Off plan property – are you better off?
Before investing it is important that you conduct specific off plan research, especially if you’re new to off-plan property investment. You might question the valuation that developers place on their new build properties; it’s easy to rush to the conclusion that the premium over other property prices in the area adds up to a big risk on your property investment.
The average ‘new build premium’ is typically around 20%. In this article, we examine why this is so, and ask: is the premium worth it?
How buying existing property as buy-to-let investment works
The biggest advantage of buying an existing property as a buy-to-let investment is its price. That 20% discount to new build seems very tempting. But unless you do some updating and modernisation work, the rent you can charge may be on the low side.
When you first view the property, you’ll probably do so while the current owners are there. Furniture, fixtures and fittings can hide all sorts of problems. When the owners move out, and you occupy the empty shell, suddenly other niggling problems become apparent:
- Chipped skirting boards
- Doors that don’t close
- Wallpaper that is peeling
- Cracked tiles that ‘weren’t there before
- Carpets that are worn underneath the sofa
With the need to replace the kitchen and bathroom to bring the property into the 21st century, you’ve now discovered a ream of small issues that mount up to a rather nasty headache.
This work takes time to complete. And every month of work is a month without rental income − that’s without any unforeseen delays.
Then you’ve got the time between completing the work and finding a tenant. That could be another few weeks.
Before you know it, you’ve lost four to six months of your expected rental income. What had promised to be a positive cash flow investment has suddenly become a money pit as your buy-to-let mortgage payments eat into your capital reserve.
Off-plan property as buy-to-let investment – how does it work
The risk that most off-plan investors are concerned about is the possibility that the new build property won’t be completed, and you’ll lose your deposit. By doing thorough research into the area, the developer, and the new build development, you’ll mitigate 99% of this risk. We always do this research before recommending any new build development, working to an 89-point due diligence checklist.
Assuming the new build development completes, you now own a property that can be let from day one. It is in pristine condition, and so will command a premium rental price. And because it’s new, it should be easier to find tenants. Just as most people would like a new car, most people would like to live in a new house.
With everything new from the beginning, and under builder warranty, your early years’ maintenance charges will be kept to a minimum. And you’re less likely to receive a call from an irate tenant at one in the morning, complaining about a dripping tap or that the central heating has stopped working.
Repair and maintenance costs which buying off-plan avoids
Getting back to finances, here’s how those repair and maintenance costs add up to an existing property:
| Item | Cost (£) |
| Replace the boiler and update central heating system | 1,000 – 2,000 |
| Decorating | 300 – 2,000 |
| Windows and wood (external) | 100 – 1,800 |
| Carpets (replacing or cleaning) | 200 – 2,000 |
| White goods to be replaced | 200 – 1,000 |
| Kitchen needs refurbishing/changing | 500 – 4,000 |
| Bathroom needs refurbishing/changing | 200 – 3,000 |
| Light fittings, fixtures and fittings | 10 – 200 |
| Door locks need replacing | 50 – 150 |
| Total estimated cost | 2,560 – 16,150 |
These costs are just to get the existing property up and running. Your ongoing maintenance costs are likely to be higher, and you won’t have that builder warranty to fall back on should there be any structural or build deficiencies discovered during the guarantee period (normally ten years).
And, of course, you can’t benefit from rent until all the work is done. If this takes three months and then another two months to find, vet, and install a tenant, you could be thousands more out of pocket.
Easing the pain of new build premium
As you can see, new build property quite rightly commands a premium price, just like a new car does. As a buy-to-let investor, you can ease the pain of this premium when you buy a property off-plan. One of the many advantages of buying a property off-plan is that you’ll probably benefit from a discount to market value.
Clients of Gladfish also benefit from five unique property guarantees that reduce your risk – watch this video in which Brett discusses these property guarantees in more detail to discover the comfort level from which you’ll benefit as a client of Gladfish.
In my next post, I’ll provide you with seven questions to ask when buying property off-plan. These will help to reduce your risk even further during your property search.
Call me or one of the team here at Gladfish on +44 (0)207 923 6100 to ask about our current off-plan opportunities, the research that we provide to clients, or how our sales progression process eases the investor through the off-plan buying cycle.
Cheers,
James Cox
