- Hi, it's Connie from Prosperity Finance.
Thank you for watching this episode.
Since the government introduced some tax rule
around investment property in March,
we receive a lot of inquiries
about whether investing in new build or existing property.
So before that rule came out,
it is a norm that people normally invest
in existing properties.
But since the new rule introduced,
there're some benefits with new builds.
However, there's no one size fits all approach,
it really depends on the situation and the goals.
So it's important for us to understand
the pros and cons for both options under each aspects
so that you can apply those to your own situation
and then work out what is the better option for you.
So today, I made a table for you
which we're going to go through shortly.
Now, with that table
we compare a few things
so that you can see clearly
which is a better option for you right now.
So without further ado, let's go into it.
Okay, so here you can see on the left hand side
we have about 10 items that we want to compare.
And then on the second and third column
we have the new build and existing property.
So let's start with tax deductibility rule
which is relates to cashflow.
So with a new build,
potentially you can deduct the interest costs
from your rental income.
The reason I say potential
because the government still yet to confirm that aspect
but looks like it is likely the case
but it's still subject to confirmation.
And we don't know how long you can offset the interest full
because new build eventually
will becoming an existing property, right?
So that's the new build.
Now, with existing property,
if you purchase a property post 26 March this year,
then from the first October,
unfortunately you can't offset any interest costs
with your rental,
but if you purchased before that date
then you have four years phase out period.
Now let's move on to the next part
which is the interest rates.
Now you probably heard the ASB Back My Build offer.
That is the designed for buying off-plan property
and also building a property
for owner-occupied and investment purposes.
Now, the rates is at 1.79% floating rates
which is a significant discount
from any other rates
versus existing property
there's no any further discount from the special rates.
Now, as it today,
the best rates
is one year about 2.19% from the main banks.
But 1.79% for Back My Build is a really decent deal
but it can only used for the new build or construction loan.
Now, the next item is the Bright line rule.
Now, the government has confirmed with new builds.
The brightline rule is only last for five years,
after five years, if you sell it,
there's no capital gain tax
versus existing property
if you purchased post 26 of March,
then it's 10 years rule.
Now, also the Healthy Home compliance aspect.
Now, from July this year, you need to be compliant
if you have a rental property.
You need to make assessment
to see if your rental property meet
the condition of healthy home.
If not, you need to upgrade to become compliant now
or the next time you have a new tenants.
So, that involves time and money
and of course, stress.
With a new build because there's a new build,
everything ticks the box.
So you don't really need to do anything
for healthy home aspect
if you buy a new build as an investment purpose.
Now, when it comes down to deposit requirements,
now the bank only require 20%
even if it's investment property
but existing property require 40% deposits.
So, it's doubled the requirements.
In terms of borrowing power for new money,
ANZ at the moment treat new build
and existing property differently.
Now, if you buy a new build,
ANZ still take into account 75% of the rental income
but if the property that you buy is existing property
and purchase date is from the 27th March,
then they can only take
into account 65% of the rental income,
therefore, there will be less income
in terms of a servicing calculation.
Therefore there'll be less borrowing power as a result.
Now, next item is the maintenance.
We all know it's not easy
to become landlord in New Zealand.
With a new build,
there's really minimal maintenance required.
So there'll be less ongoing costs
in that aspects and less stress.
There's no worse than, you know, tenants tell you,
"Hey, I want this to be fixed and that to be fixed."
I know how it feel because I'm a landlord myself,
so yeah, definitely not something I want to hear very often.
Now, with existing property,
yeah, it depends on the condition of the property.
It may involve significant costs to maintain that.
Now, recently I had example from a client,
he was told by the tenants
that the property had a major issue
and the tenants has to move out to upgrade the property.
So they're not only spending more money to fix the issue
but also loss in rents.
Not sure if they have the insurance, but if not,
yeah, that's significant costs involved.
Okay, next item is the rental yield.
Now with the new build,
it generally gives you a better yield
because it's new property.
So generally with the same,
when we compare apple with apple, same street,
same number of bedrooms,
you generally can get a higher rent due to the condition
and also less maintenance costs,
less tax so less expenses
therefore better yield compared to existing property.
Now, the next few items
probably more in favor of existing property.
Like I said, that there's no
definite answer for new build or existing,
it really depends on the situation and goals.
So let's talk about these as well.
Now with the locations with a lot of new builds
they are in the area which is far from the CBD,
so, there's a longer time for commute,
probably not very convenient.
But with existing property that you can find them
in the mature suburbs, which close to the CBD.
Let's move on to the next item, which is adding value.
when your property
build up equity over time,
there are two ways the property can grow value.
One is organic growth.
The other is manually adding value to it.
Now, this item is about manually adding value.
Now with a new build, there's a little you need to do.
You can't do anything anyway, it's new
and so, you can't really do much.
Whereas existing property
you potentially can renovate.
You can paint it.
You can upgrade bathroom, kitchen, or landscaping
or maybe potentially you can add another dwelling
or even subdivide it.
So there's a lot of potential with existing property.
Now, next item is the purchase discounts.
With a new build it's very hard to negotiate the price.
It's set by the developers,
there's a little room you can negotiate,
but with existing property
if the vendor is very desperate
you can have some bargains potentially.
And we just talk about adding value.
So here is the organic capital growth.
So that means just the property,
just sitting there, grow over time.
So with a new build, I believe
because those benefits above,
potentially will push the price up in the short run
cause there's more demand
whereas existing property,
I think because normally
the property has a larger land.
Now, the new build normally like, you know,
quite small land, a couple of hundred square meters
for new build,
whereas existing properties are at least more than that.
So over the long run, you know,
you keep the larger land
which is appreciate over time,
so you have more capital growth in the long run.
And potentially you buy wholesale price
because with that piece of land,
potentially you can subdivide it into multiple sections.
So, you probably buy at wholesale price
versus new build is more a retail price,
you can't do really,
you can't do much with the land
so you buy at retail price.
So in the long run, I believe the existing property
holds value more and is more stable.
Now, lastly is to do with the off-plan property.
Now, it's part of the new build.
Now, new build can be off-plan or just construction type.
But with off-plan, just be careful
cause you may have to wait a very long time,
a couple of years or even longer.
And potentially the market will have to change,
lending policy will change and
your finance approval outcome can change as well.
not to mention about one year,
just six months, within six months,
look at how many policy has changed
both from the government side and also from the bank side.
There's just so many changes.
So if you have to wait a couple of years
who knows what's going to happen
and your own situation can change as well.
So, you have to make an unconditional offer
at the time of purchase if you buy off-plan
but at the time of settlements,
there just lot of uncertainty
and your approval may not be valid.
You may not be able to get a finance,
so it definitely more uncertainty with new builds
if it's off-plan.
So,
back to me,
so you can see it's probably 60% in favor of new build
and the other 40% towards existing property.
There's no black and white,
which is better, which is not.
Again, it comes down to your own situation.
But overall, as we discussed,
probably new build fits better
for people who need better cashflow,
do not have a lot of buffer for cashflow
and less experience with investment property,
less capacity with adding value, et cetera.
Whereas buying existing property better fits
with people who has a deep pocket, good equity,
strong cashflow.
They know what they're doing,
know what to do to add value to the property.
Either way,
is good.
Depends on your situation.
If you want to buy new build,
just bear in mind that
if you want to buy multiple properties,
not just one more but multiple more,
then also considering buying existing property
at some point in the future.
Because, if you want to build that equity
rather than saving for another 20% of deposit,
you probably need to
buy existing property
so that it's quicker to build up the equity
and enough to buy the next one.
But you can have the new build now
and take an advantage of that,
but eventually have existing property
that will help you to grow your property portfolio
in the long run.
So, I hope these tips help you make better decision.
Of course, if you want to discuss with us,
we are more than happy
to give you our opinion on that as well.
Hope you find this video useful.
And please don't forget to subscribe on our YouTube channel
cause every week we have really good content
to share with you.
Don't miss out.
Thank you so much,
I'll see you next time.
Bye-bye.