Just a bit of a theory about the whole capital gains thing. Pretty long one though.

Capital gains can be made in 2 ways only. Appreciation in value due to improvement of the property (renovations/additions etc.), and appreciation in value due to market movement/growth.

Now discussing the renovation aspect. This, I feel is probably the most secure form of capital gain at the moment due to market pressures etc (discussed below). HOWEVER, this is subject to several very important factors. Firstly, renovations in such a touchy market must be completed as quickly as possible in order to save money on holding interest on the loan and perhaps more importantly to race the effects of a declining market. There is no point taking on such an investment unless it can be turned over quickly, otherwise any value gained will simply be diminished by the fall in land prices. Secondly, adding value through renovations is most effective when the work is done by the investor, and thus saving the labour costs. Value added by renovations is really only the cost that it would normally cost to have the same thing done by a contractor (and sometimes not even that much). Therefore secure profit is possible by providing a high quality of work for absolute minimal cost. If just paying contractors to do the work it is quite likely (and I have seen it on countless occasions) that any cash invested in the improvements is simply eroded away by the drop in land prices and the investor loses money. Having said that, if the home is old and in poor condition, you should be able to negotiate at the time of your purchase that you will pay only land value for the property… generally the owner does not expect too much more anyway. Paying land value only minimises the risk and it can be quite easy to add at least some value quickly to an older home just by making it livable (a livable home should return a minimum of $40k – and that can usually be achievable by spending only a few thousand dollars). Now if you are planning on doing something like this, then it is far more clever to purchase the older home. Only so much value can be added to a newer building (whether it’s a townhouse or a dwelling) before the money added is simply wasted as the property becomes overcapitalised. A purchaser will generally not pay a lot more than what they can pay to buy a new townhouse. Depreciation is definitely a different aspect, but I don’t think that was what you were asking about anyway. I personally would never invest for depreciation benefits anyway.

Now, capital gains due to market growth. Very difficult to be confident at the moment anywhere in Australia really (the areas where growth is still occurring is usually down to outside factors such as mining industry etc. which although may be quite secure a the moment, can be changed overnight). I know you quoted residex as saying growth was likely at about 15%. Generally they are a pretty good indication but shouldn’t be relied upon. Those figures are based on a lot of things that most people don’t understand. Besides, these figures are usually only median property figures which can be dangerous to follow, especially if your property is outside that range. Answering your question about the 2 choices, think about this. The value of the entire property (whatever it is) does not actually increase. The only aspect of the property value that does increase is the land value component. The only way improvement/building value changes is as mentioned above. Saying this, it makes sense that if investing for capital gain, you should spend as little money on the actual building component as possible as any money spent on this is only more interest you have to repay to the bank. In actual fact though (without trying to get complicated) you should pay the minimum you can for a house that can still be rented out for a maximum amount. This actually makes you profit from the money that you had to spend on the actual building, whereas vacant land cannot be rented out and as such is dead money (hope this makes sense). Furthermore, you should know that when buying into a townhouse development, you do not actually own any land, as they are strata titled properties. This means that you only really own a share of the overall land in the complex (depending on the number in the complex etc.). This is one of the reasons that strata titled properties (as a general rule only) appreciate slower than Torrens titled dwellings. They only really increase when the house prices get high enough to warrant buying the cheaper townhouses/units etc. the prices are effectively being dragged up by the land prices. HOWEVER, be very careful here as this is only a guide and strongly depends on the cycles of the market, demographics and local lifestyles etc. besides which, even if you did pick the right time in the cycle for townhouses etc. then for newer building you do have a substantial sum tied up in the improvement value that could be spent on large parcels of land instead.

Just a theory…Interested to hear feedback.

Cheers, Guy