Two-Bed Townhouses: A Good Investment?
Andrew Nicol reviews the numbers on three similar Christchurch townhouses to discover which provides the best returns.
2 September 2023
Two-bedroom townhouses are a popular choice for investors and tenants alike.
But some investors may worry that an abundance of two-bedrooms being built runs the risk of an over-saturated market. This isn’t what we see in the data.
Here’s a case study of a development I recently recommended to investors in Linwood, Christchurch.
In Linwood, 55 per cent of rentals are two-bed properties, according to Tenancy Services. This suggests that tenants want properties with two bedrooms in this area.
There’s also a bunch of developers all building near-identical two-bedroom townhouses in the same neighbourhood.
But with so many new builds on the market, how do you figure out whether one is a good investment or not?
What’s The Property?
This development is on Gloucester Street, in Linwood. It has two bedrooms, 1.5 bathrooms and a car park. The rental assessment says it will likely fetch around $505 a week. See what it looks like on the opposite page.
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 factors.
#1 – Price
The most crucial factor when looking for new builds is price. It needs to be a good deal compared to other properties on the market.
This table compares Gloucester Street with two almost identical developments.
Take a look:
Gloucester Street is at least $20,000 more affordable than similar properties on the market.
All these three properties are two-bedroom townhouses, spread over 73m2, and come with a car park.
They are also within several hundred metres of each other. Tancred Street and Gloucester Street intersect.
The only remarkable difference is Linwood Avenue only has one bathroom. But this is the most expensive property at $66,000.
#2 – Is It 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 Gloucester Street measures up.
The plan for the development of two-bedroom townhouses on Gloucester Street.
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.
This 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 Gloucester Street by $121 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.
In this case, Gloucester Street had better cash flow than others in the area.
Both of the other properties on this table (Tancred Street and Linwood Avenue) required a higher top-up for one and two years longer, respectively.
Return On Investment
Gloucester Street has a return on investment of 260 per cent.
This means for every dollar you invest, you’ll get $2.60 back (as well as your initial investment).
For every dollar you put into:
- Linwood Avenue you get $2.31 back
- Tancred Street you get $2.46 back
So, from this financial modelling, you’d say, “Gloucester Street is the better investment.”
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:
- You can use the information to find a property yourself through a developer.
- 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, though there are others too.
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/gloucester-street.
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.