New build vs. existing vs. off-plan property investment
As a residential property investor, there are three main routes to property investment gold:
- you could buy recently completed new builds; or
- off-plan property; or
- existing property.
Some property investors swear by existing properties, renovating them and then renting them out, or flipping a property investment for profit. Others won’t touch anything but new build, understanding their appeal to tenants. So what is the best property investment for you? Here we answer some questions that clients often ask us, highlighting the difference between property investment in new build and property investment in existing properties.
What pays the best rental return: new build or existing properties?
While the location is key, and a chief determinant of rental income, so too is the property. Its condition, state of white goods and energy efficiency all impact the amount a tenant is willing to pay in rent. Generally speaking, new build properties offer the highest rent on a property investment.
Don’t new build properties cost a lot more than existing properties?
There is certainly a premium on new build properties, or a discount on existing, depending on your viewpoint. This is because new build properties offer some benefits that existing properties can match.
For example, a new build property comes with builders’ guarantees – NHBC guarantees on structural quality, for example – which offer the property investor the peace of mind that an existing property simply doesn’t.
So renovation costs come into play?
With a new build property, the property investor is buying a ready-to-rent home: the white goods (if included) will be new; decorating done by professionals; the structure sound; and it will have that never-lived-in appeal.
A property investor might be able to buy an existing property at a discount to market value, but the likelihood is that it will need to be renovated in some way. Modernisation costs to bring up to the standard might include a new kitchen, new bathroom, central heating replacement, decoration, and perhaps even some work on the roof or other structural aspects. This all has to be budgeted for (and budgets have a tendency to be blown through), but there is also a time cost, too.
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It could be months before an existing property is ready to be let to tenants, and every week spent refurbishing is a week’s rent lost − and that will play havoc with property investment cash flow projections.
What about maintenance charges? How will they impact my cash flow?
New build properties tend to have way lower needs for maintenance. It could be years before any work is required on the electrics, water pipes, or central heating. As far as property investment costs are concerned, new builds are very user-friendly.
Existing properties need a much higher degree of TLC. This also means, of course, that the property investor will probably get a lot more calls from disgruntled tenants whose hot water isn’t working at 7 pm on a Sunday.
Fortunately for property investors who own existing properties, maintenance charges can be offset against income for tax purposes… but the cost still eats into profits, and the tax saved doesn’t make up for the time spent chasing tradesmen and ensuring that maintenance is completed correctly. (This is one reason why property management is so important for property investors.)
What about off-plan property in London?
With a property investment in off-plan property in London, you might get the best of both worlds. You’ll have all the benefits of investing in new build property, but also many off-plan property investors are able to buy at a discount to the price that property investors pay when the new build is completed.
Though there will be a time lag between deciding to buy and owning a completed new build property ready to let to tenants, the discount works to the property investor’s benefit in a number of ways, including:
- Staged payments can help with cash flow before completion is due.
- The price is calculated at today’s market value, meaning any increase in value immediately generates profits if the property investor sells.
- Some contracts might allow the property to be sold before completion.
For the investor investing in property in London, there are a number of superb opportunities right now. If you’re investing in a location that is benefitting from regeneration and infrastructure development, you’ll give yourself the best chance of profiting from the undeniable market fundamentals that London property has to offer now and in the long term.
Contact us on +44 (0)207 923 6100. – we’re happy to help.