New build vs second hand?

Housing Market Written by John Bolton, Mar 29 2016

With the Christmas hangover well and truly gone the housing market is heating back up. Despite this, agents listing numbers are down and recent figures show sales across Auckland are down 23% on this time last year which is only fuelling the supply and demand issue.

The chances of winning auctions are getting slimmer and slimmer with net migration still through the roof – A record of 67,000 net migrating into NZ in February alone.

“Second hand” properties are continuing to rise in value and of course the 40% deposits required to get funding are growing and getting harder to put together… So what other options are there? Perhaps it’s time to look into ways that you can increase your portfolio without having to be in the rat race. Obviously buying outside of Auckland will reduce the purchase price and the deposit required and increase the yield, but that doesn’t do anything for the investor who’s looking for capital gains. Not to mention, history suggests regions outside of Auckland will feel the market correction far worse, and the correction is coming at some point.

With subdivisions and development sites opening up all over, I’m a big fan of going new. New build companies are producing a high quality product that is specifically designed for investors. The properties I am talking about consist of a 4 bedroom/2 bathroom main dwelling at around 160m2 and 2 bedroom minor dwelling at 80m2. A dual income/home and income property in Auckland for between $900,000 and $1,100,000 with a rental income of $1100 a week and a gross yield of a little over 5%.

Of course, this alone isn’t amazing reading given you can get that same return from existing properties… provided you can win the auction. But with a new build comes a 10-year master build guarantee, meaning the maintenance costs are pretty much zero in the initial few years, therefore increasing your true net return. The capital gains on a new build out perform a second hand property in the first few years and you’re almost certain to pocket 5-10% on the purchase price just on settlement day – assuming of course you haven’t over capitalised.

If you’re quick, you can pick up a piece of land before title is issued and then your capital gains increase even more. This is because developers need their pre-sales to keep the banks happy at their end so they sell off sites at a reduced price to get them out the door. Right now you can pick up a 500m2 site in West Auckland for circa $400,000 where title is still 12 months away. You might pay 10% now and nothing further until title when it is likely the land would have increased by 10-15%. And the best bit?... New build properties are not subject to reserve bank LVR restrictions, meaning your required deposit is less and your portfolio can grow faster. Bank interpretations vary of course and construction lending is a bit more complex than your standard borrowing, so make sure you’re dealing with an expert and getting the right advice. And if all that isn’t enough, when you go to sleep at night you can pat yourself on the back for helping solve Auckland’s housing problem… one property at a time.

If you are thinking about building new, there are a few different types of construction contracts available, and it’s important that you choose the right one for you. Read more about this here and talk to our advisers.

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