There are many benefits to buying property off-plan in the UK, particularly for investors building a property portfolio. Here are some tips on how to do it the right way.
Why invest in an off-plan property development rather than investing in something that can offer immediate returns is a question asked by many potential investors. If you’re in it for the long-term, off-plan investment has some unique benefits. Typically purchased in the construction part of the building process, buying off-plan is a great way for investors to purchase property at a discounted price, explains Bradd Bendall, Group Sales Director for Carrick Wealth.
A key benefit of purchasing a property off-plan, is that you’re buying at today’s value and only start paying for it once the development is complete. There is potential for surrounding property prices to rise, so you benefit from capital appreciation on the property while it is being built resulting in clear returns for the investor.
Another reason why investors buy off-plan is because they get a multiple on the uplift, says Bendall. “If you buy upfront, you’ll need to pay the whole £250 000 for your apartment, for example,” he explains, “whereas if you buy off-plan and you put 20% down for the first two years during the build period, you’re putting £50 000 in, not £250 000, for the first two years. Let's say the value increases by 10% during the build period, that’s £25 000. Because you’ve only put 50 down, not 250, during those two years, that 25 000 uplift is a 50% return on your £50 000 deposit.”
Buying off-plan also means you’re getting a brand-new apartment in a brand-new building with a 10-year build warranty. A new-build unit is always preferable in the rental market and owners can demand a slightly higher rental than older developments. Choosing an off-plan investment also usually means having your pick of the bunch when it comes to specifications, which helps in your investment strategy if you’re wanting to hold a variety of property types.
As with any investment asset, you’ve actually got to have the money and it’s important to mitigate potential risks. Here is some advice on purchasing an international property:
You need to be in it for the long-term
“The costs of buying property are substantial – stamp duty, legal fees, mortgage fees… so you don’t want to be invested for a year or two. You may not even get your money back,” says Bendall. “The longer you stay in – and ideally you should be looking at 10 to 20 years - the more meaningful your return.”
Choose the right developer
“95% of people selling UK property online are middlemen, not developers,” explains Bendall. “Of course, they act in good faith, but they haven’t got control over the build or the land or the quality or the time.” Choose a developer with a track record. Take a look at the developments they’ve completed. See what the quality is like and what the rental performance is like, because the cornerstone of any property investment is the tenant demand.
Timing is crucial
“What I've learned over the last 30 years is it’s not about timing the market; it’s time in the market. It doesn't matter if you buy at the top of the market or the bottom of the market, your strategy should be long-term,” says Bendall
Some people choose to sell the property once it's completed gaining the immediate benefit of any capital growth that has occurred during the build process. Other investors may choose to rent out the property, achieving higher rental yields and creating sustainable capital growth over many years. Selling off-plan property before completion is also an option for some investors, but it does come with its own risks. Ultimately if you’re in the property market to make money, you should consider this a long-term investment.
Location is key
If you want to stimulate growth within your purchase, it’s all about location. You should also look out for regional regenerations plans which can make transformational changes to your investment surroundings and boost value. Consider potential rental yields if you’re making a buy to let investment. It’s all about sustainable tenant demand, not just now, but in the next 25 years. “Take the time to discover if there is tenant demand in your chosen area. You don’t want your property to be vacant for an extended period of time as this will affect your cash flow,” says Bendall.
Do your research
Research your developer, the location and the rental demand. Get a good independent lawyer to check everything out for you – including that the developer owns the land and has funding, and there are no loans on the land.
Don’t let emotion rule
Don’t look at this from the perspective of what you would like if you were to live there. “It’s not for you,” says Bendall. “You must look at where the demand is. Who are the tenants that will pay your mortgage? Where are the young professionals, the students, universities? Where is the job creation and what’s going to happen in the future regarding values and demand?”
The best strategy to ensure profit is time, summarises Bendall. “The longer you’re in, the more profit you’ll make. Also ensure there is tenant demand. Let the tenant pay for the mortgage and then just let it sit and cook for you.”