Investing in real estate has long been considered a great way to build wealth in New Zealand, offering both relative stability and potential financial growth over the long term. When it comes to choosing between a new build or an existing property for investment purposes, there are several compelling reasons to consider new builds. In addition to the advantages of modern design, energy efficiency, and healthy homes compliance, new build properties in New Zealand also offer attractive tax deductions that make them a favourable option for savvy investors.
In this blog post, we will explore the benefits of buying a new build as an investment property over an existing build.
As part of the government's efforts to create a more level playing field for first home buyers and discourage residential property investment, they have applied limitations on interest deductions for residential properties. However, there is good news for those considering new builds as an investment option as new builds are exempt from these proposed rules, which offers an attractive opportunity for investors, encouraging housing supply and investment growth.
Another advantage of purchasing a new build is the ability to claim immediate deductions for low-value assets (items under $5,000). This includes items like appliances, carpets, blinds, and other fixtures. In the case of existing builds, these deductions are typically claimed over several years, but for new builds, they can be claimed in full in the year of purchase, reducing your taxable income.
New build properties often have a higher market appeal due to their modern design, contemporary features, and better overall functionality. The increased market appeal of new builds often leads to a higher calibre of tenants. Quality tenants are generally attracted to properties that offer a comfortable and contemporary living experience. These tenants tend to take better care of the property, pay rent on time, and are more likely to stay long-term. As a result, landlords of new build properties may experience lower tenant turnover and reduced vacancy periods, ensuring a steady rental income stream, resulting in better rental yields and potential capital appreciation.
Investing in new builds offers a significant advantage when it comes to deposit requirements compared to existing homes. The Reserve Bank's Loan-to-Value Ratio (LVR) rules dictate that investors interested in existing properties must provide a hefty 35% deposit. On the other hand, most banks are more lenient when it comes to approving mortgage applications for new builds, requiring just a 20% deposit.
To put this into perspective, let's consider a property worth $700,000. If an investor wishes to purchase a new build, they would only need a deposit of $140,000 (20% of the property value). However, if they were interested in an existing property, they would have to come up with a deposit of $245,000 (35% of the property value) for the same purchase.
Additionally, when considering existing properties, investors must also account for renovation costs. For example, let's assume you have found an existing property priced at $600,000, which would require a deposit of $210,000 (35% of the property value) based on the LVR rules. In addition to the deposit, you might estimate that renovations will cost around $30,000.
It's important to note that banks generally do not lend money for renovations against your investment property. Therefore, you would either need the $30,000 in cash or have to secure a loan against another property you own.
By choosing to invest in new builds, investors can benefit from lower deposit requirements, making property ownership more accessible and reducing the need for significant upfront capital. This can be especially advantageous for those who are looking to enter the property market or expand their investment portfolio while minimising financial strain.
One of the primary advantages of purchasing a new build as an investment property is the reduced maintenance and repair costs. New builds typically come with warranties and guarantees, ensuring that major repairs or replacements are covered by the builder or manufacturer. This can significantly decrease your expenses and provide greater peace of mind, especially during the initial years of property ownership.
In New Zealand, the Healthy Homes Standards have been established to ensure that rental properties meet specific health and safety requirements. These standards encompass key aspects such as heating, insulation, ventilation, moisture control, and drainage and water tightness. It's important to note that most new build homes are constructed to meet these standards, ensuring compliance from the start. Meaning less maintenance work is needed to get a property up to the healthy home standards.
As you can see, investing in a new build as an investment property provides numerous advantages over existing builds. Beyond the benefits of lower maintenance costs, energy efficiency, and market appeal, New Zealand's tax deductibility incentives make new builds an even more enticing option for investors. With tax deductions available for building depreciation, immediate deductions for low-value assets, purchasing a new build can lead to significant tax savings and improved cash flow. However, it's essential to consult with a tax professional to understand the specific regulations and requirements related to tax deductions in New Zealand. Happy investing!
At Location Homes, we currently have two residential property investment packages, currently in construction and due for completion in September 2023. Both investment properties have tenants ready for occupancy upon completion and subject to final contract being signed with new owner. Rent to be paid through a housing trust. To learn more, click on the button below.