Some investors would rather eat cockroaches than buy new. But the Reserve Bank of New Zealand’s (RBNZ) new loan-to-value ratio (LVR) restrictions could mean big business for home builders.

These restrictions mean most investors wanting to buy second-hand properties will have to stump up a whopping 40% deposit on all but new homes. Is it worth buying new? Or should investors simply wait for the cycle to turn?

Grace any large gathering of property investors and most will argue until the cows come home that second-hand makes more sense yield-wise. Tellingly, however, Keith Hay Homes (KHH), which targets the investor sector says its business in Auckland jumped from 30% investors to nearly 70% after the last LVR increase on investors by the RBNZ.

Comparing Apples With Apples

If ever there was a case where apples look like kiwifruit, it’s the new versus old question. Whether it’s rents, yields, capital gain, or even the cost of purchasing, an awful lot of ifs and buts are to be entered into the spreadsheet.

The reality is, however, that investors pay more for new homes than they would for the equivalent sized second-hand home on the same plot, says registered valuer Max Meyers, of Prendos. But there are reasons for that, which aren’t all bad and need to be considered in the equation.

“[As valuers] we know there is a premium for new homes,” Meyers says. “It’s like the new car thing. The new home has never been lived in by other people and it’s new, clean and fresh.

“That premium has been [documented] in court cases.” In particular, Meyers says, a precedent was set several decades ago involving houses built by Fletchers in the Totara Park sub-division in Wellington. The case, Meyers says, involved a valuer being sued after a buyer lost money when re-selling.

Meyers says the premium on a $600,000 new home can be $15,000 to $20,000 although it will fluctuate at different times of the cycle. If there is a lot of stock from spec builders the premium will inevitably be less than times of considerable demand as is the case currently.

One factor buyers sometimes don’t take into account when buying new, Meyers says, is that second-hand properties typically come with more fixtures, fittings, furnishing and landscaping or plants than a new build – all of which can cost $30,000 to $40,000.

Old V New In Hamilton

Like many investors Nancy Caiger began her land-lording career with second-hand properties at the lower end of the market.

Once she could afford to, Hamilton-based Caiger, who is a member of the Waikato Property Investors’ Association, started adding new-build properties to her portfolio to improve overall quality.

Now after 23 years in the game her portfolio is split 50/50 between new and second-hand homes. Both have a place in the mix and their own pros and cons, she says. “If it fits my criteria I buy,” she says.

During her last big buying spree in the 2008-10 period Caiger says she contracted developers to build 180m2 four-bedroom two-bathroom homes, paying around $380,000 for the finished product. Had she shopped around for already completed properties on the market Caiger estimates she would have paid $420,000 to $430,000 for the same property. The built-in equity is the common denominator of many of her new purchases.

If it fits my criteria I buy - Nancy Caiger

Brand New Infill

Caiger hasn’t stopped building new. But at the current point in the cycle she has turned to infill housing on her existing properties and has just taken delivery of a three-bedroom and two-bedroom duplex built on the back of a property she bought in 2004. The duplex brings in $800 a week rent compared with $220 from an old one-bedroom secondary dwelling on the property previously.

In Auckland and regional centres, KHH sales and marketing manager Barry Walker says, more and more investors are doing the same as Caiger. The most popular choice in the KHH range for this purpose is the First Choice 110, a 110m2, four-bedroom, two-bathroom transportable home costing around $200,000 on site.

In an era with increased home density expected, Walker says transportable homes can be shifted at a later date should changing urban planning rules allow the property to be further subdivided.

Changing Times

Nelson investor Seddon Marshall has lost count of the numbers of new and second-hand homes he has bought and tenanted over the last 50 years. Marshall, a former president of the New Zealand Property Investors’ Federation, built many of his own buy-and-holds from the 1970s onwards, but he has also bought second-hand when the cycle was right.

Marshall’s most recent investments: four standalone homes on two sections in Panorama Drive, Enner Glynn, Nelson. All four are serviced by one driveway and are four-bedrooms, two-bathrooms, 200m2 homes, costing $380,000 each.

Capital Gain

The $64,000 question for many investors relates to capital gain. Each and every situation will be different, although most experts agree that in the initial few years after purchase a new home will not rise in value as much as a corresponding secondhand home until the new home premium is exhausted.

In Nelson, Marshall says, newer properties tend to be situated on less desirable land in that it’s not flat and within walking distance of town.

Caiger has found in Hamilton that capital gains tend to be better on the new homes, thanks to the built-in equity. “The yield (on new builds) would be better because I have bought with $30,000 to $40,000 equity in it,” Caiger says. (When buying second-hand, Caiger looks for the ability to add value. That could involve renovating a run-down house or sitting on large properties that can be subdivided when it’s economic to do so in the future.)

This isn’t uncommon. Walker has seen investors make between $50,000 and $100,000 instant equity on new home and land packages in subdivisions in Auckland and regional centres Whangarei and Tauranga in recent times. There are always swings and roundabouts and anyone who buys a second-hand home well will also have instant equity. We asked Ross Barnett, principal at Coombe Smith to compare the numbers on two similar properties for sale in the beachside suburb of Papamoa, in the Bay of Plenty. One new and one second-hand of similar values.

Property one is a 15-year-old, three-bedroom, two-bathroom house, with a floor are of 201m2 and land area of 577m2 and a purchase price of $699,000.

Property two is a three-bedroom two-bathroom off-the-plan new build with a floor area of 186m2 and land area of 402m2.

Comparisons such as this are always fraught. For example, Barnett points out in terms of the second-hand property, not everyone will spend $3,500 per year on repairs and maintenance. “But you will have large items like painting come up, and I would expect the investor to spend $35,000 over the next 10 years,” he says.

The figures presume average capital and rent growth and don’t include one-off purchase costs such as legal fees.

Barnett noted that with full mortgages both properties were negatively geared even though the interest rate is only 4.40%.

Sometimes, Walker says, investors who buy off-the-plan are making more profit up front than the developer. (Investors do, however, need to be aware that in a stagnant or falling market, there may not be a capital gain to be made by buying off the plan.)

However, investors have holding costs on the progress payments and no rent coming in, which can seriously impact the overall gain.

The other apples versus kiwifruit question is size as Marshall points out. The average size of a new home in New Zealand has ballooned from 95m2 in 1976 to 225m2 in 2015.

WOF Ready

One of the many ways in which a new home can save investors’ money is that it is already up to insulation standards required of landlords by the Government, Walker says.

New homes will almost certainly be WOF-ready should a future government make warrants of fitness on rental property compulsory.

The insulation and other Building Code requirements mean they are cheaper to run, warmer, and more sound proof than older homes, which tenants like, making the property easier to rent.

Maintenance The Big M

A very important factor when assessing the difference in net yields between second-hand and new, Caiger says, is maintenance. Owners of both need to pay rates, insurance, and property management fees. “With my new property I have my builder’s warranty for seven to 10 years and have next to zero repairs and maintenance.”

That can be a blessing or a curse. While bigger homes may be desirable to tenants, there’s more to maintain and tenants may squeeze more maintenance-inducing people into the home. Marshall says if he was to add new homes to his portfolio in the current market he would build two-bedroom homes, which meet the needs of some of the changing demographic with more childless couples and older folk in the city.

Premium Rent

This lower capital gain, at least in the early years, needs to be balanced against the rent premium from a new home, although Caiger says the inbuilt equity in her properties and reduced repairs and maintenance balances the equation.

“New houses are desirable,” Caiger says. “They are warm. They come with heat pumps and they are fully insulated. It will have all the mod cons. New stove, new range hood, new dishwasher, an Insinkerator – and you are the first person who gets to use all those things.”

She cites the example of the two-bedroom, two-bathroom brand new duplex in Pukete. The property fetches $380 a week. Bond information from the Ministry of Business, Innovation and Employment shows this figure is well above the norm for a two-bedroom property in that area, which sits at $362.

Tenants, Marshall says, tend to stay longer in his new builds. Two current tenants in Panorama Drive have been there for more than five years. In Wainui Street, Nelson, he has one tenant who moved in when the home was new 11 years ago and is unlikely to move unless the house has to be sold.

Marshall says he would expect to get around $150 to $200 more a week on a brand new property compared with something of the same size that is second-hand. That premium dwindles over about 15 years, he says.

A Depreciating Home

When it comes to tax and accountancy, new versus second-hand makes very little difference, Mark Withers, partner at Withers Tsang & Co accountants, says.

“There is no magic in it,” Withers says. New homes depreciate in price in the same way new cars off a lot do. None-the-less building depreciation is not available as a tax deduction. “New houses may depreciate in reality, but there is no depreciation [deduction] on it.”

The only difference between new and old from a tax perspective is that there is more depreciation on the chattels of a new home. “You are buying them at new price. They will have a higher value than a list of second-hand stuff in an old bungalow.”

New Versus Old In Northland

Northlanders Craig and Julie Gordon turned to new homes after finding it difficult to compete with first home buyers for houses in good areas. “We had to start thinking outside the square,” says Craig Gordon.

The couple developed a strategy of buying vacant sections or properties that could be subdivided, but always in good school zones.

In one street the Gordons, who say they learnt much of what they know from the Northland Property Investors Association, created their own small-scale subdivision with four brand new G.J. Gardner homes for approximately $200,000 each – built on subdivided sites with older homes on the front. The couple owns other new and second-hand homes in other parts of Whangarei.

Julie Gordon says the perception that new costs a lot more than second-hand isn’t always true. “It's important for investors to break out of certain forms of conditioning, especially price perception,” she says. “The cost of the land is an important factor. It also depends on the range of group build house you want for your tenants. Top-of-the-line homes will render a different yield to a well-built house costed out to fit the return you needed on paper.”

Like other investors the Gordons have found that tenants like new homes. “It’s an easy choice for professionals for example not to have to endure a rental search through dated, worn houses when time is limited, when they are coming in on transfer from another city or another country,” Julie Gordon says.

Unusually for investors, the Gordons have been able to compare old with new in exactly the same street. They found very little downside to building new after taking into account all the figures.

“I am of the opinion that building new can be markedly better than buying second-hand houses,” Gordon says. “Once investors have done their first house under contract to see how easy it is I think they would not want to go back to buying second-hand property unless it had a big section of course.”