One of the most common questions we get asked by budding property investors is,
“what are the different holding costs involved in investing in new builds as opposed to
existing properties?”. So, without further ado, here’s a quick overview of some of the
different holding costs associated with investing in the two different types of dwellings.
Interest Deductibility
New Zealand’s interest deductibility laws mean that most property investors must pay
more tax on their rental income. However, much like with the bright-line rule, there are
more tax incentives associated with investing in “new build” properties (existing
properties have drawn the short straw in the tax-related costs department).
New builds are exempt from interest deductibility rules, meaning, investors can claim
interest on their mortgage for 20 years after the Code Compliance Certificate (CCC) is
issued.
Existing properties are not exempt from interest deductibility rules (unless they have
been substantially renovated to the point where they have been issued a new CCC). In
short, this means that if you choose to invest in existing dwellings, you will be required
to pay more tax, meaning higher overall tax costs than if you choose to invest in new
builds.
Deposits and Interest Rates
Both the required deposit and the interest rates for new builds are lower than those for
existing properties. Only a 20% deposit is required to invest in a new build, whereas a
40% deposit is required to invest in an existing property. In some cases, new builds can
also be purchased with a 10% deposit (subject to a low equity margin cost).
When it comes to interest rates, they are much the same, however, unless a new build
is a “turnkey”, lenders offer interest only floating rates until the build is complete. Banks
are also currently offering good cash incentives for construction and turnkey builds and,
in some cases, special rates for construction loans (loans for new builds).
Healthy Homes Compliance
Although it always pays to “check the fine print”, when you invest in a new build
property, you don’t have to worry about forking out funds upfront to bring it up to the
Healthy Homes standards. When you invest in an existing property, you might find you
have to undertake costly initial upgrades to ensure it is legally rentable - not to mention
other unexpected, age-related, maintenance bills. The good news is, property investors
benefit from a 90-day grace period to comply with the Healthy Homes standards once a
tenancy commences. Additionally, some Healthy Homes expenses are tax deductible,
however, you cannot claim for renovations that substantially improve the value of your
property.
Maintenance & Repairs
When you invest in a new build property you can expect less long-term maintenance
costs than you would if you were to invest in an existing property. Existing properties
tend to be older, require more maintenance, and come with a higher risk of unexpected
expenses. With that being said, a well-renovated, or well-maintained existing dwelling
has the potential to reap higher long-term rewards than a new build (such as higher
rent).
Purchase Price
Purchase prices vary for both existing and new properties. There is potential for some
great bargains to be had when purchasing an existing property and you may find they
are better located than their new build counterparts. Furthermore, existing dwellings
provide great opportunities to add value and increase rental return. Adding value and
increasing rental return also gives you more equity. More equity will allow you to buy
more properties, sooner, and can soften the blow of a market downturn.
New builds generally have zero potential to add value. You don’t have the luxury of
manually adding value through strategic renovation, extension, subdivision, adding
amenities, adding a minor dwelling, or redecorating. Therefore, to make money on your
investment, you will be relying on capital growth and rent increases over time. You may
not be able to increase your rental property portfolio until rent or the capital value of
your property has increased (which could take years!).
On the flip side, new builds can be very reasonably priced, especially when bought off
the plans. However, you’ll have to weigh up whether the location of the new build is right for the rent returns you wish to make. Another factor to consider is that the capital
growth on a new build is usually restricted due to them being built on smaller sections
(generally speaking). Land appreciates (increases in value); therefore, less land means
less capital growth.
New builds bought off the plans also incur a significant time delay between when you
sign the contract and when the build is completed and settled (it could be a year or
more). During this time, the market can dip, resulting in a loss of equity. Not only that,
but in the current market, building costs are skyrocketing. If you don’t have a fixed price
contract you may find your “reasonably priced” new build turning into an expensive
nightmare. In contrast, when you buy an existing dwelling, what you see is what you get
(more or less). There is also less risk of equity loss as there is usually only a 6-week
delay (it would be extremely unusual for the market to turn in such a short timeframe).
Looking for a Mortgage Broker? Get in Touch!
With access to all types of lending, I can help you with just about everything mortgage
related. Whether you're new to investing or looking to add to your portfolio, I know how
to break down the process of buying an investment property and making sure you have
the correct borrowing structure in place to maximise your opportunities: be that tax,
interest, or convenience.
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