Should I Invest in New or Existing Properties?

A Fair Analysis By Stevie Waring

When regular Kiwis become interested in property investment, a big question they need to answer is: "What sort of property should I invest in".

There are lots of ways to categorise properties, including:

  • Property type – whether the property is a stand-alone house, a townhouse or apartment.
  • Location – major centres or provincial regions.

And many others. One other way to categorise is whether prospective investment properties are brand new or existing.

This can be a controversial topic in property investor circles. It's certainly one we hear all the time, here at Opes Partners, since we chiefly recommend new properties to investors. So in this article we're going to tackle the benefits of new and existing investment properties, so you can decide the right investment option for you.

The Deposit You Need

How Much Deposit Do You Need for Each?

Under the Reserve Bank's previous LVR rules, investors needed a smaller deposit to purchase new properties compared with existing homes.

While investors needed a 30% deposit to purchase an existing property as a rental, there was no minimum deposit requirement set by the Reserve Bank for a new home.

In effect, most banks would then approve mortgages to investors of new properties with only a 20% deposit.

Deposit Required for Investment Properties Before April 2020

Historically, that meant that for a $500,000 property, an investor would only need a $100,000 deposit if buying a new rental. However, if investing in an existing property that would require $150,000.

That meant there was a significant benefit for investors to buy a new property.

However, in April, during the COVID-19 induced lockdown, the Reserve Bank temporarily lifted the LVR restrictions. This meant that as far as government regulations were concerned, there was no longer an equity-led benefit to investing in new over existing property.

Deposit Required for Investment Properties After April 2020

Although it did take a few months for banks to put this policy into practice, and until June many were still only lending to investors who had 30% deposits for existing properties.

Key takeaway: There is no longer a difference between the deposit you need for a new or existing property. All properties require a 20% deposit from a regulatory standpoint.

Exception: There is one exception. In rare circumstances a bank may lend to an investor who only has a 10% deposit. In this case it is generally easier for an investor to get this lending approved if investing in a new property.

There are few published rules in these circumstances and they are usually judged on a case-by-case basis.

Is New More Expensive?

Are New Properties More Expensive Than Existing Properties?

One comment sometimes raised in property investment circles is that new properties are more expensive than existing ones.


Accounting Perspective

From an accounting perspective, this should be the case, but it doesn't always work out that way in practice.

What do we mean by that? As a property gets older, the chattels within the property gradually diminish in value.

Ovens and dishwashers wear out. Lights become dated and used. Carpets deteriorate.

So, if you put a new and existing property side by side – the same in all other respects – the new house would usually be more expensive than the existing one.


Properties That Are Already Standing Tend to Be Valued More

However, it is essential to note that price difference is often mitigated by the fact that new properties are usually bought off the plans.

You might question: "What difference does that make", which is a great query. Usually, home buyers, particularly owner-occupiers who make up most of the property market, place a premium on something that is already built.

Said another way, home buyers are willing to pay more for something that's already built, rather than a home that is sold off the plans.

This means that developers often need to competitively price their properties when selling off the plans to entice buyers.

This often cancels out the impact we just discussed above, but only when the properties are bought off the plans. If the new house is already built, we would expect it to be a higher price than an existing identical property.


Properties Have to Be In Line Because of Valuers

It's also important to note that developers have a powerful incentive to keep the prices they put on new homes in line with the rest of the market.

That's not just because consumers will balk at high development prices but, more importantly, because home buyers require a valuation before they can get a mortgage approved.

Before most home buyers go unconditional on a property bought off the plans, they will need to get their mortgage approved. Since the property doesn't exist yet, the bank will require the purchaser to get a registered valuation.

This is where a professional valuer will conduct an analysis of similar properties that have recently sold in the same area.

A value will then be placed on the property, and the bank will not lend more than this valuation.

For instance, let's say that a first home buyer wants to purchase a property that a developer has priced at $500,000. The first home buyer has a deposit worth $100,000 and wants to secure a mortgage for the remaining $400,000.

But what happens if the developer has overvalued the property compared to the market?

Let's say a valuer goes to inspect the plans and the registered valuation comes back at $480,000?

The bank will then only lend up to $384,000 on the property (80% of $480k), which means that combined with the $100,000 deposit, the home buyer has a total of $484k, which is $16k short of the $500k purchase price.

In this case, two things can happen:

  • The first home buyer negotiates with the developer to drop the price to $480k, in line with the valuation, or
  • The first home buyer walks away because they are scared off by the lower valuation.

You might think, "What does this all really mean?" It means that developers have a powerful incentive to keep the prices of new properties in line with the cost of comparable existing properties. That's because when valuers make their assessment of the brand new property's value, they're looking at the entire market to make that judgement call, including existing properties.

Case Study

Case Study: Addington Christchurch

To give you an example of this in practice:

Early in 2020, we at Opes were involved with a new development located on Ruskin Street in Addington, Christchurch. These 3 bedroom, 2 bathroom townhouses were priced at $499,000.

As part of our due diligence, we wanted to understand how this purchase price stacked up compared with the broader market.

We used QV to find out what properties had recently sold in the area and then used that information to locate similar properties. The idea here is that similar properties should have the same value.

We then cross-referenced this against Homes.co.nz (which tends to have more photos of individual properties) to make sure the houses were comparable.

We found a property located around the corner from the investment we were analysing that had sold 9 months prior on Burke Street.

The Burke Street property was a townhouse with 3 bedrooms, 1 bathroom and a floor area of 99 square metres. It sold for $475,000.

Screenshot 2020 01 17 12 15 14 squashed

That compared with the Ruskin Street property which was also a townhouse with 3 bedrooms, but had 2 bathrooms and a floor area of 117sqm, with an additional parking space. As mentioned, this was being promoted at $499,000.

Screenshot 2020 01 17 12 27 32 squashed

So, there was a $24k price difference in this case, which is primarily because the Ruskin Street property was larger and had the extra bathroom and car space.

That gives us confidence that if the properties had precisely the same features, they would have been priced very similarly.

This process is not scientific by any means, and if you look hard enough you are sure to find exceptions. But still, new and existing properties are usually priced reasonably in line with each other if the new property is bought off the plans.

Who New Is Not Right For

So Who Are New Properties Not The Right Fit For?

New properties certainly aren't the right fit for all property investors, and the difference comes down to the strategy each property investor uses and their personal situation.

Who New Properties Are Not the Right Fit For

When new properties are completed, they typically won't have any renovation potential. This means that property investors who focus on renovations should not invest in new properties (if their intention is to use a renovation strategy on the new property).

If an investor was to try a renovation strategy on a new property, they would over-capitalise. It is likely they would not get their money back.

Similarly, new properties bought off the plans may not be the right fit for people who are concerned about significant changes in their personal life over the next 6-12 months.

To use an example to illustrate this, let's say you are part of a couple who are looking to have a child in the next 6 months. The bank might approve your investment mortgage now based on both partners working.

However, you might be worried the bank won't approve the mortgage if only one partner is working.

The risk here is that you go unconditional on a property that is under construction. Then you're not able to get the mortgage approved when it comes time to settle because your household income has dropped.

In this case, you would be better served investing in a property that is already built and standing, rather than purchasing a property off the plans.

This is also the case for people who are worried about the prospect of being made redundant shortly. If they suffer an income hit while a property is being constructed, they may face issues when it comes time for settlement.

Finally, if you are on a very, very tight budget, then newer properties may not be the right fit for you.

Former BNZ chief economist, Tony Alexander, recently referenced a study that showed fewer new properties are being built for the low-end of the market.

Instead, developers will tend to build properties in the middle of the market, where they have the most appeal. If your budget dictates that you must buy an investment property at the lower end of the market, then new properties may not be the right fit for you.

Who New Is Right For

Who Are New Properties The Right Fit For?

On the other hand, if you are looking for a low-maintenance long-term buy and hold investment, then newer properties may be the right fit for you.

Who New Properties Are the Right Fit For

Newer properties work really well for a long-term buy and hold investor because they are straightforward to hold over that term.

As a comparison, one of the biggest unbudgeted costs investors face with existing properties is long-term capital maintenance. This is when things like the roof or a hot water cylinder need replacing, or electrical work needs to be redone.

Depending on the job, these could cost $10,000 – $30,000. This can be crippling for investors who don't have the capital to fund that cost.

Because everything within a recently built property is brand new, investors avoid these one-off and unexpected costs. That comparatively decreases investors’ risk and medium-term maintenance costs.

Similarly, because these properties are more attractive for tenants, investors in new properties can gain higher quality renters. This can mean that investors secure longer-term tenants, decreasing vacancy and the potential for lost rent in the downtime between one tenant moving out and another moving in.

From experience, we also see that tenants are more likely to take care of a newer property, which can decrease day-to-day maintenance costs over time.

Next, not all property investors are handy on the tools or have the experience, knowledge or inclination to renovate properties themselves. Newer properties tend to work for these investors. That's because they can secure a high-quality property with solid bones, without the need to rip down, replace and repaint gib, or recarpet a room themselves.

This is also beneficial for investors who have fulltime jobs or families that take up a significant amount of time. In this case, these types of people can still become property investors without having to sacrifice their current work, social or family lives.

Finally, it's important to note that people who invest in new properties may also engage in renovation on a new property itself.

However, they're more likely to renovate the property at the point where they are selling it, rather than when they've first purchased. The benefit to this is that investors can achieve a premium for the property after it has been cosmetically enhanced.

Summary

Key Things To Take Away

Investing in brand new properties is not for everyone or all investors. They're not the right fit for people who want to renovate properties or buy and flip, or for those who are concerned about an unmanageable short-term change in circumstances.

On the other hand, they work really well for long term (15 years +) investors who want a property they can buy, walk away from, and not have to think about.