What’s better for rental income – new build properties or existing?

Savvy property investors know the answer

One of the decisions you’ll need to make as a property investor is whether to invest in new build or existing properties. Investors who are committed to older properties extol several advantages of doing so, including:

  • You don’t pay the builder’s profit margin in the price
  • Opportunities for renovations and refurbishment are opportunities to add value
  • You have historical data which eases price discovery and confirmation of value
  • Well selected existing properties are less likely to fall in price in a market downturn

While the above may be true, all of these advantages are centred on the potential for capital growth. The arguments in favour of older, established properties rely on the same fundamentals for capital growth as new builds. If you buy an existing property in an undesirable area, it is likely to perform worse than a new build in a sought-after location.

What about the choice between new build and existing as a long-term investment for rental income?

In this post, I’ll examine five undoubted advantages of new build over existing for the buy-to-let investor.

1. New build properties are lower cost for tenants

In general, new build apartments are built to higher standards of quality than homes built, say, 30 or more years ago.

Properties built today benefit from being more environmentally friendly. They have energy efficient windows, better insulation, and lower-cost amenities such as modern central heating systems. It translates to lower running costs for the tenant.

2. A better finish attracts a better tenant willing to pay a premium price

The majority of people prefer new to second-hand. New appliances, pristine decoration, and carpets that have never been walked on are all reasons for premium pricing. Most tenants are willing to pay a premium rent for brand new living space. A property that has never been lived in really is one that a tenant can call their own.

Often, it is the new build properties that attract the better quality tenant willing to pay higher rents – directly impacting the capitalisation rate and the return you should expect from your investment property.

3. Lower void periods

Better quality homes, attracting better quality tenants, tend to have fewer and shorter void periods when your property in untenanted. Tenants stay longer, paying higher rents, and when you do need to find a new tenant, it is easier to ‘sell’ a newer property to the next high-quality tenant.

4. Lower repair and maintenance costs

I used to be one of the car owners that would never buy a new vehicle. Like my father, I used to think that buying new was a waste of money – after all, don’t new cars depreciate as soon as you drive them off the forecourt?

Then I bought my first brand new car. I had become fed up with the weekly repair bill, one that only seemed to grow. Within a couple of weeks, I was converted. My new car may have been more expensive to buy, but I suddenly found my repair bills had disappeared. Plus I had the peace of mind of knowing that I was driving a vehicle that was under manufacturer’s guarantee.

New build property benefits from lower maintenance bills and builder guarantees. Plus, tenants naturally want to look after a new property better – it’s human nature.

5. New build properties offer the buy-to-let landlord better rental income and cash flow

The combination of the above four advantages of new build creates better and more consistent cash flow for the buy-to-let investor. You should suffer lower void periods, command a higher rent, and be subjected to lower maintenance costs. Your rental income should be higher, and your costs should be lower. Where this is the case, your capitalisation rate is higher as you benefit from higher positive cash flow.

Not all new build is created equal

Any property’s value depends on some elements. These include location, local amenities, infrastructure, and proximity to transportation, as well as the property itself (size, the number of bedrooms, etc.).

You already understand this. Making sure these property fundamentals are in place is part of your research and due diligence process.

There is a well-established trend (especially among millennials) for people to choose inner city living. It’s close to work and close to entertainment. However, inner city land is scarce and will become scarcer in the future. It will naturally increase the premium on inner city land and property. And in market downturns, it is the luxury and high-priced end of the market that is affected first. The majority of these will be existing properties.

As a savvy investor looking for long-term potential and higher-than-average, consistent rental income and cash flow, what would you rather invest in new build or existing properties?

To find out about the extra benefits of buying off-plan property, contact the team at Gladfish on +44 (0)207 923 6100 today.

Live with passion,

Brett Alegre-Wood

Brett Alegre-Wood
October 24, 2016

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