A question we often hear, is it cost-effective to purchase a new build with a view to letting the property out?
With the property being brand new and with no previous tenants or repairs to consider, on the face of it, this seems a good way to attract higher rental income. But, is this potential for higher rent worth the additional cost you are likely to face in the initial purchase price? FJP Investment decided to look into whether you should buy a new build for buy to let.
Before making your investment
Vitally, regardless of whether you choose to invest in a new build or not, the process of purchasing a successful property investment remains the same.
You will need to make sure you have identified the best location for your investment considering your target audience, the purpose for your investment (buy to let, House of multiple occupations (HMO)) and ensuring that legislative requirements will be met. There is a lot of research you need to do here before committing to the purchase of the property.
Beyond this, you will also need to familiarise yourself with the various elements of the off-plan property. Buying a property off-plan means that you need to visualize how the property will look when it is constructed.
Analyzing the maintenance, running costs and eligibility of new-build mortgages will also be required before purchasing the off-plan property.
The new-build rental market
New build property has grown in price significantly in recent years – this obviously instills concerns for those purchasing with a view to renting.
The Government has made commitments to build 300,000 new homes per year for the next five years. Construction levels are reportedly on a ten-year high, although reports suggest we are falling short of this figure, there is still clearly supply increasing.
To match this increase in supply, we have seen a growing demand for property over the last decade. Q1 2019 saw a 31% rise in new applicants for new build property alone.
Investing in new builds
On a basic level, the running costs of the property vs your rental income will be your main measures of investment potential. Will the property be earning more than your running costs? The profit made here will have to be worth your time.
You also have to thoroughly check the specifications for the off-plan property you purchase. You may like how it is perceived to look at the images/drawings, but these can sometimes be deceptive.
Make sure you have the dimensions, build schedule slips and any other supporting information to ensure you are paying for what you are expecting. You may have to reconsider your use for the property, for example, if the rooms are not to a certain size, you cannot operate as an HMO and appeal to your niche.
The benefits of off-plan
Off-plan property is a property that has yet to be fully completed and is usually pre-construction, discussing the property on paper or a model.
Looking at the benefits of off-plan, the first sticking point is the location. Generally speaking, off-plan property is developed in areas that have been researched prior to the developer. They are suited to certain demographics, such as students or families, often with great transport links planned for in advance.
You can also benefit from lower prices when buying off-plan as opposed to purchasing at the new build stage. Prices can be as much as 10% lower when investing in the property before it is constructed.
You may also have some say in how the property will turn out, being able to shape the property with certain additions. This does depend on the developer and the agreement but allows this additional benefit when purchasing in many cases.
The level of capital return achieved on a new build is also a major benefit to the investment, a significant additional ‘invisible’ income in addition to the potential rental income.
Additional benefits of new builds
New builds have the additional advantage of being brand new, this means on-going maintenance such as fixtures and refurbishments will be minimal compared to a standard house. Most come with 10-year warranties too, so you are covered for this period.
You can expect to pay less or have your tenants pay less, on utilities too. New builds are more energy-efficient and this can also be reflected in a higher rental price.
Approaching the purchase
Although new builds are seen as ‘higher risk’, there are plenty of options for securing a mortgage against a new build. You may need a higher deposit than usual, if this is not an option, there are a growing number of alternative lenders in the market that can offer more personalized loans to your situation, usually at the expense of a greater rate of repayment interest.
A normal home insurance policy also will not cut it here. You will have to have a specific landlord insurance policy to offer the key protection needed, this will likely be a requirement for any capital loans also.
Whether you decide that off-plan, a new build or an existing property is the route you take when looking into the world of buy to let, the same key principles apply. Do your research beforehand, make sure you have located the optimal location for your investment, you are certain in its use, and you are protected with the purchase.