Investing in a property before it’s been built, known as off-plan, in recent years has become more and more attractive to investors throughout the UK and overseas. It’s seen as a way to purchase a property at a discounted price ahead of a price rise on completion, essentially giving investors instant equity in the property once completed.
There are many pros and cons for investing in off-plan property, but as the government is keen to get close to their target of just over 300,000 new homes each year (in order to meet the current, and ever increasing demand), there is no doubt a great opportunity for investors to cash in on this hugely undersupplied market.
https://www.ft.com/content/d8854b1e-bf08-11e7-823b-ed31693349d3
The process of purchasing an off-plan property is not quite the same as purchasing a completed property, but equally its not an overly complex one. Investors generally are required to pay a deposit in order to exchange contracts (typically 20-30%), with the balance of the funds due on completion. Occasionally developers will be required by their finance lender to request an additional payment from investors throughout the development but for the more reputable developers, the bank will be happy with a small commitment. The lower the deposit, the lower the risk for the investor.
More savings equal higher returns
One of the big advantages is that you are securing the property at today’s market value (possibly less), giving time for a significant increase in the value of the property by the time the development is completed. It is not uncommon for some investors to have made up to 100% growth on the value of their cash invested between exchange of contracts and completion.
For example, Investor A commits to buy a property 3 years off plan in Manchester for £200,000.
The cash deposit required is 20% (£40,000)
Growth in the city is approximately 20% over the next 3 years, therefore the value of the unit is now approximately £240,000. The investor could sell the property; take out the initial £40,000 and a further £40,000 profit. In other words a 100% ROI.
Of course, there are no guarantees that you will achieve this growth, so it is important to be investing in areas with strong demand, and with developers who have a track record of delivering high quality properties.
Getting a mortgage
Many investors think it is extremely complex when getting a mortgage on an off-plan property. This is a myth!
It is very possible to take out a mortgage on an off-plan property, although the criteria is different from lender to lender. Remember though, you can’t use a mortgage for your initial deposit. This will need to be cash.
A bit of advice…don’t submit a full application until the development is within 3-6 months of completion. Time and time again we see mortgage brokers advising investors to submit an application (as an excuse to charge their fee up front!), then when it comes to survey, there is nothing for the surveyor to view as the property is not ready yet!
What we always advise our clients to do is secure a decision in principle (DIP) from the lender – this is essentially the lender doing a quick review of your situation and giving you a yes or no. Make sure you declare all of the information they request as you could run the risk of a declined application if you aren’t fully honest about that missed/late credit card payment two years ago.
https://www.which.co.uk/money/mortgages-and-property/new-build-homes/buying-off-plan-a9dt35d6m2hn
Some investors choose to ‘flip’ their properties, which involves buying at off-plan price, then reselling before completion once the value has risen – this is a slightly risky investing strategy – some clients make a lot of money from it, some clients don’t. You will also need to ensure the contract you have is fully assignable if this is your investing strategy.
https://www.propertyhawk.co.uk/magazines/flippin-investments/
Remember, when buying off-plan, always conduct full research into the area, local market, for both rental demand and resale demand. Although it can seem like a daunting process, if you conduct thorough due-diligence, the rewards can far outweigh the risks, and by working with an experienced advisor or investment broker should make things easier.
One final thing to remember, property prices over the last 100 years have doubled on average every 7-10 years (this is through 2 world wars, and multiple recessions). The reason for this is simple…the rate at which new properties are built is no way near as high as the rate in which more humans are being added to the earth! Demand V Supply. When the demand is high and the supply is low, and you hold onto the property…you will always win. And even if prices don’t rise as much as that…you’re still renting it out and generating an income!
http://www.thepropertyteacher.co.uk/house-prices-still-double-every-ten-years-part-two/
If you’d like more information on investing in off plan property, please feel free to get in touch with the team today who will be more than happy to help.
https://tdpropertyinvestment.com