Buying a New Build vs Existing Property – That is the question
Interest deductibility is now ruled out for existing properties… we think (it’s still not completely clear), and will not be ruled out for new builds….probably, which is causing investors to think, “should I invest in new builds or existing properties in New Zealand?”
Before the announcement about eliminating interest deductibility for investment properties people typically invested in existing properties. Although still not a law (the changes are working their way through a discussion process) it appears that tax changes are driving investors to invest in new builds.
There’s a lot to weigh up between new builds and existing properties, and this has traditionally been a controversial topic among investors. Yet, there’s no one-size-fits-all approach and new builds may not be the right investment for everyone.
In this article, we are going to share our insights on how to decide when and what to buy next and weigh up the pros and cons of investing in new vs existing properties so you can make an informed decision.
Goals, Goals, Goals
At times like these, the easy thing to do is to sit on our hands and do nothing. But what are we waiting for? Absolute certainty about interest deductibility, COVID to pass, interest rate stability?
The problem with this approach is that we are letting market conditions dictate our actions. When racing in a round-the-world yacht race, sailors don’t say … “oooh there is a storm coming, let’s stop, drop the anchor and wait for the storm to pass” If you do that, you lose the race. Instead, they adjust to conditions, choose a smaller sail, take another route and sail on. They know where they are, they know their destination and they monitor their progress.
So, let’s stop looking at the problem for a minute, and remind ourselves of our wealth and passive income goals and the associated strategy. This year I am determined to buy more property. I will do all I can to prevent interest deductibility or COVID stop me from buying. My job is simply to keep knocking on doors until I find the right investment for my portfolio.
Should I invest in an existing property or a new build in New Zealand?
When deciding to buy a new build or an existing property, we all know there’s a lot to weigh up. Some of the things to consider are personal preference – some people love brand-new fittings and fixtures with fewer worries about maintenance, while others prefer the idea of renovation opportunities. We’ll leave those debates to you and your family, let’s instead work with the information we have that are more definable aspects of this decision.
Should I buy an existing property as an investment in New Zealand?
Let’s say you’re thinking about buying a $1million property with 60% leverage. That is going to cost around $4,000 per annum in tax without interest deductibility – assuming a 2.5% interest rate and a 25% tax rate. If you think those variables are too light, increase them… it won’t make a meaningful difference. We believe there are two ways to look at investing in this property:
- Capital growth
Do you think you will get more than $4,000 in capital growth per annum? Is the total capital growth benefit greater than the total net loss (if there is one) per annum on average over 10 years?
Generally, existing houses tend to have bigger sections of land compared to new builds, making them more likely to see bigger capital growth in the long run. But again, you need to compare this with your total net loss.
- Tax bill
The question is: can you afford the tax bill? From 1 October 2021, owners will not be able to offset all their interest as expenses against rental income for residential investment properties purchased on or after 27 March 2021 become progressively non-tax deductible against rental income thereafter.
If so the answer is “yes” to there probably being more capital growth than the cost, and the tax impact is affordable… why wouldn’t you keep buying property to achieve your wealth and retirement income plan?
The pros and cons of buying an existing property
Pros of buying an existing property:
- Capital growth – the great thing about investing in existing property is that you can achieve capital gains by holding the property over the long term.
- Renovate the property to build equity – fresh paint, new kitchen cabinet, a new bedroom, landscaping or even a new dwelling or car port – the sky is the limit. Every upgrade to an existing property will add to its value thus allowing you to access more equity for your next property.
- Bigger living space – Most new builds we see nowadays are 2 – 3 level townhouses with 50 – 60 sqm living area as opposed to older bungalows with 120+ sqm living area.
Cons of buying an existing property
- More expensive maintenance – depending on the condition of the property, with some older properties having existing maintenance issues.
- Healthy home standards compliance cost – you possibly have to spend time and money ensuring your rental property is compliant with the Healthy Homes Act.
- Competitive to buy – When buying an existing property, there’s plenty of competition. You may be buying at auction and you won’t know if you can afford the final price until the bidding gets underway
Should I buy a new build as an investment in New Zealand?
If non-deductibility of interest is top of mind:
It is likely interest will be deductible on new builds. So if you are really concerned about the non-deductibility of interest on existing property – then buy a new build. If it turns out interest is not deductible…how bad is that? Could you handle the tax bill for a few years while you wait for rents to catch up?
The pros and cons of buying a new property
Pros of buying a new build:
- Less deposit – when buying a new build as an investment, only 20% deposit is required while a minimum of 40% deposit is required when purchasing an existing property as investment.
- No maintenance required – New builds are built to the current building standards and are therefore Healthy Homes compliant. They usually come with a 10-year Master Builders Guarantee, thus providing you with a peace of mind that your investment is protected.
- Shorter bright-line rule period – the government has indicated that new builds would be subject to a 5-year bright-line period. In other words, if you sell the property after the bright-line period ends, you won’t need to pay capital tax.
Cons of buying a new build:
- Smaller space – compared with existing properties, especially older properties, new builds are often a little “crammed” into developments, as builders want to optimise their return. This causes new build houses to sometime suffer from being overlooked by neighbours, or parking issues.
- Premium prices – when comparing the properties with the same location and same conditions, the price for a new build (eg a three-bedroom house in Mt Eden) is often higher than an existing property.
- Lack of character – a new-build property can be polished and shiny, but sometimes they also feel a little plain, or lacking in charm.
Like many decisions regarding property investment, the answer depends on your situation and the market you’re buying in. The above pros and cons to buying a new-build property or an existing property should help you decide which type of property might be the best option for you.