Private property issue #113 - New Build vs Existing - Which is the best investment?

For years, the number one question I get is – "What’s better? Investing in New Builds or existing properties?"

The trouble with this question is that the rules always change.

We’ve had 4 major rule changes this year. This changes the math –

• The interest deductibility rules changed. That makes the cashflow of existing properties less bad
• The bright-line rules are about to change. That removes an advantage for New Builds
• The debt-to-income ratios (DTIs) are about to come in. That adds a big advantage for New Builds
• The deposit rules (LVRs) are about to change. That marginally decreases the advantage for New Builds.

So, how do you weigh this all up?

Here are the main benefits and drawbacks summed up in a simple graph –

Of course, every investor will have a slightly different view. And, of course, my business (Opes Partners) helps investors buy New Build properties. That makes me a bit biased.

So, I always try to be as honest as possible. Because here’s the truth. New Build properties are not right for every investor.

Having said that, one new advantage we need to talk about is the Debt-to-Income ratios.

These come in on the 1st of July. They have a big difference in terms of how many properties you can buy.

New Build investors will grow their portfolios faster, according to the Reserve Bank. Here’s their modelling –

This matters.

If you can buy more properties, you make more money as property prices go up. That’s simply because you own more property.

A New Build investor might make an extra $500k, based on these estimates. That's over the next 10 years.

I’ve got a podcast coming out on Monday, walking you through all the numbers.

But here’s the graph –

Of course, that doesn’t mean everyone should go out and buy a New Build. If you renovate your properties and add $500k of value, then perhaps you'll prefer that option.

But you can see how small (and frequent) changes to the government’s rules can change what you invest in.

When investors see this type of analysis, they often ask, " OK. But that assumes that both New Builds and existing properties go up in value at the same rate. Is that true?”

This is something I’ve tried to definitively answer for years.

But the data has been hard to get. No one has really looked at this question before.

So, Ed (our economist) spent almost $10k to hire CoreLogic to get the data for us.

We found that there’s very little in it. New and existing properties go up in value at a similar rate.

This graph compares properties in Auckland City. It shows the value change of the average property.

But it splits it out into properties that were built in 2008 and those that were already standing that year.

The lines are very similar. They change roughly at the same rate.

Overall, existing properties eke out a win between 0.2 – 0.6% per year, depending on where you buy. Here’s the full analysis if you’re interested.

Should I buy a New Build or an existing property?

The decision to invest in new or existing properties comes down to how you want to invest.

Would you prefer to :

• build a bigger portfolio with New Builds? Or,
• buy a smaller number of properties and renovate them to add value?

Under today’s rules, you can be a successful investor using either strategy. It’s just about finding the right investment for you.

Disagree with my analysis? Hit reply and let me know what I’ve missed. I only want to put out the best information for property investors.

So, if I’ve missed something, let me know. I’ll incorporate your feedback into a podcast or article.