There’s a lot to weigh up between a new build or an existing house. Some of it is a personal preference; the beauty of a stained glass window in a picturesque villa versus the open plan living and new carpet of a home that hasn’t yet been lived in. We’ll leave those debates to you and your family, let’s instead look at the more definable aspects of this decision.
If you’re eligible for the First Home Grant you can get up to $5,000 towards purchasing an existing home. This doubles to up to $10,000 to purchase a new build. It’s considered a new build if you have a building contract or you’ve bought a new house that got its code of compliance in the last 6 months. Eligibility is per person so if you and your partner both qualify for the full amount on a new build you would get $20,000. It’s a substantial amount. The challenge, however, is to find a house that meets your needs and comes in under the cost threshold for the grant. The threshold is between $500,000 to $700,000 for a new build depending on where you live. For more information see our First Home Grants and KiwiSaver article.
A new build means little to no repairs or replacement costs for years to come. This is a big financial plus, especially for those that pick up the phone for a repair person rather than picking up the toolbox themselves. Look for a builder that guarantees their work for 10 years to be sure of a cost-effective and stress-free decade.
Building can create instant equity. A completed build is often worth more than just the cost of the house and section combined. Buy a section for $300,000, build for $300,000 and the end result could be worth $620,000 or more. Note however that the statistics could be skewed by time elapsed between the section purchase and the completed build, as you would expect your property to grow in value over time anyway. There is also the personal cost of time, energy and sometimes stress that goes alongside building your home.
One of the valuable and more fun aspects of building is the ability to tailor your home. As well as tailoring to your own needs you can also tailor it to the market. By doing this you maximise the likelihood of lots of interested buyers when you go to sell, likely driving up the final sale price. Talk to real estate agents about what is popular – large open plan vs separate hidey-holes? Is a walk-in wardrobe and ensuite a must-have for many buyers? Taking what’s popular into consideration while also building to suit your own lifestyle and preferences will future proof your investment. Note that for the lower cost new builds you may not be able to adjust the plans. These houses are built to a specific plan to keep costs down. These lower costs builds are more likely to meet the First Home Grant criteria.
Location is important to most when buying a home. Popular areas close to amenities are usually built up with little to no sections available, making desirable building locations limited. Building is often more doable for those looking to get away from the hustle of cities and towns, or in areas that are growing rapidly with new centres being created around whole settlements of new housing.
When buying an existing property there is often more room to negotiate due to the state of the house or to get a good deal at the right time due to the current owners needing to sell quickly. In the first scenario, you of course need to budget for the cost of getting the property into shape. In the second it can take patience and a bit of luck. Both require a clear head and good negotiating skills.
While building a house is exciting, some can find it stressful. Delays, unexpected costs and dealing with contractors can take its toll. Pre-designed plans with a fixed price build removes a lot of the uncertainty and headaches. Even so, if making lots of choices and being patient isn’t your strong point then an existing home might be the best option.
Some of the comparisons between newly built properties versus existing properties remain the same. New build properties require very little maintenance for years after purchase.
You design a new build to suit its purpose. Investment properties should be designed slightly differently from owner-occupied homes. They need to have easy-care gardens, tougher internal walls that can survive scrapes and bumps. They should have easy access for people to move furniture in and out and well-ventilated bathrooms that don’t rely on tenants opening windows. They may need to be located closer to schools for young families or universities for student tenants.
Importantly, new-builds will, by default, meet the healthy homes standards which are now a legal requirement for investment properties. Improving an older house to meet the insulation and heating requirements can be expensive, particularly for very old homes.
The overwhelming argument for purchasing a new build as an investment property, however, is the relatively new tax-deductibility rules. In April 2021, the Labor government announced significant changes to how the interest paid on your mortgage can be deducted against the rental income. Existing homes will increasingly be unable to deduct this expense as the rules are phased in over 4 years from October 2021. That can mean thousands, sometimes tens of thousands of dollars difference to your annual tax bill and therefore your cash flow.
Despite significant tax advantages for newly built properties, existing properties still have one advantage. You can purchase existing properties that need renovations or enhancements at a significant discount. Perhaps the vendors aren’t in a financial position to renovate or simply can’t see the benefit. They may be preparing for retirement and not able to project manage a major build. This presents an opportunity for a savvy buyer with the right skills.
Renovations that can significantly increase the value of houses include (disclaimer: do your own research for each individual property before proceeding):
Because of the significant advantages of the interest tax deductions, this renovation strategy may work if you plan to buy, renovate and sell. It’s also worth knowing that adding a second dwelling to an existing property may make that new dwelling subject to the “new-build” tax deduction benefits. Consult your Accountant to find out if this applies.
Broadly speaking, there are two types of payment structures; turn-key and progress payments. We go into these in detail in Construction Mortgages: Turn Key Versus Progress Payment Contracts.
Building a home often requires progress payments during the build. This can be difficult financially in the short term as it means paying both rent and at least part of your total mortgage until the build is complete. For more information see our article on Calculating the Interest On Your Progress–Payment Construction.
Like many decisions when buying a home, the answer is dependent on your personal situation and the market you are buying in. And of course, if your partner is determined to have that stained glass window in a character home, the question of whether to build may be moot.
Tiny homes are all the rage these days. With more people looking to downsize their lives, these little houses are popular among homeowners and renters alike. However, one of the…
If you’ve ever watched one of the Mortgage Lab’s webinars or Facebook livestreams, you will most likely have heard us rave about this app of the month. It’s one of…
Recently Labour and National shocked New Zealand by not only agreeing on something but also working together on a new housing bill: the Resource Management (Enabling Housing Supply and Other…