Podcast: Review: Golden Homes – Should You Buy an Investment Property From Golden Homes | Ep. 219

Posted by Ed McKnight on 23/04/20
Should You Buy an Investment Property From Golden Homes 001
Listen to the Show

Listen to the Show

Show Notes

What's Covered in the Show?

In this episode, we discuss whether you should buy an investment property from Golden Homes.

Golden homes sits at the slightly premium end of the market relative to other competitors such as GJ Gardiner, Mike Greer and Stonewood Homes, which the price reflects. They have some initiative finance models, that makes the purchase price cheaper than they otherwise would be, which provides benefits for those who can afford the slightly higher purchase price.

Throughout the show, we discuss who Golden Homes are a good and not so good fit for.

We also mention our property investment webinar, which we are holding this Tuesday, which you can sign up for.

Transcript

Transcript of the Podcast


Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're doing a review of Golden Homes.

Now, of course, one of the main strategies we talk about on this show is the buy and hold strategy. And we often specifically talk about buying new properties, and we talk about the reasons why we think that it's generally a pretty good idea for most investors, not necessarily all investors, but most investors. And so one of the strategies off that is if you're going to go buy a new home, the place to go is to developers.

So we're going to start doing a couple of honest reviews about the different developers that we've used in the past, that have provided properties that we've recommended as well because a big part of what we do at Opes is going around looking for the best investment grade opportunities for investors. And we're going to be talking quite plainly today about what we think about Golden Homes.

Andrew, I know that you've been having a relationship with Golden Homes for a little while, over several years. So you've seen how they are, you know, what they're like and how they've changed. What's your kind of feeling about them?

Andrew Nicol: So the relationship, a lot of the builds that some of our clients have gone through with, over the last wee while have been in Canterbury, and in that region, we've dealt with Golden Homes all over the country, but particularly in Canterbury, they've been pretty big on on that investor market. So pricing to make it quite attractive for investors. I think I would have dealt with Golden Homes for about 10 years now.

A couple of years ago the owner of the franchise in Christchurch sold to a new guy called Dean McGuigan. Dean comes from running a major car provider in Christchurch, Indy Cars, so he's a very experienced businessman and so I've kind of got to get to know him a little bit more over the last wee while, and we actually had him come to our virtual staff meeting just this week, just to talk about some of the differences in their product and the way that they do things.

And there were some really good points there so that's why it's sort of inspired this podcast today. I just want to talk a little bit firstly about what maybe makes their build a bit different to other builders and everyone's different and everyone believes that their product is the best. But Dean is definitely very passionate at about his particular builds and, and providing a better value proposition.

He makes it very clear that he's not at all considering himself the cheapest in the market, but he does consider himself the best value. And so there's a big difference between cheapest and best value. I just wanted to talk about some of the main points that they say will differentiate them from the competitors. So there are four main groups.

So firstly, they claim to have quite a higher spec on their finishing. And so now I'm not talking about high spec bench tops necessarily or things like that or different types of appliances. What I'm talking about is the actual, the fixtures and fittings and things aren't hinges and the skirting board, all of these kind of little differences that perhaps you wouldn't notice if you were just going from one property to another, but the difference in using things like a better quality garage door, for example.

So they use the Dominator brand for the garage doors. What that means is that they don't have garage doors failing a lot faster than some of the other products or manufacturers out there. So he used the example of their previous supplier of garage doors three years on, they're replacing a lot of those, whereas something like a brand like Dominator that probably will last a much longer period more like ten years for example. And so, of course, replacing the motor of one of those can be relatively expensive.

And so, you have to figure this into your maintenance and things like hinges, if you use bit quality hinges or better skirting, you don't have, you know doors coming loose quite as easily. You don't have things like the skirting board, if there's a leak in the house, for some reason, or there's high humidity or something like that, often skirting boards will swell, if you use the, the traditional, just trying to think of what the name of it is, can't think off the top of my head, fibrous board where the fibres all glued together. In the event of moisture, high moisture content in the building, they tend to swell. And so then you have instances where you've got to try and remedy that.

You've got paint cracking and stuff like that. Some of their other points of difference. So they use a thing called RAB board which is a fibre cement board, with polystyrene underneath that rather than using builders paper to help provide better acoustics in the property. And for it to retain the heat a lot better, so that makes a big difference.

They use a RibRaft foundation by default. Now that's a higher quality of foundation because it's got reinforced steel in it. Now with that, if you have, and so Christchurch is a good example of this, if you do have a slight earthquake or some movement in the house, which is completely natural, you typically have less cracking. So you don't have things like joins showing cracks later on that need to be remedied or repainted and things like that. One of the other things that he thinks is really important that they do is they use a fire retardant roof underlay.

Now that's not required by the building code and most properties aren't built with that. But a good example of why you might, would it be discuss City tower. So the Sky City tower was using the more conventional system, and we see that went up in smoke, so to speak. And so by them doing this they believe they're future proofing because there are lots of building products that have been used in the past that are no longer able to be used.

Take asbestos for example or take something like monolithic cladding which resulted in leaky homes. There are things that may be an issue later on down the track where you might not have to go and replace these things. But if you're selling this property in 20 years and all of a sudden the building code has been lifted, that could be a consideration for a future purchaser.

They might look at the property and say, Oh, well, actually we bought a property, sorry, we're looking at a property using the old system and it isn't fire retardant so they might be less inclined to pay the full market value of that property.

Ed McKnight: Okay, so it sounds like they've got a better product, but let's talk as well about how that impacts the actual financials of the investment.

Now, Andrew and I had a bit of a chat around this as well, and we're talking about, well, would this actually impact the potential rent you could charge, knowing that a lot of this detail is going into the bones of the house or the structure of it. And what we kind of said, if I remember rightly, Andrew, was that, look, it may not impact the rent you're able to charge for it.

But what this does do is it saves money, later in that case. And so essentially who it's going to be really useful for are people who don't want to have to budget for larger amounts of maintenance later. What we'd typically call capital maintenance, which might cost 10 grand for XYZ things that have broken down over a 10 year period.

So by capitalising that upfront and paying a bit more up front, then you don't have the same expenses later, and that point around capitalising is quite important because of course, if you need to do 10k worth of capital maintenance in five years time, well, you've got to find the 10 K for that. Whether that's leveraged against the investment property itself, or you find it from elsewhere.

There are a couple of different options, but if you buy the better quality house up front, then you only need to find in order to get that 10 K with capital maintenance, the extra 2K to put into your deposit and the bank gives you the other 8K so you're paying for that upfront and using the bank's money in order to avoid that maintenance that you would make late later on. Does that kind of make sense, Andrew?

Andrew Nicol: Yup. Completely. And actually just flowing on from that, I'm just going to talk about how their financing is slightly different.

So one thing that Golden Homes don't do that other developers do is they don't offer a full turnkey package, which is where you pay for the house once that's complete. Now of course, when you're buying a property and you're making staged payments, there is added risk. So this is something to consider.

One of those risks is that the longer the building takes, the more interest you pay. So you're making your loan isn't increasing based on the stages of the build and you're making additional payments to the builder. Now to combat the fact that they don't offer this turnkey package, what Golden Homes have offered is that they will do a system where you do the stage payments through your bank, but they will pay the interest.

So again, if it takes 12 months rather than nine months, because there was a Covid19 lockdown and everything went on hold, the interest cost isn't increasing for you, and therefore you don't need to borrow any extra money, which is a really, really good benefit. Now remember, if you are buying a turnkey build, the interest costs you're still paying.

So the builder factors that into their cost of their sale price and you're purchasing the property, generally speaking, about $20,000 is allowed in the budget, depending on the bill, to allow for the builders to go and fund that through a finance company. And generally it is finance company or it's a bank but you're paying commercial rates, which might be kind of 8-10% maybe higher in some cases, depending on the scale of the builder. And so there can be some savings in doing it this way.

So you can kind of offset the extra cost by the savings that you make, by having to builder pay the true cost of the interest, rather than you having to pay for it. And that's just something that I think would kind of make this still work from a numbers perspective for people. And one extra benefit that Ed actually identified when we were talking through this with Dean, is that when you buy a turnkey package, if that loan offer that you get today is only valid for say, six months, and often banks will do them for 12 months, let's say it's six months or three months, which some banks, like for example Sovereign, only offer a three month term according to a broker that I spoke to yesterday. If you do that, then when you come up to settle in nine months time, if your situation has changed, the bank might not still approve that loan.

Now that's just something to be aware of. If on the other hand, you are doing this through the Golden Homes model because you're starting to draw down the loan from day one, then the loan doesn't get re-assessed at month nine. So what that means is if there's some uncertainty around your personal circumstances, i.e. you're concerned that you might be made redundant or, you plan on having a child or something like that, then this could be a safer way of guaranteeing the money and that the loans approved because the loan is valid from day one, and so there's no reassessment of that loan.

Now, obviously there is a risk when you're making stage payments and the major risk is if developer falls over mid build and you've got a half completed house, then you potentially could have a challenge. Now Golden Homes are part of the Master Builders Association. And so what they means is someone else has to step in and complete it at the same price. So that mitigates that risk in part.

The other part of mitigation that they've got this risk mitigation that they've got is they've got a New Zealand insurance policy, which covers them in the event that they did something negligent or, Dean ran off with your deposit money to the Bahamas and was never to be seen again. So there is that added level of protection.

So, whilst often we would deter people from making stage payments. In a situation like this with Golden Homes I actually have no problem with it and think that there could be a relatively strong benefit of making stage payments and doing it this way.

Ed McKnight: And it's important as well, just to think about the trade off, if you know that you would be accepting if purchasing a property through Golden Homes, so little bit more expensive up front, and you're not necessarily going to see many cashflow benefits in that, we were talking about how we would manage or put together a cash flow for a Golden Homes property.

And we were saying, well, would we decrease maintenance well of course, we estimate that at $500 a year, no, we wouldn't decrease maintenance. Even a yearly maintenance, even though it is likely to be lower. So we wouldn't, from that kind of cash flow perspective and we'd still be quite conservative of the rent. So even though you are buying that better quality product, you wouldn't necessarily see that benefit in year one.

You'd be looking at a benefit over a longer term period because you've bought a slightly more expensive house at a cheaper price because of that financing model. But also you're avoiding that longer term maintenance.

So it's quite good for people who are in a strong equity position and it's quite good for people who are more conservative investors and want to avoid that kind of deferred capital maintenance, it probably wouldn't be the right fit for investors who are just at the margin, I guess, and just on the cusp of being able to make it work or not. If you are just on the cusp of being able to buy your first investment or not, it's probably better to get that slightly cheaper property and just still have that little bit of head room.

Would that be about right Andrew?

Andrew Nicol: That sounds right to me Ed.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more and more people and hey, if you want to learn how to run your numbers on an investment property, kind of like what we've just talked about, then we've got a great webinar coming up this Tuesday the 21st I think it is of April at 7:00 PM and Andrew is going to be presenting on how to run the numbers the right way on an investment property.

There's going to be lots of Excel spreadsheets. There's going to be lots of formulas. It's going to be a great time, so I'm going to drop that link in the show notes or just go to Opespartners.co.nz to sign up there.

Thanks for listening to the Property Academy podcast. I am your host Ed McKnight, and I'm Andrew Nicol and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.