If you’re nervous about investing, then it might seem too high risk to invest in a property that doesn’t exist yet. But, many investors and buyers have benefited from taking the risk.
The whole idea is to buy at current prices at the planning stage, and when the development finishes, it will be worth more. In a robust market, it’s possible to see profits of between 10-20% from a deposit of 20%.
When to buy
It’s common for large investment companies or groups to be given a first look at ‘units’ that will become the properties, before the plans are made public. The units that are left are then usually offered to private investors. You’ll be able to get all the information from the estate agent and should be able to view a show home or a prototype unit.
A ‘show home’ should show exactly how a typical property in the development will be when it’s complete, and reflect what you will get for your investment once it’s built. It’s best to ‘get in’ early if possible as you’re more likely to get a discount on the price.
You can conduct plenty of research online for new build home developments in the area you’re interested in. You should be able to tell how popular it is by how quickly the units are selling.
It’s vital that you work out feasible rental prices for the area before you commit as you need to know you can cover the mortgage on your investment. Or, if you’re intending to sell it when the price increases, be aware of how many units are being sold to buyers who are planning to let them out. You need to assess the direct competition you will be facing, whether your investing in off plan property for renting or selling.
Here are some things to consider:
• Where is it? – The location is always key, particularly when it comes to assessing the likelihood of making money out of the property. Is it in an area that’s generally being regenerated, for example? Is the infrastructure, such as schools, roads and shops already in place? Are there plenty of new build developments nearby? If so, think about it carefully. If the area is already saturated with similar properties it will make it harder for you to get a return on your investment.
• What’s the price? Clearly you should search the surrounding area to see the kinds of prices houses are going for. However, as you’re buying before it’s been built and you won’t be able to sell or rent for at least 12 months, be aware that the market can change a lot in that time. Sometimes the developer will offer a guarantee on the rental yield for the first couple of years, which could give you more security in the short term.
• Look at the property spec. Study the details, specifications and plans for the property. Make sure that it will suit the target market you are aiming for, whether that’s tenants or buyers. It’s best to visit the development in person if you can to assess the likely vistas from the property. If you rely on computer generated plans, you could miss something nearby that could put renters off, such as an unsightly power station or recycling facility. How to buy off plan
Once you’ve found the development and location you’re happy with and arranged your mortgage, loan or investment fund, you’ll need to reserve the property and pay a fee (usually from £500 to around £1,000).
Arrange for a surveyor to value the property, as your lender will want this information. Complete all the legal paperwork and then exchange contracts. This is the time you pay the deposit (usually between 5-10%).
The importance of forecasting
When buying off-plan property, you must have an accurate idea of what the local property market is like. If you don’t take the time to research the area you wish to invest in, then you will be opening yourself up to a lot of unnecessary risk.
If you can find out that growth is expected short term, then the chances are that buy the time the property is completed you’ll already be looking at profit.
Advantages of investing in off plan property:
• Breathing Space
One of the biggest advantages of investing in off plan property is that you have time to plan how to make your investment work best. Compare this to buying an existing property that needs to be either filled with tenants or marked up and sold immediately.
• Control of the end result
Putting money into a property before it’s been built means there’s a bigger chance you will have some input in the end result. You can make sure the décor and look is how you want it, and add extras if you want to. All of this can increase the value of the property for your purposes, whether you’re looking to sell it on or rent it out.
• Perfect positioning
As with all developments, new ones have prime areas. If you buy off plan then you’ll be among the first to choose exactly where you want your property, rather than having to compete with lots of other people for an already established property.
It’s worth considering practical things like parking, schools, shops and local transport links. All of this will dictate the kinds of buyers or tenants that will be interested in your property.
Are there any disadvantages to off plan investment?
It may sound like it’s an overwhelmingly positive choice for investors, but there are definite drawbacks to be aware of. It’s not the easiest way for everyone as you will more than likely need a cash deposit.
Lots of banks are reluctant to lend money for off plan investment. It’s not clear why financial institutions consider it riskier, but the fact remains it’s difficult to get a mortgage or loan for this kind of investment. But, if you can find the cash for the deposit, buying off plan can be a favourable option.