Buy Land to Build a House

A roadmap to land ownership and home building

Do you dream of buying land so you can build your dream home or develop an investment property? Then read on, this is your go-to resource for understanding all aspects of purchasing land in New Zealand. Let’s explore the advantages and disadvantages of buying land to build on, give you the questions to ask before buying land and demystify land-buying jargon. We’ll also provide insights into financing options and specialised construction loan mortgage brokers who can assist you in this journey.

Purchasing your own piece of land holds potential for any New Zealander looking to invest or build their dream home. To find property, you can consult local real estate agents or search platforms like Trade Me and RealEstate.co.nz. It’s always a good idea to consult with an urban planner and lawyer to navigate zoning, restrictions, and legal aspects effectively. And like all forms of investment, it comes with its own set of risks and considerations that are often overlooked. Let’s investigate the advantages and disadvantages of buying an empty section to build on.

The Advantages and Disadvantages of Buying Bare Land

Advantages of Buying an Empty Section

1. Less Competition: Empty plots tend to attract fewer buyers compared to properties with existing structures. Part of the reason for this is mortgage providers (mainly banks) tend to be more cautious when it comes to granting the funds needed for buying bare land. This reduced competition can give you greater negotiating power when determining a fair purchase price.
2. Potential for High Capital Gains: Buying an empty plot in a strategic location can be a lucrative investment, especially in areas earmarked for future development. As the area grows and gains popularity among developers, the value of your property can appreciate significantly as the area of your property becomes more established and desirable.
3. Low Upkeep: If you don't plan to build immediately, an empty plot requires minimal maintenance, saving you on ongoing expenses.
4. Freedom: You have freedom to use the land however you like, subject to any covenants. If you want to build on your new piece of land, you can design the final product to suit your tastes. There may be a couple of restrictions to this, such as zoning rules and the cost of resource consent.
5. Tax Advantages: For individuals interested in developing land into residential investment properties, new builds currently offer the advantage of 100% interest deductibility on their mortgages for a period of 20 years. This can result in significant gains for property developers. However, tax can be a complex and evolving area, and currently no interest deductibility is available until the land has been developed; that is, you cannot claim interest until a structure is attached to the land whether this is via building directly on the land or relocating a house onto the bare land. For more information on this, please see an accountant or tax adviser.

Disadvantages of Buying an Empty Section

1. Limited Short-Term Cash Flow: Unlike occupied rental property, empty land does not provide immediate rental income. Exploring alternative uses for the land may help offset this lack of income.
2. Uncertainty: Buying empty land can be fraught with unknowns, especially if you plan to build. Hidden geological issues, resource consents, and unexpected construction delays can lead to unforeseen expenses. Building costs have ballooned in recent years but are showing signs of easing.
3. Financing: Mortgage lenders often require higher deposits for land purchases. This can be due to timing of development or whether services are already attached to the land, plus the lack of income the land generates heightening the risk you won’t be able to repay the debt.
4. Related Costs: If you intend to build a home for yourself, you might have to manage rent or mortgage payments for your current accommodation while your new home is under construction. This can strain your finances and raise concerns for lenders when arranging construction finance.

Questions To Ask Before Buying Land

Purchasing land, whether for immediate construction or as an investment, is a significant decision. To ensure a smooth process and avoid unpleasant surprises, you will need to carefully assess several areas.

• Zoning and Future Changes: Investigate any zoning and potential future changes, as zoning regulations can impact your building plans.
• Neighbourhood Developments: Inquire about upcoming developments in the area which could impact on your property's value or living conditions. Are new supermarkets, motorways, amenities, and businesses likely to be built?
• Environmental Factors: Consider factors like wind exposure or coastal proximity, which may require additional construction measures. Riskier sites may have higher insurance costs or may be uninsurable in the future.
• Sloping Land: Assess the cost implications of building on sloping terrain, including retaining walls and earthworks.
• Access and Obstacles: Determine ease of access and potential obstacles like powerlines, trees, or foliage.
• Soil Quality: Investigate soil quality and any potential contaminants that could affect construction. Purchasing a property that has already had a geotechnical report done will ensure there are no unwanted surprises.‍
• Natural Hazards: Check for risks such as erosion, liquefaction, potential landslips, or flooding that could affect insurance and construction costs.
• Utility Connections: Ensure the land has access to essential utilities like water, power, gas, and internet. Costs can vary widely, from a few thousand to over $100,000.
• Rural Land Considerations: If the land is rural, assess sewage and water options, transport costs, and regional requirements.
• Land Restrictions: Verify any land restrictions, including covenants, easements, and mortgages listed on the title.

Key Terminology: Buying and Building

The process of purchasing land involves a multitude of terms and acronyms that can be confusing. Here, we define some common terms you may encounter when buying an empty section:

• Subdivision: The division of land into smaller lots or sections, often for residential or commercial development.
• Geotechnical Report: A study assessing the soil and ground conditions of the land, crucial for construction planning.
• Resource Consent: Permission from the local council for activities or land use that do not comply with zoning regulations.
• Certificate of Title: A document detailing ownership history, land characteristics, rights, restrictions, and a site diagram. Land Information New Zealand maintain this information.
• LIM Report: Land Information Memorandum Report, which provides information about the property, such as zoning, building consents, and other relevant details.
• Covenant: Rules governing land use, which may include restrictions on animals, building specifications, and materials. Covenants are noted on land titles.
• Easement: A right allowing another party to use a portion of your land for a specific purpose, such as access.
• Construction Loan: A mortgage designed for building or renovating a home. Funds are released in stages, with interest-only payments until the construction is complete.

You guessed it, with all this terminology and complexity, you will want a solid team around you. This includes a good lawyer to help you understand and work through all the details above.

Buying Land in a Subdivision

Many people choose to purchase a piece of empty land within a subdivision.

When considering the purchase of a section within a new subdivision, several factors make it potentially advantageous compared to acquiring a vacant lot:

1. Utility Connections: Often, utilities are already connected, saving you the time and expense of arranging this yourself.
2. Flat Plots: New subdivisions typically feature flat plots, facilitating easier future construction and potentially eliminating the need for significant earthworks to lay foundations.
3. Developer Insight: Developers are usually well-versed in the land's structure and any underlying geotechnical concerns.
4. Capital Appreciation: As the area surrounding your plot gains popularity, there's potential for substantial capital gains.

However, it's crucial to be aware of several key considerations when purchasing land in a new subdivision:

1. Certificate of Title: A certificate of title may not have been issued for a newly subdivided plot yet, which can contain vital information about the plot's suitability for purchase.
2. Sunset Clause: If making an offer on a plot where the title has yet to be issued, negotiate a "sunset clause" with the seller/developer. This clause allows you to withdraw from the deal without penalty if the title isn't issued by a specified date.
3. Subdivision Guidelines: Developers may impose restrictive covenants on new buildings to maintain uniformity within the subdivision. This could dictate design, colours, materials, and even plant choices for your garden. This could limit options like placing a tiny house on wheels or relocating an existing home.
4. Additional Costs: Ensure you understand what's included in your bill. There may be additional costs, such as infrastructure growth charges, water/council fees, and outstanding rates bills, the developer has not covered.
5. Developer Risks: Property developers are usually leveraged, which means they’re borrowing large amounts of funds to keep developing more land. This is risky, and many can and will go bust.

Here at Become Wealth we help people with property investment, and other types of investments and financial matters, every single day. If you’d like to discuss this with one of our financial advisers, please get in touch.

Learn more:

• ‍New Builds Versus Existing Properties
• What to Consider When Buying an Investment Property
• When to Become a Property Investor

Finance a Land Purchase

Before you begin your land search, determine your budget by considering various costs, including the land price, construction expenses, rates, resource consents, and potential unexpected costs. It’s a smart move to add a buffer of 10-15% to account for unforeseen expenses.

If you’re buying bare land, as opposed to buying from a developer under a ‘turnkey’ arrangement, securing finance for land purchase differs from standard home loans and can be more challenging. You will typically need two types of loans: one for the land and another for construction. Lenders may be more cautious when providing loans for vacant land due to its lower income-generating potential. Expect a minimum 20% deposit for land near city boundaries. Lifestyle blocks may require a deposit of 20% to 50%.

To enhance your financing application's success, demonstrate your intent to build by providing architectural plans. Explore potential benefits like the KiwiSaver First Home Grant if you qualify. Consider using mortgage brokers, including our lending team here at Become Wealth for guidance, who specialise in construction loans.

The Bottomline: If Buying Bare Land, with Risk Comes Reward

There are no two ways about it. Building a new property is more complicated than buying an existing house, but the rewards are there for those who put in the work and navigate the market correctly.

It would be the pleasure of one of our trained professionals to help you work through anything mentioned above, get in touch to book your complimentary initial consultation.