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Plea For Careful Investment Study

Plea For Careful Investment Study

With so many new builds on the market, how do you figure out if one is a good investment? Andrew Nicol takes a close look.

By: Andrew Nicol

3 December 2023

Two-bedroom townhouses are one of the most common investment properties. But with so many new builds on the market, how do you figure out if one is a good investment or not?

Here’s a case study of a development I recently recommended to investors in Christchurch.

What’s The Property?

This development is at 35 Eversleigh Street. It’s a project of eight, two-bedroom townhouses on the corner of a quiet street in St Albans, Christchurch. The rental assessment says it will likely fetch between $530-$550 a week.

The developer is Four Avenues, a company started by three brothers in 2019 – Jack, George and Rob. They come from the Clifford family, an established family in Christchurch who accumulated an expansive portfolio of land over the years. The brothers are now developing townhouses on this land.

But don’t spend too much time looking at the pretty visuals. They won’t tell you whether it’s a good investment or not. Instead, you need to look at the following three factors.

The Price

The most crucial factor when looking for new builds is price. It needs to be a good deal compared with other properties on the market. This table compares Eversleigh Street with similar developments, all within a few kilometres of each other.

Eversleigh Street is at least $80,000 cheaper than an almost identical property in Edgeware. These two properties are the same size and are only one kilometre apart.

The most expensive property on this list is $140,000 more than the Eversleigh Street property. Apart from being eight square metres larger than Eversleigh Street, the specifications are the same.

A Good Investment?

There are two main numbers you need to know when you invest in a property:

  • cash flow (the amount of money you need to top up the property per week)
  • return on investment (for every $1 invested in a property, how much do I get back?)

Let’s take a look at how Eversleigh Street measures up.

Cash Flow

The primary way you make money through a new build is by holding the property over the long term.

The value goes up as the market appreciates, but you can’t get those gains unless you can afford to hold on to the property. And like most properties bought in 2023, the rent doesn’t cover all expenses. That means the investor needs to cover the shortfall. Investors call this a “top-up”. It’s also known as negative gearing in property circles.

By my forecasts, the investor will need to top up Eversleigh Street by $125 a week in the first year and continue to top up for nine years (although the amount will come down as interest rates gradually decline and rents continue to rise).

ROI Figures

Eversleigh Street has a return on investment of 266 per cent. This means for every dollar you invest, you’ll get $2.66 back (as well as your initial investment).

For every dollar you put into Tonbridge Street you get $2.12 back; with Edgeware Avenue you get $2.31 back. So, from this financial modelling, you would say: “Eversleigh Street is the better investment.”

How Does The Property Compare To Others?

Eversleigh is an affordable property in a desirable location. It’s a stone’s throw from the CBD, and it’s in good school zones.

Taking the midpoint of $540 per week, the property is expected to achieve a gross yield of 4.61 per cent. St Albans is in the top 10 per cent of suburbs for gross yields.

This rental range is very likely to be achieved. Over the last six months, 1,296 different two-bedroom properties were rented within the suburb.

That makes up 44.5 per cent of all properties that found a new tenant in St Albans over that time frame. This shows there is demand for two-bedroom properties within the area.

How Do I Buy A New Build?

If you’re looking to invest in a new build property like this, there are two ways to get one:

  1. You can use the information to find a property yourself through a developer.
  2. You can work with a property investment company. These businesses build you a financial plan and then find new build properties that fit that plan.

Opes Partners is one example of a property investment company, although there are others. Property investment companies often don’t charge you a fee. Instead, they get paid by the developer. It’s a bit like mortgage brokers, who usually get paid by the bank.

For my complete analysis on this property, go to opespartners.co.nz/eversleigh

Through Opes Partners, Andrew Nicol works with 97 developers from around the country. He and his team of financial advisers build Kiwi property investors a financial plan and match these investors with new build properties that fit the plan.