How staged payments accumulate off-plan property profits
There are many reasons that property investors like me love investing in off-plan property. These include:
- locking in a discount to today’s market value;
- the choice of the best property on a new development; and
- the value of time until completion.
It is the last of these that unlocks what I call the secret benefit of off-plan property: the incredible property investment gearing potential it provides.
It’s all about the off-plan property deposit
Investing in off-plan property is more accessible than investing in existing homes, because of the way in which it works. Let’s say you are considering an investment of £250,000. To buy an existing property at that price, you’d need to secure a buy-to-let mortgage with a deposit of around £75,000. Typically, the deposit needed at the time of purchase for an off-plan property of equivalent value is 10%, or £25,000.
So, the property investor who buys off-plan property gets to keep more of his or her money in the bank for longer. With staged payments, you’ll know when money needs to be withdrawn (or a buy-to-let mortgage needs to be drawn down), and so you get to earn interest on the excess deposit you haven’t used (or pay less interest on the amount of mortgage you haven’t drawn down).
Plus, because you’ve bought off-plan property at a discount to today’s market value (let’s say 10%, for the sake of argument), you’ve actually put a £25,000 deposit on a property worth £277,000 in today’s market.
Maximising gain by leveraging off-plan property investment
As the off-plan property progresses through development phases, you may be required to make stage payments. These pay for the development and building costs up to each payment date. The development time is often 12 to 36 months, so the property investor is able to budget finances in advance.
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The last payment is the largest, and here’s where it gets really interesting for the off-plan property investor. If you don’t want to own the property as a buy-to-let landlord, you will have the opportunity to sell it before you need to make the final payment. So let’s look at how the numbers stack up:
- You’ve bought an off-plan property with a £25,000 deposit. The property is worth £275,000 in today’s market.
- Through the next 18 months, you pay another £100,000 in stage payments. Your investment to date is now £125,000.
- Three months before completion is due, you research the market and find that the value of my property is now £325,000.
- You decide to sell the property before you have to make the final payment, grossing a profit of £75,000 less costs (£325,000 minus original purchase price of £250,000).
- My profit equates to a return of 60% in less than two years!
Of course, it might be that you’ll decide to make the final payment, keep the property, and benefit from the higher rental income achievable on new build property.
If you do decide to invest in off-plan property and use a flip strategy, keep in mind that there may be capital gains tax to pay – though there are strategies for reducing capital gains tax on investment properties.
So there it is; part of the secret of my success. Always invest in quality off-plan property, in a location that you’ve researched thoroughly, and invest with a keen eye on cash flow.
What success have you had as a property investor in off-plan property? Have you ever invested and wished you hadn’t? Have you had a review of your property portfolio to make sure its performing as it should, and that it will continue to do so?
As always, the team are here to talk you through anything you need, we’re here to support you to secure the best off-plan property available. Call our team on +44 (0)207 923 6100 and discover why our clients invest in only the best property opportunities?