If you’re looking to add to your portfolio, you could go through media like Trade Me or The Property Press. But another way is to buy property off-the-plans from a developer.

Here are four reasons to consider it:

1) You pay today’s price, but get tomorrow’s value

Using the most common type of investment contract, investors agree to pay the developer a price for the property, but don’t make payment until the build is complete, maybe 12-18 months away.

Over that time, the market may have moved, increasing the value of your property. However, you still pay the agreed price.

Say you secured a $500,000 property with a 10% deposit. If this was borrowed from the bank, you’d need to cover the interest costs throughout the build, which would be $34 a week at 3.5% interest.

For that investment, we have seen investors make $30,000 in equity over an 18-month build. That’s an 11-times return on that cash investment.

2) No issues with tenants or maintenance during the build period

During the build phase you won’t have tenant or maintenance issues, yet you still achieve equity gains over that time.

3) The property will be compliant with new tenancy regulations

The government has introduced several new tenancy regulations since coming to power, with more likely to be introduced this year.

These regulations primarily impact investors who own older properties that need more maintenance, so buying new helps investors stay within these regulations.

4) It’s easier to get finance

All new builds are exempt from the Reserve Bank’s loan-to-value ratio (LVR) restrictions. Although there is no minimum LVR set for new properties, it’s standard that an investor can secure a new property with a 20% deposit, as opposed to the mandated 30% deposit for existing properties. That’s an extra 50% deposit investors need to stump up for the equivalent priced property.

There are two types of build contracts that are often used: progressive payments and turn-key packages; investors typically will use a turn-key build.

Progressive Payments

You buy a piece of land and make staged payments to the developer throughout the build. This means your mortgage increases during the build.

The benefits:
• You have control to make changes to the plans and choose what the final product looks like.
• You’ll typically pay less interest than turnkey because you’ll pay the actual interest rate rather than an estimated amount the builder factors in under turn-key.

The risks:
• Because you make payments to the builder, your mortgage increases over time. If the build takes longer, or your builder goes into receivership you would face extensive delays, which would increase your interest costs. This can blow out your interest costs from $15,000 to $30,000.
• There is potential for cost blowouts because many build contracts use Provisional Costing Sums.

Turn-Key Packages

Investors agree a fixed price with the developer under a turn-key package.

The benefits:
• The price doesn’t change, even if building materials increase in price or the build takes longer. This gives certainty to investors.

The risks:
• The timeline could blow out – which is also a risk for progressive payments.
• One way investors protect themselves is to have a sunset clause, which allows the investor to pull out if settlement has not been completed before a particular date.

Many buy-and-hold investors find it beneficial to have brand new properties in their portfolio, both because they come with fewer tenant and maintenance hassles and because you can use a lower deposit to get started. Our general advice for investors is to opt for a turn-key package to ensure they have certainty about the commitment they’re making, but always seek personalised advice before committing to a purchase.