Amidst rapidly increasing house prices, property shortages, competitive offers, and recent government initiatives tightening investment restrictions, the possibility of investing in property may seem like an increasingly daunting and unachievable prospect. But cut through the noise and you’ll quickly learn property investment isn’t going anywhere anytime soon!There are many benefits of investing in property and the truth of the matter is, despite tighter rules and regulations, property investment remains one of the most efficient ways to help you build wealth and passive income long-term.
One solution to investing in a rental property, despite an overwhelmingly difficult market, is to consider a new build. Choosing to build new warrants exemptions that other investment options are required to comply with. It also presents a more desirable home offering to renters, allowing the potential for a higher rental yield.
Benefits of investing in a new build
Weighing up whether to build new or buy an existing property for a rental can be a difficult decision. Below we outline some of the benefits that new builds such as prefab homes, transportable homes, kitsets or standard builds can access that may be helpful determinants for deciding how to invest your money.
1. Exemptions for bright-line tests
In New Zealand, a bright-line test treats any capital gains on an investment property as taxable income. A capital gain is the profit you make when you sell a property for more than you paid for it. This means if you buy and sell an investment property within a certain timeframe it’s possible you will have to pay capital gains tax.
In order to relieve the strained housing market and give first home buyers a better chance of getting onto the property ladder, the government increased the current bright-line test from 5 years to 10 years for properties purchased after March 27th, 2021. However, an exemption of this rule for new builds to remain at the 5-year bright-line period was included to encourage investors to focus on new property development to replenish the depleted nationwide housing stock. This means if you invest in a new build and want to sell after 5-years you won’t have to pay capital gains tax - an investor’s dream!
When a dwelling is added to land it does not need to be constructed on-site or be brand new to be classified as a “new build”. This means that prefabricated, transportable, and relocated homes all qualify for this bright-line test exemption.
2. LVR exemptions
Just like the bright-line test, loan-to-value ratio (LVR) restrictions are also more rigorous for investors when buying an existing property versus buying a new build.
An LVR is a measure of how much a bank will lend against a mortgaged property, compared to the value of that property. In March 2021, LVR restrictions for investors were reinstated to a maximum of 5% of new lending at LVRs above 80%. Lending limits increased further in May 2021 to a maximum of 5% of new lending at LVRs above 70%. This means the majority of investors are now only able to borrow 70% of the value of the property or properties they want to buy.
Investors are only exempt from these lending limits if they invest in new housing. Prefab homes are a great way to access this exemption but in a swifter, simpler, and significantly less stressful way than a traditional build. Getting a mortgage for a prefab house can be slightly tricky so it might be worth speaking with a mortgage broker instead of your normal bank to see how finance for a prefab might be achieved.
3. Immediate healthy homes compliance
With the introduction of the Healthy Homes Standards in 2019, many landlords found themselves having to make significant and costly upgrades to their properties to bring the heating, insulation, and ventilation up to the new minimum level required. These standards help to ensure that landlords provide healthier, safer properties that improve the overall living conditions and well-being of the tenants.
Investing in a new build means immediate compliance with the Healthy Homes legislation. A new build will also be of higher quality and a more durable home, reducing ongoing maintenance costs, unexpected bills and will help ensure it remains in good nick long-term should any future requirements be initiated.
At Genius Homes, our prefabricated houses not only comply but exceed the Healthy Homes Standards, so you can invest confidently knowing that no significant upgrades will need to be made in the years to come.
4. Increased rental prices in the South Island
With the direction the rental market is going, investors are almost guaranteed a high return on investment. Rental prices across the country are continually reaching record highs year after year. While prices are still typically higher in the North Island, the South Island rental market is seeing similar trends with rental prices increasing in Canterbury (up 7.1%), Southland (up 8.8%), and the Nelson/Tasman regions (up 6.5%) since the previous year.
Since these increases are largely the result of a lack of supply, the current government is continuing to roll out initiatives that primarily support first home buyers and encourage investors to choose new builds.
New housing will also have a better rental appeal. Modern houses such as those at Genius Homes are designed with maximum comfort and functionality in mind making them highly sought-after properties in the rental market. With a new prefab, you’ll have no trouble tenanting the property and may even have the potential to reap a higher rental yield based on this too.
5. Easier to finance
Getting a home loan for an existing investment property requires a much higher deposit than your initial home. If you’re after a loan, you’ll need to produce a 40% deposit. This differs from a new build investment property, which only requires a 20% deposit. If you’re tight on cash but eager to get on the investment ladder, building a new house with this lower deposit option could be a more plausible option as it will require less cash upfront. And fortunately, with new build options such as prefabs, the process of building a new home might not be as stressful as you’d think!
In addition to a lower deposit, a new build investment property often results in instant equity as often a completed build is worth more than just the cost of the house and section combined. For example, say you buy a section for $300,000, build for $300,000 the result could be worth $620,000 or more. This is especially true of a prefab house where the cost of the build is often significantly lower than a traditional build.
Newly built houses or purpose-built rental properties are also able to access exemptions from high tax bills with a two-decade tax exemption recently confirmed for these property types. Revenue Minister David Parker says, "we want to curb investors' appetite for existing residential properties but also want to stimulate investment in new housing. That's why we're also proposing an exemption for property development and for new builds, allowing interest deductions in full."
These tax-deductibility rules could mean thousands, sometimes tens of thousands of dollars worth of difference to your annual tax bill and overall cash flow. It’s worth your time to discuss tax-deductibility regulations with an accountant or tax advisor to properly understand the financial benefits your new build investment could yield.
Prefab houses as an investment property
With so many benefits and government initiatives in favour of investors who choose new builds over existing properties, it’s worth seriously considering a new build as your investment solution.
Prefab homes, sometimes referred to as transportable homes, are the perfect option for investors looking to purchase a new build rental property at a more affordable price point and through a more efficient and sustainable build process than a traditional build.
Eliminate extensive decision-making by selecting a pre-designed home from our wide range of options. Enjoy being worry-free knowing the build process is in a tightly controlled factory environment meaning budgets, plans, and timeframes are all strictly adhered to.
Whether you’re considering adding a small 1-2 bedroom unit or granny flat to the back of your property as a source of extra income, or investing in a full-sized family home on a separate piece of land, a prefabricated home is an excellent investment option. Reap all the benefits of a new build investment property but with a quicker turnaround time, a more affordable price, and an overall smoother build process.
To view the full range of prefab options perfect for your next investment, download the catalogue or contact us directly to discuss your options.
