When Buying New Makes Sense
Campbell Venning discusses spreading risk and the merits of brand new housing versus secondhand.
1 March 2016
Many seasoned investors are set in their ways, whether it’s purchasing solely in the location they live, only buying multi-flat properties, or dealing with only one lender.
I understand this approach, as in my first 12 years of investing I lived by similar rules. While these few examples of bad habits may not prevent an investor from growing their portfolio, diversification into multiple areas equals spreading your risk among multiple markets. Any investment advisor or property savvy AFA would agree this is less risky.
When choosing banks, any decent property accountant or asset planner would insist on spreading your debt among multiple lenders. If you avoid one holding all of the cards, in the event you have a significant drop to your LVR to less than acceptable levels, you won’t be at such a high risk of a lender divorce, a huge drop in asset values or even a bankruptcy.
Fair Weather Friend
When things change, banks get nervous and for you this can lead to a loss of control over your properties. During the global financial crisis I saw it all so remember, your bank is a fair weather friend.
Another mistake I am also seeing repeatedly, especially in the regions, is that seasoned investors are ignoring brand new property and choosing second hand dwellings solely out of habit.
When the Auckland Unitary Plan (AUP) came into effect, it caused a rush of buyers in the South Auckland secondhand property market, because people assumed they could subdivide sections overnight. Some of the prices I saw people paying were actually more than what they could purchase a new townhouse/3-4 bedroom house in the same location, returning the same rent.
Out of habit they assumed that more land is better than less even though the house on the larger section often required serious overdue maintenance. They then found that subdividing or adding a Minor Dwelling Unit (MDU) on the back of a section was not as easy as they had imagined and the true cost of building a smaller dwelling is much higher per metre than for a developer/builder constructing a number of properties on the same piece of land. This is because of the economies of scale available when building the same thing multiple times.
This phenomenon of over-priced secondhand stock is even more prominent in the regions. Recently I was in Hamilton, Rolleston and Wanaka in the same two-week period and all three locations had second hand houses that were more expensive per metre than buying new.
I scratched my head and asked the agents why people accept this and the only common answer they could give me was out of habit and/ or familiarity. While building new can be a very stressful and time consuming experience, you end up with a double glazed (compulsory in New Zealand now), low maintenance, brand new house with a 10-year build guarantee.