Investment Education – 35,000 reasons to laugh at the scary new build premium

Why more investors are buying off-plan property

When you’re considering new build property investing for the first time, it’s easy to flinch at what’s called the ‘new build premium’. After all, a residential investment property is a residential investment property, right? Why is it that just because a property has only just been built, it should be so much more expensive? Good question, is it like buying a new car?

For property investment opportunities, you may be considering new build If you are, one of your biggest concerns may be if the new build premium will disappear should you sell.

In this article, I’ll explain why there’s a premium on new build property. You’ll have a better appreciation for how the premium doesn’t disappear overnight like it does when you buy a new car. I’ll also introduce you to how to strip some of the new build premium from the price you pay for your investment property.

How much is the new build premium?

The premium on new build property varies from one development to another. It also varies with the property and economic trend cycle. When the economy reverses, and growth slows, the new build premium can even disappear! Developers want to sell their properties as quickly as possible.

It is one reason why some property investors are keen buyers during economic downturns. There can be some fantastic new build investment bargains when other investors and home buyers are running scared of financial commitment.

At the present, the average new build premium sits between 15% and 20%.

Why do new build properties usually cost more than existing property?

A new build property benefits from the most up-to-date build technology, materials and design. It’s greener, cleaner, and more energy efficient than a property which is twenty, thirty or more years old.

So, when you buy a new build, everything will be new:

  • Windows, doors, roof
  • Central heating and air conditioning
  • Kitchen appliances
  • Flooring
  • Cupboards and wardrobes
  • Water system

Some if not all will come with warranties or guarantees for even ten years.

With an existing property, there are no such guarantees. Of course, you can update an existing property, but that’s going to cost. In fact, the likelihood is that you’ll need to replace more than you think, a lot sooner than you think.

Replacement costs on existing investment property

Here are some of the major improvements or replacement costs you are likely to incur when you invest in existing investment properties:

·         Central heating

A few years ago, the rules on acceptable standards of piping in central heating systems changed in the UK. Before this, if your boiler broke, you only needed to replace the boiler. Now, if you have old piping, the likelihood is that it will also need to be replaced when an old boiler is replaced.

According to householdquotes.co.uk, the average cost of replacing a central heating system ranges between £2,350 and £3,580. However, this cost can quickly escalate, depending on your choice of boiler and style and size of radiators. And don’t even think about that plumber’s whistle when you ask him how much it’ll be in total.

And here’s something else to think about: central heating systems tend to last between 15 and 20 years.

·         Flooring

Depending on the age and state of the investment property you buy, at least some of the flooring will probably need replacing. If you’re lucky, it will be just a few carpets. If you’re unlucky, you may need to replace a few floorboards or even all the floors in the property.

Cost could range from a few hundred pounds to several thousand.

·         Roof and guttering

Depending on the extent of roof damage (roofs last an average of 25 years) you could spend thousands on fixing a roof. Minor damage will cost around £200 (which.co.uk). To replace a slate roof on a four-bed detached house will cost an average of more than £8,000.

If the soffits and fascias need replacing, you’re looking at another £2,500.

·         Windows and doors

The costs for windows and doors varies depending on several factors. These include:

  • Material
  • Style
  • Types of glass (Double, Triple glazing, gas filled etc)
  • Type of window (Georgian, bay, sash, etc.)
  • Finish

Energy efficient windows and doors (to bring a property up to the standard of a new build) are more expensive, too.

A typical uPVC will cost around £400 fitted, and a door between £500 and £1,000. If your property has ten windows and two doors, you’ll be looking at spending around £6,000 to replace them all.

·         Kitchen and bathrooms

A new kitchen, with new appliances, units, worktops and flooring could set you back an average of around £7,000. Also, since 2008 your kitchen must have a residual current device. If it doesn’t have one, there will be extra rewiring costs to be added.

Even before you’ve got around to decorating, and painting inside and out, you could be looking at an upgrade cost averaging around £30,000.

And, on top of this, you won’t be able to rent your property out until all this work is finished. That’s probably two to three months’ loss of rent. At a UK average of £888 rental payment per month, that works out at almost £2,700 in lost earnings.

And during this void period, you’ll still have to pay your mortgage. And the council tax, utility bills, and other costs.

All this considered you could be looking at total associated costs of around £35,000 when you buy existing property as an investment.

Suddenly, the 15% new build premium doesn’t seem quite so excessive, does it?

Is investing in new build property worth the premium?

Of course, when you buy existing property as an investment, you’ll control what you replace and when. However, it’s likely that you’ll need to spend money on repairs, maintenance and improvements like those we’ve discussed above within the first few years.

Then there’s the premium on the rent, which we haven’t yet discussed. New build properties tend to command higher rents. What would you rather rent if you were a tenant:

  • a brand new, never-lived-in apartment with all mod-cons; or
  • a tired flat with second-hand appliances and higher utility bills?

When you do sell, your investment property will no longer be brand new. But a property that’s six or seven years old, with all the benefits and features we’ve discussed, will still be in more demand than a 30-year-old property.

How to buy new build for less

Buying new build makes financial sense:

  • You’ll have lower maintenance costs
  • The property will be guaranteed by NHBC warranty
  • You should benefit from higher rents
  • It should have a higher resale value than older investment properties

You can get all these benefits at a discount to market value by investing in off-plan property.

We negotiate early-stage bulk purchases from property developers selling off-plan property. We work with developers that we trust and buy in locations that we’ve fully researched for investment potential. When we agree prices with developers, we can achieve some eye-popping discounts.

To discover just how large those discounts could be, and how investors benefit when they invest through Gladfish,  contact one of our team today on +44 207 923 6100.

Live with passion

Brett Alegre-Wood

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

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