New build property investment

Many people have the notion of buying an investment property. Not nearly as many actually make it happen, especially now in Auckland.

Borrowing restrictions and the price of property have pretty much blown Auckland out of the water for the average Joe Investor. But when it comes to brand new builds, the door has definitely been left wide open for investors.

Here’s why:

Deposit size on new build finance

When you’re buying an investment property you usually use the equity in your home as a deposit on the rental. The size of your deposit matters in terms of the affordability hoop the bank will make you jump through. Just like buying a private home, having a smaller deposit means you need a heftier income, compared to when you have a larger deposit.

As you probably know, banks have restrictions placed on them as to how much low deposit lending they can dish out. But in the case of new builds those restrictions have been ditched by the government in an effort make more homes available and ease the housing pinch.

What that means is that you can purchase a brand new investment property in Auckland with just 5-10% deposit… That’s a huge difference to the 30% deposit required for an existing property.

To build or buy?

While the equity in your home has probably pretty much doubled in the last five years in Auckland, if you’re looking for an investment here, so has the price tag on that property.

If you want to invest in Auckland, you’ve got to be willing to use a lot of your equity as a deposit, so a new build is clearly a better option from the cost of investment perspective. Restrictions require 30% deposit for investment in Auckland. For a $650,000 home that’s $195,000 of your equity… Enough to bring a tear to your eye! And a $650,000 property in decent condition to rent might be hard to find.

Compare that to the 10% deposit of $80,000 needed for new build finance… There you’re buying an $800,000 brand new property which will earn a bit more rent, have less maintenance and we reckon higher capital gain over the next 10 years. You may have to compromise on location, but new is not a hard sell really.

Now, yes, that seems like a hell of a lot of extra debt on top of your own mortgage – and honestly, it is – but that is how most property investments are structured. It’s ‘good’ debt, working for you and covered by rental return + a little personal top-up and the thought of long term capital gains on the house. You do need a really clear breakdown of whether all the costs involved are manageable for you and if its a punt you want to take. If property investment forms part of your long term planning then a new build that takes advantage of new build finance terms is something to seriously consider.

All that said, you can invest anywhere in New Zealand and those same rules apply to new builds. Perhaps purchasing elsewhere, your equity could go a heck of a lot further and sometimes the rental returns are even better in relation to purchase price (pays to do your research here). Capital gains outside Auckland will be different although that seems to be changing lately.

Do note though… if you’re looking at a new build apartment, the deposit requirement is still 15%, and there are some other strings attached that you need to be aware of.

So what are the best options for building?

Turn key builds

From my perspective these are the kind of building contracts that are the most straightforward and we like them a lot. Find your house or plans, pay a 10% deposit (sometimes 5% is all that’s needed) and then wait for the builder to complete, at which point you pay the rest of the purchase price. They are governed by a fixed price contract which gives everyone comfort around timing, milestones and importantly, the price.

It’s a lot like buying an existing property just with a longer wait between paying your deposit and getting the keys.

House & land packages

Slightly trickier than turn key because you need to have 20% of the section price as your initial deposit. But never fear, that 10% deposit in equity you’ve got (which is actually 10% of the completed project value) often equates to 20% of the land price = you can usually connect the dots. Or at least adjust the build cost to make it work.

You also need to make payments to the builder as the project progresses which adds some complexity, but a fixed price build contract governs that pretty well.

First steps into investment

If you’re keen to start out in your property investing journey, then a new build is a pretty solid option – perhaps your only option at the moment to get you invested, but not too heavily invested in personal equity.

Finding a reputable company to deal with is the next step. We regularly work alongside Rob East from Mike Greer Homes, who offer both turn key and house and land packages that sit in that initial investment price range.

“A lot of our clients are investors. For them, buying brand new as an investment is win-win – a lower deposit, and a fresh new property with higher rent and much less maintenance. It’s a simple choice” says Rob.

If you go looking in the new build market you’ll notice that turn key builds aren’t offered by every builder. It’s because they need sufficient capital to get through the project before you eventually pay them. Which is why larger building companies, with more stability and security, like Mike Greer Homes can. House and land packages are widely available, though you do need to do more homework on just how reputable the developer is.

Want to understand if new build finance will open up more possibilities for you? Talk through all your questions with us.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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