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Why build new over buying existing?
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Many who enter the existing housing market (rather than purchasing a new home or house & land package) as part of an investment strategy don't appreciate that existing houses do not grow in capital, they grow in inflation. That is to say, if someone purchased a home 10 years ago for $200k, and now it's worth $400k, they have doubled their value.
But if they were to take the proceeds and reinvest in a similar house in a similar market, they would find their purchasing power would not have improved - so no capital gain. There are effective ways to gain capital (as defined by a return above the rate of inflation).
The three types of real estate to gain capital by are:
1. Renovate
A good old fashioned way to get on the property ladder, but often fraught with its own issues, such as leaky homes or over-capitalising.
2. Subdivide
By far the most profitable - but requires lots of capital and lots of patience - not a good definition of the average Kiwi!
3. Build new
A safer way to create capital.
There are lots of tips on how to use new construction to effectively grow wealth. All three of the above have one common characteristic - capital is created, it does not just happen over time.
The key to wealth is the ability to create value faster than everyone else. In fact, my definition of wealth is just that, finding ways to create value slightly faster than everyone else, and over time the compounding affect of this can create substantial wealth.
In summary, a new build creates a return above the rate of house inflation. The key to a successful wealth strategy is to repeat the process regularly.
Ian A. Webb – Managing Director, New Build Home Finance Limited
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