this, you're saying that we should really not be asking about whether I'm buying a newer property or I'm buying a new or buying an established property. What I should be asking is, what are my fundamentals coming in there? What are my numbers looking like? What are my financials looking like out there. What is kind of growth which is expected there? What what am I going to get as my objectives there? What are the risks making sense for me or not? When I look at the entire picture, the numbers, the maths behind it, that's where it makes sense for me to choose on which kind of property do I want to go for. But if my numbers don't stack up, then I think it's it's it's not a it's it's it's it's a very simple decision where it stacks up that's where we go right absolutely
Mudit
100% correct it's it's not about whether yeah this is better that is better what you are looking for what risks you're you're okay to take and what is the trade off between the growth and the cash flow how do you manage that this is this will tell you the answer whether this one is for you or not
Parag Dixit
this one's for you or not? That's right, absolutely right. Thank you so much, Mudith, and lovely chatting with you on on this. I hope we've been able to answer a lot of questions which people have in their mind, and it's a brilliant topic. It's an often repeated topic which people have new or established, but I I hope a lot of people would have got the answers. I hope so. Yeah, there we can talk about hope in this one. Thank you. Bye.
