New builds are generally an attractive opportunity to investors, there are fantastic mortgage options for new build properties. You’ve got yourself a few financial benefits from choosing a new build over an existing property, such as a lower deposit. You also have the potential for a lot less stress as well, what with no maintenance costs to consider for at least a decade.
Of course, there’s an opportunity cost for choosing a new build over an existing property. Every decision we make in life has its advantages and disadvantages. If you are an experienced property investor, you might see more to both sides of the coin. Those new to building an investment portfolio may not have the depth of consideration that experience brings.
But that’s what we are here for, so don’t worry. As property investors ourselves, we have made rookie mistakes in the past and we’ve learned throughout the process. Investing with new build properties comes with a lot of considerations that you might not have thought about. We touch on a bulk of them here in this article.
But if you’re looking for some direct, one-on-one advice, then do get in touch with a mortgage advisor who can listen to your situation and provide you with some. relevant information.
You can also take a look at our YouTube series on new builds. Blandon goes through the major points regarding a new build investment in a set of videos all just over 5 minutes each. They are a quick and easy way to get you thinking about the right things if you are considering a self build mortgage in NZ.
To get into it, there are two types of new build purchases that you can get a mortgage for here in NZ. They are a home and land package or a deal ‘off the plans’. A home and land package is the process where you effectively finance two separate situations: you buy the land and then you pay for the building of your home.
They can be two different loans or you can combine them. You will progressively pay for the construction of the house with the last 10% paid once the building is signed off by the council and is compliant.
The second type of new build, off the plans, is what we are going to be talking about in depth here today. You pay a deposit and then you wait a certain amount of time, generally 1-2 years, for the build to be completed.
What are the advantages of an off the plan new build?
Compared to existing building purchases, buying a new build off the plans offers a few serious advantages for the first time investor as well as a first time home buyer. Even seasoned investors will find that by sourcing a reputable developer for a new build investment will save them time and make them money.
You can get away with a low deposit.
When you buy a plan from an investor, you actually only need to front up with a small portion of the overall cost as a deposit. The developer has sought out financing from lenders themselves so are not reliant on you to pay their way through the process.
You may be able to negotiate down to a 5% deposit until the code of compliance is complete. This is when you will need to come up with the rest of the payment, having approached your bank prior to this to confirm your eligibility for a home loan.
Generally speaking, owner occupied new builds expect a 10% deposit and investor deposits must be at least 20%. These are half the amounts that are required for standard mortgages and if you are an investor, LVR exemptions apply as well.
New specs and low maintenance costs.
New builds will usually have better moisture, thermal and acoustic ratings. They can also have energy efficient lighting, heating and appliances. If you’re living in the new build, you are going to benefit from lower living costs as a result.
All appliances will be covered by warranties which are usually 10 years. If you’re purchasing a new build to be a part of your rental portfolio then lower maintenance costs means higher net return on cash flow.
Some tax exemptions.
We are specifically talking about the tax deductibility rule and the 10 year bright line test.
The tax deductibility rule is where any interest relating to a new build can be deducted for the next 20 years after the CCC (code of compliance certificate) has been issued. The 5 year bright line test, now increased to 10 years, allows investors to avoid capital gains tax if they refrain from selling on an investment property within a 10 year period. There is an exemption for new builds which will remain as a 5 year brightline.
You can check out part 1 of our 6 part series on YouTube if you’re looking to learn a little more about these advantages to investing with new build properties.
So what are some cons?
Like we said, there are always two sides of the coin. It is important to not get swept away with the possibilities that your current home’s equity, or your hard earned deposit can provide you. Let’s take a look at some of the disadvantages that purchasing a new build for property investing can be.
You’re investing in a lower land value.
If you’re after capital gains, then a new build isn’t going to be as lucrative as an existing property for several reasons. Firstly, the majority of the property value is in the improvements. Higher capital gains properties are typically those with more land.
With new builds, you need to pay a premium on the actual building which over time, actually depreciates in value unless you invest further into it somehow. Land is where capital gains are made, not buildings.
There is little to no potential for you to add value.
Since developers are already maximizing the land by building as much as possible, there is often little room for the buyer to actually add value in the future when compared to an existing home, especially an existing home on a large site.
The more you learn, the more you earn.
Opportunity cost can be a hard learned lesson and a real disadvantage if you don’t weigh up your options correctly. Unless you have a direct comparison, it’s hard to get a good grasp of what you might be missing out on.
So it is imperative to do due diligence with your lawyer before embarking on any kind of new build project. We will discuss some of the clauses you can add into your contract later on in this article as well.
Yes, a low deposit is a benefit, but it is wrong to say you can’t have a condition that allows a low deposit with an existing property either. You could be gaining significant value with an existing property by having a long buy date. You simply won’t know this if you narrow your search to a single property purchase.
New investors have these stumbling blocks more often than experienced ones. It takes practice to confidently plan out how financing the build is going to work and how to analyze the future of opportunities. If this is resonating with you, then our 3 property accelerator course is going to be extremely valuable. Check it out.
How much deposit do you actually need?
When you declare an unconditional contract, you need to front up with some money. It’s usually 10% of the total cost, but you can try to negotiate down to 5%.
We here at mortgagehq can help you to determine whether you are in a position to be able to negotiate terms and how to do so effectively. We have some tried and true methods that can help you to stretch your money further and make it work for you.
Then, when the build has finished and the CCC (code of compliance certificate) has been issued by the council, you’re going to need to finalise your mortgage terms and pay a percentage of the principal as is expected with home loans. Owner occupied new builds can sit at 10%, including your unconditional deposit.
Be aware that any less than the standard 20% deposit for owner occupied will be sitting in the low equity margin and subsequently incur a higher interest rate or a fee when you settle. Assessing the best financial situation for you, whether it is absorbing that fee or handing over a higher deposit, can be worked through with your dedicated mortgage advisor.
How much can you borrow for a new build?
There’s a simple mortgage calculation that the banks do to determine your borrowing power and we can do it too. Your UMI (uncommitted monthly income) is essentially an assessment of your income with all expenses taken away. This is tested rigorously against borrowing situations to determine your financial strength.
For those looking at a new build as a rental opportunity, you’ll be happy to hear that potential rental income is included in an UMI calculation which boosts the amount you are going to be able to borrow somewhat significantly.
You will find however that the amount you feel you are able to comfortably repay is likely to differ from the bank’s decision. Mortgage repayments are calculated with an extra 3-4% interest rate margin added to your mortgage rate to stress test.
If you are looking to purchase an apartment, you can also find that a bank will be hesitant to hand over a figure that they would otherwise offer you should you be looking at alternate builds. Buildings under 50m2 can have some limitations in terms of borrowing, so if you’re in this situation, be sure to check in with a mortgage advisor to ensure you aren’t blindsided by an unfortunate rule.
Plan out your expenses with a mortgage broker. Be prepared to potentially make a few changes and sacrifices for the greater good. But understand the right changes to make so that you maximize those benefits.
Getting pre approval to build a new home.
Getting pre-approval a little later in the build process is a good idea. Because a pre approval only lasts 90 days, if you are able to time this to be within 3 months prior to the CCC being issued, you can allow for a more seamless experience. Something we can all appreciate.
Builds take a long time to complete. They are usually longer than 12 months from when a buyer declares unconditional. You can find a lender who is willing to stretch out your pre-approval to 12 months from the standard 3 month period, particularly when they understand the situation you are in and specialise in new build lending.
However, unless your financial circumstances dramatically change within the time that you have gone unconditional on the build and the time that the build is completed, you shouldn’t have too much trouble meeting the standards required to finalize your loan.
Be aware that pre-approval agreements with a lender have conditions that aren’t going to keep you safe for the entire build length. There is a risk that you run when embarking on this journey. Having an experienced lawyer on your side can protect you significantly though and you should always do your due diligence on the team responsible for your build if you can. We will talk about this in a little more depth in a moment.
If you want to understand more about deposits, pre-approval and borrowing power in regards to new builds, then we cover this in our getting financing and pre approvals for new builds segment.
Those who make sound decisions quickly are the ones who get good deals.
Part 4 in our YouTube series on investing in new builds discusses 4 concepts that could translate to making instant equity. A good investor is going to immediately identify situations that will make money on the way in on the deal. Let’s take a look at the 4 key areas to consider to help you to make good decisions.
- Find the dollar per floor area rate.
New builds are priced by suburb and by floor area. When researching potential new builds to invest in, try to narrow down your search to specific suburbs so that you can start comparing data.
Include new builds and existing property in your research for comparability. Also take a look at cross lease sales or similar properties that are fully renovated. You are going to want to gather this data into a spreadsheet and divide it up into asking and sale price so that you can find the floor area rate.
We may have some relevant data on hand to help speed up your search as we either do this kind of thing for ourselves or have worked with previous clients. So don’t hesitate to ask for guidance here from your local mortgage advisor.
- Consider the capital gains potential.
Always think of property as an investment, even if you’re living in it. The more capital gains that you may be able to get, the better you’re set up for the next purchase.
Perhaps the biggest influence on capital gain is location. Being near local amenities or a train station are always good bets. Use your own preferences to help guide you here as well.
If you’re looking to add more cash flow, make sure you do a thorough analysis, Ask yourself whether rental appraisals are realistic or if they have been inflated to a premium price. Ask several property managers for their input.
There are many factors that could change the potential rental income including the vacancy rate in the area, size of bedrooms, location, land and so forth.
Quietly, if you’re looking to maximise yield, don’t buy an apartment. Buy a title that gives the highest rental income such as a dual key property or a home and income build if you can.
- Resale value.
Obviously, you’re going to want to be able to resell the property at a good price in order to make a profit. The resale value differs from the capital gain potential in the way that smaller details are overlooked with the latter. Capital gain is more about the financial benefit found on paper, whereas the resale value considers the design of the home, the amount of sunlight that comes into the living area and the units that have the best view.
You may pay a little more on the outset, but this can return tenfold when it comes time to sell.
What is the basic process of development?
If you’re looking to become a developer yourself or simply want to understand what the basic process is, then it all starts with land acquisition. A developer is going to calculate an opportunity that has a 25% bare minimum margin because this is the margin that the bank will only begin looking at to fund a development.
A developer will usually try to get this under contract and negotiate for a long settlement before launching resource consent.
The next stage is the presell. Smaller developers are not in as much of a hurry because they are not looking to continue recycling equity to move on with more projects. They can sell closer to or even at the completion stage. Other developers will look to line up buyers before they even settle with the bank on the land.
The third stage in the process of development is the resource and building consent stage. This can take anywhere from 6 to 12 months to get the council happy with your design and plans. Presells may have already occurred or the consent could have been lodged during this time. As a buyer, make sure that you consider this resource and consent stage before signing a contract, just in case changes need to be made to the plans.
The construction stage takes another year or so, including the issuing of the CCC. This final stage is when the buyer is called in to do their final inspection and to take possession. The registered valuation occurs here which is needed for mortgage finalisation as well in many cases.
How do you get a new build under contract?
You ask a real estate agent who is tasked with selling the properties for an information pack usually. There will be a lot of information in there and many conditional clauses as is the uncertain nature of a new build.
Don’t worry though, your lawyer is going to be going through all of these clauses with a fine tooth comb and make sure that you understand and agree to them. You can also discuss some points of potential confusion with your mortgage advisor to clarify any uncertainty.
Make sure that you sign a document with a conditional clause that gives you time, usually 10-15 days, to do your due diligence.
To understand the process of signing a sales and purchase agreement a little further, our YouTube series touches on this in part 5 of the 6 part series.
Who needs to be involved now?
So you’ve found the one. You’ve got pre approval, you’re happy with the plans, you’ve considered resale factors and determined that this new build is a great buy with real investment potential. You’ve asked to get the property under contract and the ball is rolling. What do you do now?
There are three key professionals that you want to have backing you at this stage in your new build purchase. They are a lawyer, a mortgage advisor and some healthy competition.
Your lawyer is going to go through the contract for you. They will advise you on the clauses to put in to get you in the best position possible and remove as much risk as they can. Choosing a lawyer who invests in property themselves is a great advantage if you can find one, because they will have that personal experience that is difficult to emulate.
A mortgage advisor is there to help you navigate the tenuous relationship between yourself and the bank during the entire length of the build. Because new builds take a while and preapproval only lasts 3 months, you want certainty and advisors can help.
There are situations where you can get a 12 month pre approval. A mortgage advisor can see if this is an option for you. We are able to guide you through how the banks think to ensure a more seamless and stress free experience with them.
Finally, it is always good to ask a comparable developer to point out the differences that their properties have with the one that you have chosen. They may show you things you might not have realised and give you a little more insight into what you are stepping into.
The most important thing about new builds that you will learn today.
If you take away anything from this article, let it be this. As you put together the contract for your new build, it is time to do some due diligence to protect yourself. Here are 3 due diligence (DD) suggestions that are going to make your life significantly easier, including some excellent clauses that you need to include to reduce any risk to you.
DD #1: Get a good lawyer on your team.
They are going to do 80% of your due diligence work. As we mentioned before, choose a lawyer who is an investor themselves. Good lawyer’s main objective is to reduce your risk on what you’re signing. They are tasked to put you in the best position. You also need to understand all of the jargon so you know what you are signing.
DD#2: Research the developer’s background.
Do a check on their past projects. It would be best if you are able to go to a completed project to understand the quality. Try to compare these past projects with what they used to sell the properties to note any discrepancies that might be an indicator of how your new build is going to turn out.
Developer and construction teams are often different, so also do your due diligence on the construction teams as well. You can Google potential mismanagement articles in the news or just ask around on social media to find legitimate testimonials on the quality of work and the time it took them to do it.
DD#3: Important clauses to put in your contract.
Use a sunset clause that allows you to withdraw your deposit if the developers don’t make enough progress within a certain date.
An onsell clause is great for people who are concerned about obtaining their finances come the end of construction. Many people may be feeling this way due to recent CCCFA law changes. An onsell clause allows the buyer to sell the property contract to someone else later on.
This is usually an uncontested clause, but there may be a condition that demands that you cannot sell it for less than what you bought it for.
Another clause to consider regards the variation of proposed land or floor size area. Sometimes when you buy off the plan, resource consent and building compliance hasn’t been confirmed. This means there may be adjustments that need to be made. Having this clause allows you to adjust your price accordingly as a result.
So, buying off the plans is a great opportunity for investors to gain a foothold in the property investment market without having to front up with a large initial deposit. There are pros and cons with investing in a new build, but with the right team on your side, you can make swift decisions that result in great financial windfalls. But do your due diligence and make sure that you have covered all of your bases with on-point clauses to reduce the risk that may be incurred. Check out part 6 of our YouTube series that discusses why due diligence will save you time and money and make sure you look at the variety of courses and content that we have available at mortgagehq.