New properties vs older ones

28th October 2014

I recently spoke at a Waikato Property Investor Association (http://www.waikatopia.org.nz/ben.php) seminar about new builds.  I was quite surprised with some of the comparisons between a new build and an older property, so I thought I would share these with you.

I looked at a new property purchased in May 2009.  It is an average new house in Rototuna, 4 bedroom, 2 bathroom, internal garage.  It was purchased for an average price at the time and wasn’t an amazing deal.

Hamilton Average House

The Hamilton median sale price in May 2009 was $330,500.  The median as at August 2014 is $346,500.

So over 5 years approximately, the average house in Hamilton has increased $16,000.  This is 1% per year capital gain, in simple terms.

New Property

Our Rototuna example cost $431,000 in May 2009.

A real estate agent has estimated the price between $480,000 and $515,000.  So say $500,000.

So over 5 years approximately, this Rototuna property has increased approximately $70,000.  This is 3% per year capital gain!
So the new property has out-performed the average Hamilton property by a considerable margin in the last five years.  To get information about the Hamilton median house price, I go to: http://www.lodge.co.nz/Residential/Residential-Property-Overview

Repairs & Maintenance

• 2010 $0
• 2011 $0
• 2012 $0
• 2013 $1,341
• 2014 $914

Over five years, the Rototuna new property has only cost $2,255 in repairs.  This works out to be an average of $451 per year or 0.09% of the property value.  This property has a property manager, so all costs for repairs will be within this total.

I’ve compared this to a $250,000 older property, that is managed by a really good Hamilton landlord.  He would have fixed and done a lot of the little things himself, so the real cost would be higher than shown below:

• 2010 $3,067
• 2011 $1,309
• 2012 $1,000
• 2013 $1,396
• 2014 $3,370

Over five years, this older property cost $10,142 or $2,028 average per year.  This is 0.81% of the property value.

A general rule of thumb is that repairs over the long term are around 1% of the property value per year.  So the new property is obviously costing a lot less over the first 5 years.  A well managed property can also run a little under this rule of thumb.

Depreciation

There is obviously no more building depreciation.  Here is a comparison of the depreciation on the new Rototuna example versus the $250,000 older house used in the repairs example.

So over the five years, the new property was allowed $29,914 chattels depreciation, which at a 33% tax rate would save approximately $10,000 in tax.

The older property only had $1,625!

Overall, capital gain, repairs and depreciation are three reasons to look at newer properties long term and to try to build them into your investment portfolio.  Another great reason is they often attract better tenants who cause fewer hassles and make landlording more enjoyable.  But the downside is that newer properties often have lower cash flow, and for them to really work you really need to get the debt down quickly!

Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?