Secrets You Should Know About New Build Properties
Why you need to be careful with New Build Properties
If you’re considering buying an investment property you’ve probably wondered about the pros and cons of buying Off-Plan or New Build versus pre-occupied; as someone who has bought and sold both types of investments and advised clients, family and friends I want to share my experience with you before you make any major property investment decisions.
Admittedly there are a number of advantages to buying Off-Plan/New Builds, especially if you’re looking at properties that aren’t local to you and want a low-touch long-term property investment – but it doesn’t come without some major disadvantages.
Firstly let’s consider the property investment strategy of ‘flipping’:
Flipping is where you buy a property (or properties) from a developer that hasn’t actually been built yet (hence the term “Off Plan”), then on completion you would sell (flip) for the current market value which is often more than the price you initially paid (sometimes significantly so!).
For example let’s say you bought a New Build property for £120k Off Plan and then sold it on completion for £170k, giving you £50k in capital gains – sounds good, right?
While it’s true that you could use such a strategy and some property investors have made major profits doing so, it requires a few assumptions to hold true, like:
You are being offered a genuine “Off Plan” price rather than a price that has an additional premium added to it (thereby paying too much for the property at the outset)
The value of the property market you’re considering investing in is growing, quickly – if it isn’t you could be left with a place you now can’t sell (or can’t sell for a reasonable gain) and if the rental yield isn’t great you’ve now got money tied up in a property ‘investment’ that isn’t delivering a worthwhile return and could potentially cost you money!
You don’t have much competition – if you’re trying to enter a market with lots of other investors flipping properties you’ll struggle to find properties that will deliver a good return
The Return on Investment stacks up when you consider all associated costs – after you take into consideration the purchase costs (legal fees, surveying, mortgage fees, stamp duties etc.) as well as re-sell fees (estate agent, legal fees) will you still make a significant profit even after you’ve paid Capital Gains Tax?
The unfortunate reality is that the UK presents few opportunities where the above assumptions hold true; the UK property market has few properties available where you could expect to buy cheap and sell for significant margins and the property market overall is not increasing quickly enough to cover your entry and exit costs and make a reasonable profit. Flipping is a high-risk property investment strategy that I wouldn’t recommend you pursue.
However, I would still recommend that you consider a New Build – but not for the purpose of flipping, let me explain…
If you are consider buying a New Build with a view to renting out the property, you’ll have several advantages, such as:
The property being new! Blindingly obvious I know – but new means new plumbing, electrics, flooring, kitchens, heating systems, bathrooms, fresh paint on newly plastered walls, new roof, the communal halls, gardens, car parks are all….you get the picture! Like any property you’ll still need to do ongoing maintenance but your property won’t need cosmetic or structural work done before renting it out – meaning you can find tenants straight away
You can customise the look of the interior – often when you buy a New Build you can decide on the fixtures and fittings and some developers allow you to select the type of flooring, kitchen and bathroom you’d like
No need for gas safety certification – many New Builds (flats especially) tend to be more energy efficient and often don’t have gas running into the property, meaning they don’t require a gas certificate, something you may also consider advantageous
Structural warranty – when buying new, you are often given a 10-year NHBC warranty covering structural defects and some developers even provide their own two-year warranty
No upward chain – because you’re not waiting for the seller to find another property you don’t run the risk of them changing their mind or trying to
co-ordinate dates with other buyers and sellers. The developer may push you to meet their deadlines but they are willing sellers who want to get the transaction completed as quickly as possible
99-125 year leasehold – if you’re buying leasehold (typical with flats), you’re buying it on a new lease; leases vary in length depending on the seller but are commonly 99-125 years
Despite all these benefits there are other disadvantages that you need to evaluate before deciding whether to invest in a new build (or not), let me walk you through them:
Price, ouch! When buying a New Build property you are paying a premium – much the same way you do when buying a new car, the colour specification, tinted windows, satnav and alloy types diminish in value the moment you leave the forecourt, property is no different. While this doesn’t make New Builds a ‘bad’ property investment, it does mean you need to consider it a long-term investment as you wait for other ‘second-hand’ properties to catch up in value. You can also expect to receive a premium rental income on a new property – but it’s not proportional and the yield is generally lower
Service charges and fees – If you purchase from a developer you’ll need to pay ground rent and service/maintenance charges to the company managing the development. Management companies like to have a slush fund for emergency works and this needs to be built up by leaseholders. Bear in mind that the more facilities a development has (lift, concierge, underground parking, communal hallways, gardens etc.) the higher the charges will be
Competition for tenants – when you take ownership of your New Build so too will other buyers, many of whom will also be looking to rent out their properties, this means there will be ample supply which generally forces the rental price down; expect a void period if you’re not willing to negotiate on rent! Take your cues from experienced landlords who minimise void periods by pricing according to market conditions and look to increase rent either at the end of the initial tenancy or during a rent review – losing £50 a month in your first tenancy is a lot better for your cash-flow (and sanity!) than having your property untenanted for two months
Size matters! – when you’re looking for Off Plan investment properties you might struggle to get a feel for the property, spatially. When you buy from floor plans and computer generated images (or even a show home) you can be disappointed with the end result and realise that the cost per square foot/metre is actually quite expensive by comparison. You may have been considering renting it out to two single professionals but now realise that you won’t be able to fit a double bed and wardrobe in each room!
Higher deposits, financing and market variability – if you’re buying Off Plan you are required to place a holding deposit down when you reserve, and exchange contracts a month later with a 10% deposit (less the holding deposit already paid) with the balance coming on exchange and completion; if the gap between exchange and completion is a relatively modest period this is all well and good, however bear in mind mortgage offers only last a limited time which means you can’t secure the finance till nearer the completion date. You could find you have to put down a higher deposit than what you budgeted for, or the interest rate isn’t as favourable now as the mortgage market has changed
Under construction – while it’s great to have all new everything and builder’s guarantees, not all problems show up during the snagging survey and some developers have terrible after-sales service, if any! Also be mindful of buying in the early phase as although your property might be ready the site could still be under construction – not ideal for tenants
Lower rental yields – Off Plan investment properties have a lower yield than their pre-owned counterparts, this isn’t necessarily a problem if you want something low maintenance and are focused on the potential for capital growth – but it may mean you have to put down a bigger deposit as the rental calculation may not fit the mortgage lender’s requirements
In summary unless you are getting a verifiable, significant discount from a developer I’d take a wide berth in investing in New Builds. Developers will generally negotiate in the very first sales - or the last few – so it’s wise to try and compare notes with others who are also considering investing in the same development and ensure the numbers genuinely stack up in your favour after all costs and possibilities have been taken into consideration.
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