The Advantages of New Builds & What to Look Out For

The Advantages of New Builds & What to Look Out For
02-May-2017 Mark Honeybone

The Advantages of New Builds & What to Look Out For

Property Ventures puts serious effort into selling new developments. We won’t just list any new build; we want developments that haven't been hammered to death by other Agencies. We want to present unique opportunities to our investors and homeowners that follow the basic fundamentals of investment.

The first criteria we have for new developments is that they must be in a good location that will encourage growth for the area and for the value of the development or complex we're selling.            

What are we talking about when we say ‘new build’?

  • Off-the-plan apartments or townhouses
  • Sections
  • Sections with land and home packages
  • Properties that are purchased from the developer within 6 months of ‘code compliance’ or earlier.
 
 

What should you keep in mind?

First: The developer

This is very important. You should always go into a project that has an experienced developer at the helm. And when I say experienced, I mean experienced in a variety of types of developments. A developer is no different to a small time 'renovate & sell investor’ – the more they do the wiser they get. An experienced developer should be aware of the following:

  • the Purchaser's needs,              
  • the tenant's needs,              
  • the community's needs,              
  • construction costs,              
  • lending criteria, 
  • the timeline of the project.             

These are all individually important for you, the Purchaser, at the end of the day and can make an off-the-plan build more costly or risky if the developer does not keep them in mind.

The more projects a developer has completed, the more comfort you'll have in working with them.

 

Second: Your finance

If you're purchasing off-the-plans with a completion date that's more than a year away, there are no guarantees that your finance will be approved based on today’s rules. Most lending institutions won’t confirm lending that far out.

But don't be alarmed! If you would be approved today (in a very harsh lending period with banks) and your personal situation is not expected to change in the next year and a half, you should be ok.

Just be aware that things do change. You might go from having two incomes to one, for example. Make sure that when the time comes, you'll be able to afford your purchase.

 

Third: The Sunset Clause

This is incredibly important if you're buying an off-the-plan investment or home. In most cases there is an expected date by which the project will finish and code compliance certificates will be issued but these inevitably do get pushed back. There can be many reasons for delays, so you should have a ‘Sunset Clause Date’ which might be 6 months or a year after the expected finish date.

If the project is not finished by this date, you, the Purchaser, have a chance to pull out of the project and have your full deposit paid back. If you want to stay on with the project you can. Remember, one of the risks with new builds is time itself and where the market will be when building is completed, so bearing this ‘Sunset Clause’ in mind is a MUST.

 

What are the benefits?

 

Depreciation on chattels is still very much a good thing for investors. An investor can claim this as an expense and it can be worth thousands of dollars in the early years, especially when everything is new, and/or you purchase furniture with the build. Talk to your property accountant about this.

 

Capital Growth 

With just a small deposit you get maximum growth from the whole purchase price while the property is being built. This is most effective in a growing market. Caution is to be taken in a flat market. For example:

Purchase Price $500k
Deposit $50k
Valuation (Price at settlement) $550k
The Investor has made 100% on their money put into the deal. 

Choice

As you see from the above example, time is a great thing because it gives you choices. By the time your new build is ready, you may have made some equity. This may mean you can refinance and use the equity to subsidise some of your deposit, or you can revalue after settlement and use this for another property or take the gains back out of the property. It could also allow you to trade the property before or at settlement, which means you will have profited from just a minimal deposit. Of course, you would normally have to pay tax on any of this profit (something to discuss with your accountants).

 

Less Maintenance

A new build obviously has less maintenance expenses, which results in more cash flow. Tip: Maximise the early years of depreciation and savings on maintenance, and pay this against the principal. Don't squander this money, pay it against the principal meaning accelerated results in later years. This will give you choice, because less mortgage means:

  • less risk in your investment 
  • less interest to pay 
  • more lending capacity on your investments 
  • better cash flow

Invest well and if you do your finance wisely, you can accelerate your investment portfolio quickly.

 

Lending Criteria

Depending on what sort of new build you are getting into, you can get much better lending conditions than normal loan-to-value ratio (LVR) rules for investors. It is the ‘norm’ to only have to provide up to 20% of your own money towards the purchase price, depending on what you are purchasing.

 

Deposit Bonds

These may be of benefit to you. On some occasions and projects, the bank may offer you (if you ask) a deposit bond. This means that it may only cost you a small fee (approx. 1% of purchase price) and they will finance the rest of the deposit. Put that calculation to the example above and you will be smiling. Conditions apply to this and you must ask your bank.

 

Hands-Off Investment

Many of you are busy and just don't want the hassle of dealing with builders and tradespeople, It can be time consuming, very draining and get very frustrating. Many new builds can be totally hands off, which means minimum input and little stress for the investor.

Tip: Make sure there are no clauses in your agreement with the builder that allow them to increase the build cost; you must get a fixed priced contract.