New build properties are growing in popularity among New Zealand property investors and first home buyers alike, as:
Supply-wise, developers are being incentivised to build new properties to help address the shortage of housing.
Demand-wise, the government and regulators are rewarding investors and first home buyers who purchase new builds with tax incentives and easier lending criteria.
Changes to interest deductibility rules, healthy homes standards, and other regulatory pressures are making it harder to invest in existing properties.
Should you stick to the tried-and-true path of existing properties, or should you venture into the world of new builds? In this article, we'll compare the benefits of both options, helping you make an informed decision that aligns with your investment goals. But first, let’s ensure we’re on the same page.
What Is a New Build?
A new build is a brand-new property, where you are the first person to own the property other than the property developer.
You might buy the property from the developer or through a real estate agent. What matters is you are the first person to buy it.
The Changing Landscape: Interest Deductibility Tax Laws
Before diving into the merits of new builds and existing properties, it's crucial to understand how the recent interest deductibility tax laws have impacted the investment game. These changes have altered the economic dynamics of property investment, particularly for those who own existing properties. Under the new rules, investors with existing properties are facing higher tax bills, as they are effectively taxed as if they don't have a mortgage. This unexpected burden can eat into profits and has reshaped the landscape of property investment.
However, gains made through interest deductibility have not disappeared for all investors – new builds are exempt from these changes for 20 years. By that point, the property should have experienced 20 years’ worth of rent and house price increases. So, it should be able to comfortably cover the higher taxes without the investor needing to dip into their own pockets. If a property received a Code Compliance Certificate (CCC) on or after March 27, 2020, or if you buy a new build off the plans, you're in the clear. This exemption translates into a significant tax benefit for investors purchasing new builds.
But, as always, there's more to the story. The examples above look specifically at interest deductibility. Now, we’ll look at the benefits of buying both new and existing properties.
Pros of Buying a New Build Investment Property
1. Better Cashflow Potential
One of the immediate benefits of new builds is their better cashflow potential.
The exemption from interest deductibility tax changes means that new builds can offer higher profitability, especially when compared to existing properties burdened with increased tax bills. This difference in cash flow can significantly impact your investment's financial performance over time.
A quieter, better-quality, new property is also likely to attract a better-quality tenant. This means higher rents, less likelihood of a problematic tenant, and possibly less vacancies!
2. Interest Rate Protection
New builds might be thought of coming with an added shield against interest rate rises. Because of the interest deductibility, if interest rates do climb, the effective interest rate is lower for new builds because you can offset more expenses. By investing in new builds, you're essentially safeguarding yourself from the potential financial strain of rising interest rates.
3. Lower Deposit Requirements
A smaller deposit is required for new builds compared to existing properties, thanks to the Reserve Bank's loan to value (LVR) rules. This means you can stretch your investment dollars further, making it an attractive option for investors with limited equity. Currently, the minimum deposit for a new build is 20% of the property’s value. For an existing investment property, it’s 35%. That means a property worth $750,000, would require a $150,000 deposit if it’s a new build vs a $262,000 deposit for an existing property.
When you think about it, this makes perfect sense as it’s an incentive to build new places for people to live and alleviate the housing crisis.
If purchasing as a first home buyer, you can get twice the cash contribution from the government if purchasing new compared with purchasing an existing property.
Buyer beware: LVR rules can change, and so can incentives. Whether you’re a first home buyer, or property investor, please check in with our lending team if you’re thinking about this area, and they can provide the most up to date information to help your decision-making.
4. Reduced Long-Term Maintenance
The ongoing maintenance costs associated with existing properties can be a burden for investors. New builds, with everything in mint condition, spare you from the surprise expenses of roof repairs, electrical work, and other long-term maintenance. For instance, a new roof alone can cost anywhere from $15,000 to $50,000.
New builds offer a hands-off investment approach, particularly suitable for those who don't have the time, skills, or inclination to undertake renovations or hefty maintenance. This passive approach allows investors to focus on other aspects of their lives without compromising their investment potential.
6. Tax Advantages
In addition to interest deductibility, qualifying new builds have preferential treatment under current “bright-line” real estate capital gains tax. This law requires income tax to be paid on the sale of property that is bought and sold within five years for qualifying new builds or 10 years for all other properties.
7. Immediate Capital Gain
In most cases, property developers (or the real estate agents operating on their behalf) sell under-construction properties at a slight discount to the likely final construction value of the property. They do this to keep their own business cashflow moving, i.e., to avoid finishing a project and then having to wait to sell those houses until they have the funding to start their next development.
Even better, let’s say you purchase a new build property today which has 12 months until completion. Hopefully, the local property market – and thus the value of your property – will have lifted during those 12 months, which means you will bank a double capital gain: a small discount on the price then hopefully an uptick in the value as the property is built!
Pros of Buying an Existing Property
1. Value-Adding Opportunities
Investing in an existing property opens the door to renovations that can increase both the property's value and rental income. This active approach can be immensely profitable for investors who enjoy hands-on involvement. Simple yet effective ways to add value to a property can bring-in huge rewards. A paint job, minor alterations and gardening can increase the value of a property by tens of thousands, according to experts.
2. Quicker Equity Recycling
Renovation strategies can help investors recycle equity more swiftly, allowing for faster portfolio growth. While new builds can also offer this benefit, renovations tend to accelerate the process if they are sold quickly.
3. Avoid Body Corporate
Purchasing an existing property often means avoiding the complexities and potential additional costs associated with body corporates or residents' associations, which are common in many new build developments. You can expect to pay about $100 a week for the average property, which adds up to $52,000 over a 10-year period.
4. Immediate Ownership
Unlike new builds, existing properties are already standing and ready for ownership. This means you don't have to wait for construction to be completed, avoiding potential delays or changes in property specifications. Possible construction delays can be one of the most off-putting things about new build properties.
Even worse, in an economic downturn, there will be some developers that go bust, leaving buyers' money at risk. While most contracts and building arrangements foresee this possibility and protect against it by various methods such as holding the buyers’ deposit in trust, the fact is that it’s still a big and undesirable disruption!
With the 2022 and 2023 fall in housing prices across New Zealand, some properties under construction saw their values fall before they were completed. In other words, the finished house was worth less than what the purchaser originally paid. This would have been fine a few years ago (prices don’t always go up, after all!) but there have also been tough changes to the Credit Contracts and Consumer Finance Act (CCCFA) that placed greater restrictions around debt servicing. This has meant some lenders (banks) would no longer lend against a depressed property value, so purchasers could not afford to settle the transaction with the developer and have faced losing their original deposit – as they did not have the finance to purchase the property.
Property Prices and Considerations
The perception that new builds are inherently more expensive isn't entirely accurate. While newer properties might sometimes appear to have a higher upfront cost, it's important to consider the details that come into play. Over time, the depreciation of an existing property, along with the wear and tear already suffered by its fixtures and chattels, means they should command a lower price. Furthermore, it's worth noting that the pricing strategy for new properties is often strategically competitive, influenced by the preferences of numerous buyers who favour homes that are already constructed and ready for occupancy.
An additional aspect to consider is the inherent advantage of a new build when it comes to complying with the evolving Healthy Homes Standards, particularly relevant for rental properties. This is since existing homes often necessitate significant renovations in order to meet these standards, which can incur substantial costs over time.
The Bottom Line: Invest in the Right Property For Your Situation
Ultimately, the decision between new builds and existing properties boils down to your investment strategy. If you're a ‘buy and hold’ investor seeking a hands-off approach, new builds offer attractive cash flow, tax, and maintenance benefits. On the other hand, if you're an active investor looking to add value through renovations or a ‘fix and flip’, existing properties might be your preferred avenue. The recent tax changes have also reshaped the landscape, making new builds more appealing for investors with existing properties facing higher tax bills.
The world of property investment is nuanced, and there's no one-size-fits-all answer. Assess your financial situation, investment goals, and risk appetite to determine whether new builds or existing properties align better with your strategy. Remember, no investment is entirely risk-free, but a well-informed decision can set you on a path to maximising your returns while minimising potential pitfalls.
The current market presents opportunities for both clever first-home buyers and for investors alike.