Why “Brand New, Middle-of-the-Market, Residential” Is the Formula

Now we know where to buy: the question is, what to buy? Our answer is generally this: brand new, residential property in the middle of the market. Here’s why.

Why Residential?

If you’re in a residential property, you can achieve a higher lending ratio, allowing you to buy more properties with the cash or equity you have. If you want to buy a shop, you’d be lucky to get a 70% loan for it, because it’s a commercial venture, and you’d also pay a higher commercial interest rate.

At the time of writing, commercial rates were approximately 7-8%, while residential rates were about 4-6%, depending on the lender. So with commercial property, you’re restricted to borrowing less, and you pay more for the privilege. With residential, you can often borrow up to 90%, depending on where you’re buying and the lender’s criteria, and get a lower interest rate too. The more property you have, the more you make when prices move. Simple.

This is just one of the rules of the game. You either learn the hard way, through your own mistakes, or the easy way, by reading books like Safe As Houses. Just make sure you have sufficient rental income to cover your mortgages.

Why the Middle of the Market?

The reason to stay in the middle of the residential market is twofold. First, it’s less volatile in terms of value fluctuations compared to the high end of the market. Second, the quality of tenants is higher than at the lower end.

The high end of the market is driven by the demands of the wealthy, and most wealthy people are in the business of some form, so their fortunes and their demand for high-end property are directly tied to the state of the economy. One client owned a $3.5 million property in Western Australia; during the Global Financial Crisis, that property dropped to $2.5 million within twelve months. And besides, why would you want a $2.5 million investment property when you could have three $800,000 properties across different locations instead, spreading your risk?

The high end of the market also tends to have a poor rent return relative to property value, because anyone who can afford to rent an expensive home can usually afford to buy their own. That means less demand for expensive rentals and longer vacancy periods.

At the lower, cheaper end of the market, you’re more likely to encounter difficult tenants — not because poor people make bad tenants, but because difficult tenants are more often found among lower-income renters. Every property also carries some overhead on your time, even with a property manager involved. So why buy ten $200,000 properties at the lower end, when four $500,000 properties in the middle of the market avoid the difficult tenants and come with a lower management overhead?

Some investors like to boast about how many properties they own. The smart, more successful investors know it’s not “how many” — it’s “how much” they’re worth. Staying in the middle of the residential market lets you buy more property while keeping your values more stable, which matters when you’re trying to build a stable portfolio.

Why New Properties?

The next part of the formula is buying new. There are several good reasons.

Builder’s warranty. When you buy a new property, you typically get a 6-month builder’s warranty. One of the first things to do is instruct your new tenants to report every last thing wrong with the property — most tenants are shocked to hear their landlord actually encourages that. They send you a list, you forward it to the builder, and the builder is legally obligated to fix it.

Very low maintenance costs. This also means no maintenance costs during the warranty period, which is excellent for cash flow.

Good tenants. New properties attract good tenants who tend to stay longer. Everyone wants to live somewhere nice, and being the first to live in a house is genuinely appealing.

Depreciation. Depreciation is the on-paper loss in value of the building over time, and the Australian Tax Office allows you to claim it as a deduction, saving thousands of dollars a year. The catch is that it tapers off as the property ages, so the newer the property, the greater the depreciation claim. Take two properties, both worth $400,000 — one brand new, one 25 years old. The new one costs less to actually own, because of its depreciation benefits, which for the average investment property can add around $100 a week to your cash flow.

To claim depreciation, you need a Depreciation Schedule prepared by a Quantity Surveyor, typically costing around $690 and it’s worth every cent, often paying for itself tenfold at tax time.

Understanding Negative vs Positive Cash Flow

Most properties start negatively geared, where rent doesn’t yet cover all the costs of holding the property. Over time, as rent increases while costs generally only track inflation, the property reaches a break-even point and then moves into positive territory.

You can own an unlimited number of positive properties. You can only own a limited number of negative ones before you run out of your own money to top them up. One of the main reasons people fail in property investment is taking on too many negative properties and sinking themselves in the process, which usually ends in a bad experience and a forced sale.

A common misconception is that a positive property means settling for low capital growth. That’s false — the goal is to get through the negative stage as quickly as possible, or avoid it altogether, without sacrificing the location fundamentals covered in our earlier article on booms and workforce-driven growth.

Frequently Asked Questions

Why is residential property better for investors than commercial property? Residential property typically allows a much higher lending ratio — up to 90% in some cases — compared to around 70% for commercial property, and usually at a lower interest rate. That means you can borrow more, more cheaply, and spread your capital across more properties.

Why avoid the high end of the property market? High-end properties are more volatile because they’re tied to the broader economy and the fortunes of wealthy buyers, they attract weaker rental yields relative to their value, and they experience longer vacancy periods. A downturn can also hit high-end values disproportionately hard.

Is it better to own many cheap properties or fewer, more expensive ones? The middle of the market is generally the sweet spot — enough properties to spread risk, without the tenant management issues common at the lower end or the volatility and poor yields common at the high end. What matters most is total portfolio value, not the number of properties owned.

How much can depreciation actually add to my cash flow? For the average new investment property, depreciation benefits can add around $100 a week to cash flow, tapering as the property ages. A Depreciation Schedule from a Quantity Surveyor is required to claim it.

What’s the difference between a negatively geared and a positively geared property? A negatively geared property costs more to hold than it earns in rent; a positively geared property earns more than it costs. Most properties start negative and move toward positive as rent increases over time relative to holding costs.

Download Your Free Property Selection Guides

📘 The Unofficial ADF Property Guide — the complete formula for what to buy, not just where 👉 /www.integritypropertyinvestment.com.au/the-unofficial-adf-property-guide/

📗 Safe As Houses – ADF Edition — the full property-selection chapter this article is drawn from 👉 www.integritypropertyinvestment.com.au/safe-houses-adf/

📞 Want help finding a positive property in a strong location? Book your free chat: www.integritypropertyinvestment.com.au/free-discovery-call/

🎯 Want to learn the full formula before you buy? Join our free ADF & Veterans Property Masterclass: www.integritypropertyinvestment.com.au/property-investing-for-adf/

-The Integrity Team