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Best Time To Buy New

Buying new builds has never been so easy or attractive and we’ve uncovered five reasons why investors should seriously consider this strategy. By Joanna Jefferies

By: Joanna Jefferies

30 April 2019

All the stars have aligned and there’s never been a better time to build or buy new. There have been so many regulatory changes for investors, both in lending and in compliance in the past year, that some have got cold feet for residential property.

But for new builds, not only is lending far more accessible, there is no cost to comply with the new Healthy Homes Standards. On top of that, there are more options for buying new than there has ever been, and renting out a new build means you’ll attract the best tenants.

There are so many reasons why now is the right time to investigate the strategy of new builds, and we’ve collated the top five reasons here.

1 Maintenance Costs

A BRANZ study last year shows New Zealand is in need of 225,000 additional rental properties by 2038, with the current housing stock dismally below World Health Organisation recommendations and in serious need of an upgrade, says GJ Gardner’s Dan Oliver.

The Healthy Homes Standards were brought in to improve rental stock, but along with them are increased compliance costs. For rental property owners with older homes, it means another hit to their maintenance budget.

But new builds are likely to automatically meet the Healthy Homes Standards and can also offer more security, says Oliver. “Reduced expensive maintenance costs [equals] more secure returns. The same 2018 BRANZ study report suggests that homes which are built to rent, generate positive cash flow several years earlier than existing homes, thanks to their lower maintenance.”

On top of this, most group home builders offer a 10-year new build warranty, which reduces maintenance costs to virtually zero. Especially if build materials are specifically selected to support low maintenance and high wear.

Oliver says it’s common for investors to choose more durable components when they build rentals, “For example, impact-proof internal linings to reduce tenant damage, or low maintenance [materials] to reduce overall costs.” Another design aspect that can be chosen to reduce maintenance is a simpler landscaping design.

2 Lending

When restricted loan-to-value ratios (LVRs) were brought in for investor lending on existing dwellings, the intention was to stimulate an increase in housing stock by way of new builds, which fall outside the bank LVRs. Lending for most new builds can be secured at an LVR of 80% while that figure is typically only up to 70% for existing rental properties.

The higher LVR makes a significant difference to investors trying to build their portfolio and it means for the first time new builds are a serious option to consider. Strategic Mortgages director Ammon Acarapi says if you want to take the plunge and build new, it’s important to know that each bank’s construction loans are structured differently and some banks have more favourable terms.

“That includes things like the number of progress valuations required throughout the build – you don’t want your valuer out there every single time there’s an invoice from the builder.” Acarapi says each valuation is costly and time-consuming and ideally there should only be around five progress valuations in your contract. This means progress payments will be released in five stages: deposit, foundations in, block up, ready for roof and practical completion.

“Five is about the average, but I have some projects where there are nine or 10 and that’s a bit too much.” Another discrepancy to watch out for in your construction loan paperwork is whether the final payment will be released on practical completion, or upon receiving Code of Compliance (CoC).

“There’s quite a difference between practical completion and CoC. Practical completion is when the council has visited the property and it has passed all its checks and all the necessary paperwork has been sighted. CoC is when the paperwork has been processed through council, which can be an absolute nightmare because there’s no logic in how long that can take.”Until the final payment is made, the home usually can’t be insured and is therefore unable to be occupied which “can be very frustrating and stressful for everyone involved”.

A Lending Advantage

There’s definitely an advantage to what a new build can do for lending on an existing property. If you choose to build a new second dwelling on that property you’ll be able to refinance all the lending for the property at the 80% LVR, once the build is completed.

It’s a bit of a loophole – “So long as you built it yourself or you’ve bought the property directly off the developer it’s classified as a new build and you’re credited with adding a new house into the national supply,” says Acarapi.

Once you have a fixed price building contract, your building and resource consents and insurance, you must obtain a valuation of the property “as is”, and on that valuation there’s a figure called the “on completion” valuation.

Without it you won’t be able to secure the lending at the more favourable LVR, says Acarapi. Another thing to consider is that if you wish to refinance your property down the track with another lender, they are unlikely to match that same new build LVR.

3 Buying Under

Value In a rising market turn-key new builds, whereby a developer sells properties off the plans, can be an excellent way of accessing a capital gain, while making only a small financial commitment.

But when the market has plateaued there are still opportunities to buy under market value and realise a gain upon completion.

Property Ventures’ Mark Honeybone says developers trying to get a project off the ground often sell properties well below market value, especially in the first round of sales.

“Getting in early in a development is 100% the best time to buy for an investor.”

Honeybone has been involved in selling a Christchurch development recently, where each of the 90m2, two-bedroom dwellings have an “on completion” valuation of $465,000.

“They’re putting the first 12 out at $410,000, once they are sold the next 12 will go up by $20,000 and when they are sold it will go up $20,000 again.”

This is the company’s third such development in Christchurch and Honeybone says each time the “on completion” valuation has been accurate.

Getting in on that first round of sales virtually guarantees a $55,000 instant gain, he says.

“Any new build development or complex, it doesn’t really matter what the market is doing, you make money by default.”

Of course, in a rising market, this can mean a substantial unexpected gain. Acarapi paid a deposit in 2015 for a new build in Auckland and there’s been quite a few delays to the completion of the project.

“It’s not expected to be completed until early next year. I’m more than happy with that because it’s a full turn-key new build and I’m not going to have to pay another cent until settlement, so that any capital gain that’s occurred over that time, I’ve received by just putting down my 10%.”

4 Options For Building New

Never have there been more options for getting a piece of the new build pie. Whether building apartments, duplexes, terraced housing, standalone houses or prefabricated dwellings, banks are paving the way with more favourable terms for lending The Unitary Plan in Auckland means that sections that could accommodate only one additional dwelling in the past, can now accommodate any number of dwellings, subject to planning regulations.

Innovations around creating a cheaper product, such as transportable homes, are becoming sophisticated and appeal to the investor market. New Plymouth investor Jeni Woodham-Mills has invested in new builds for some time and she’s tried standalone, apartments, and a duplex, all with great success.

What You Should Know Before You Build

When you sign up with a builder, whether it’s through a house and land package, or through a private arrangement, it’s crucial to understand what your contract means and how that might impact on your investment. Keith Hay Homes national sales and marketing manager

Barry Walker, who also invests in new builds, says it’s important not to be afraid of talking it through with your builder, because they ultimately want a good outcome for their customer.

Here are a few more things to consider before you sign on the dotted line:

• Some investors take a lot of time doing due diligence at the start of a project because they are trying to get prices down, but they end up increasing holding costs, says Walker. “My advice is that if you meet with someone in the building industry that you want to deal with, set some clear goals that you want out of the project, whether that’s timeframes, costs, or the design, then make sure you have a clear understanding of the build start and finish dates.”

• How experienced is the development company and the builder? How financially experienced and secure is that developer or builder? “Talk to people in the industry you trust, talk to people at a property investors’ association and Google them,” says Mark Honeybone.

• Always use a solicitor experienced with new build contracts to help you understand the different clauses developers use. Is there an increased costs clause? Is there a sunset clause? And what will they mean for you?

• Also look at what your build contract includes and what it doesn’t. Are landscaping, driveways and curtains included? There will be significant extra costs to consider if they aren’t.

• Usually bank pre-approvals only last for a year, so if it’s going to be over a year when you settle the property ideally try and secure lending less than 12 months away from completion, says Honeybone.

• Allow a contingency for unforeseen costs, says Walker. “Foundations are always going to be an issue and for subdivision have a good understanding of what the public works will cost.”

The duplex house and land package she bought in Welcome Bay, Tauranga, in 2014 for $549,500 was completed in 2015 and valued in August last year at $800,000. The four-bedroom and twobedroom units rent for $840 per week and they’re virtually maintenance free.

She also invests in New Plymouth and completed a new standalone build on an existing property with a dwelling that she’d purchased for $373,000. The cost of the new house was $361,000 and she’s currently looking at spending $7,600 to complete the subdivision, which will mean the property will be worth around $990,000.

Whatever new build option you go with, Woodham-Mills says the key to investing wisely is to choose a build location where you’re going to experience capital growth. “It doesn’t cost you to build more in any location. If you built a $300,000 house in Tokoroa you’re not going to get that growth, whereas if you build the same house in Tauranga you will.”

Currently Woodham-Mills is looking into prefabricated homes, for their significantly lower cost and shorter timeframes. PrefabNZ estimates a prefab build can reduce the build price by 15% and the build timeline by 60%, which in itself reduces costs.

It’s been traditionally difficult to finance prefabricated builds due to the complex issues around security of the asset while it’s being built, but Westpac recently announced a tailored product.

However, Keith Hay Homes has been ahead of the game on financing transportable dwellings and has offered interim financing for build progress payments for many years to its customers.

5 Rentability

It goes without saying that a warm, dry, doubleglazed and insulated home is going to be far easier to rent than its draughty, cold counterpart. Good quality tenants expect a high quality product and they’re also willing to pay for it.

Honeybone recently built a onebedroom dwelling in South Auckland and underestimated its rentability. He marketed it for $310 per week and received over three days, 80 or 90 texts, emails and calls about it.

“I would have been ultra-happy to have the fourth-best person that I had come around to see it, but what I realised was I should have advertised it for $350 per week.” Tenants aren’t used to seeing brand new properties for rent, says Honeybone and it’s just another one of the reasons why investingnin new builds makes sense. ■


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