Two-Bed Townhouses A Popular Choice
One of the most common investment properties remains a new two-bedroom townhouse, but investors still need to do the numbers to ensure a good return, writes Andrew Nicol.
30 December 2023
Two-bedroomed 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 377 Selwyn Street. It’s a project of eight, two-bedroomed townhouses in Addington, Christchurch. The rental assessment says it will likely fetch between $520-$540 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 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 Selwyn Street with similar developments, all within a few kilometres of each other.
Selwyn Street is at least $44,000 cheaper than other comparable properties in the area. These three properties are all within a few kilometres of each other.
The Colombo Street property is $35,000 more expensive than Selwyn Street. It has a larger floor area but has one less bathroom.
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 Selwyn Street measures up.
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 Selwyn by $139 a week in the first year, and continue to top-up for eight years (although the amount will come down as interest rates gradually decline and rents continue to rise).
Selwyn 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 Colombo Street you get $2.28 back; Dickens Street you get $2.45 back. So, from this financial modelling, you’d say, “Selwyn Street is the better investment.”
How Does The Property Compare to Others?
Addington is in the top 15 per cent of suburbs for gross yields. And on average, house prices in Addington have increased 6.50 per cent per year (Jan 00 - Sep 23).
Property prices in this area tend to be more affordable, because they are 27.89 per cent lower than the average house price in Christchurch.
Selwyn Street is expected to achieve a gross yield of 4.75 to 4.83 per cent, depending on the size of the property, and the number of bathrooms. This is higher than the Christchurch median of 4.06 per cent.
This rental range is very likely to be achieved. Over the last six months, 630 different two-bedroom properties were rented within the suburb. That makes up 37.5 per cent of all properties that found a new tenant in Addington over that time frame.
This shows that 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:
- 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, 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/selwyn ν
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.