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Buying Off The Plans

Buying Off The Plans

If you want to develop your section or buy a new build to rent out, purchasing off the plans could be the answer, says Informed Investor economist, Ed McKnight.

8 October 2021

The Labour government gave new-builds a significant tax advantage in late March.

Now, investors buying existing properties – those previously lived in – will have to pay a lot more tax. That’s because their interest costs can’t be claimed as a tax deduction.

In some cases, existing property owners will see their tax bills hiking NZ$5000 higher each year.

The government’s signalled that new-builds – properties bought through a developer – will be exempt from these changes.

The new rules are making many investors who previously wouldn’t have considered buying or building to think: “Should I consider buying a new-build?”

Stuart Shutt, general manager of Sentinel Homes, says he’s already had a lot of calls asking what the new rules mean for those wanting to build and he expects it will lead to an upswing in business.

He says it’s about time the government did something to make it more attractive for Kiwis to buy new houses.

“Historically, they’ve worked against us. It’s been easier to buy an existing home.”

Who is buying off the plans right for?

New-builds aren’t for everyone. But they do tend to be the right fit for passive, hands-off investors, or those developing or subdividing a site.

Forget the new Healthy Homes rules. New houses don’t need a lot of maintenance, and there’s little risk of having to replace the carpets or the roof any time soon.

Government policy is also slanting the economics towards off-the-plans purchases, to grow the housing stock.

Investors buying existing properties need a 40 per cent deposit. In contrast, if they buy off the plans, they’ll only need a 20 per cent deposit.

That means an investor with a NZ$200,000 deposit has the choice between investing NZ$1,000,000 in new-builds, or NZ$500,000 in an existing property.

Better cash flow

The changes to tax laws also mean that new-builds often have a better cash flow than existing properties because they’ll soon pay substantially less tax.

That doesn’t mean existing properties don’t have their place. But they now only stack up if investors significantly improve the yield of a property through substantial renovations.

These active investors will add bedrooms or sleep-outs to properties to earn more rent to compensate for the extra tax they’ll soon need to pay.

The government’s policy will likely have its intended effect. The economics have changed so much that passive, hands-off investors will likely be better off purchasing new-builds.

But investors with the time, knowledge, and capital to renovate and improve the quality of New Zealand’s housing stock will still find existing properties a better investment.

What’s the process for buying off the plans?

If buying off the plans is the right fit for you, then there are three main pathways to find a suitable property.

1. Build your own

If you already have a site to develop, you could approach a building company and look over the plans they have available, or get your own plans drawn up.

The benefits to this over buying an existing home are you get a guarantee, you have a new product to rent out, and it’ll be up to the new Healthy Homes standards.

2. Approach developers

If you don’t currently have land, you can approach developers directly to see which house and land packages they have available.

This generally works if you already have a good working knowledge of the areas you want to invest in and a shortlist of developers.

3. Use a property investment company

The third is to use a property investment company that specialises in finding new-build properties for investors.

These companies often don’t charge a fee. Instead, they make their money by charging the developer when an investor decides to purchase within their project.

This allows investors to access a broader range of properties than they could on
their own.

For instance, Opes Partners – the publishers of this magazine – has relationships with 47 developers and has investors purchasing properties across
63 building sites.

Investors will often consider developers they mightn’t have before, when they work with a property investment company.

That could be because some developers produce quality properties, but don’t have a nationwide brand name. Or because you start to consider areas you might not have thought of before.

What do tenants want?

Property manager, Linda Forsyth from Venture Management says after years of getting bigger, houses are now getting smaller.

Where four bedrooms was the norm in the past, people are now happy with three, and there’s a move to high-density developments, and connected dwellings like terraces and townhouses.

The trend to open-plan living continues, and work-from-home spaces are in demand. Sentinel Home’s Shutt is also seeing more home-and-income developments, where part of the house is an office or a rental.

Are there fishhooks?

Buying off the plans is different from purchasing an existing property, and there are a few things to be aware of.

First, two payment structures are available – ‘turn-key’ and ‘progressive payments’.

Under ‘turn-key’, investors pay an initial deposit, often 10 per cent, and don’t pay the balance until the end of the build.

Investors generally prefer turn-key to progressive payments, where the investor has to make payments throughout construction.

Trust accounts

Next, make sure that your deposit is held in a solicitor’s trust account.

You don’t want this money paid directly to the developer to use throughout the project. If a developer goes bankrupt, which is rare but plausible, you’ll struggle to get your deposit back. But, if it’s held in a trust account, you’ll get it back, with interest.

You’ll also need to monitor the quality of the build at the end of the project. You’ll need to check the developer delivers what they said they would in their marketing material.

This means going through the property thoroughly, checking that there aren’t paint splatters on the carpet, and all the windows work properly. You’ll have 12 months to find these defects and for the developer to repair them. But ideally, these will be fixed before your first tenant moves in.

Informed Investor’s content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.