Do New-Build Developments Make
Good Buy-to-Let Investments?
Do new build developments make good buy-to-let investments? Well yes, they do, but you shouldn't get distracted from the fundamental principles of investing in property. For any buy-to-let to work in the long term, rental yield needs to be high enough to cover your running costs or you will lose money very quickly.
Is Buying a New Build a Good Investment?
When you have been looking for property investment deals you will certainly have seen a whole range of new build developments and off-plan properties which could have been either houses or apartments, or both.
The question is, do new builds make good investments or not?
Investing In Off-Plan New Builds
Off-plan property means, simply, that the property has not been finished, insofar as it is not ready for tenants to move in.
The problem with investing 'off-plan' is that things can change as the development reaches completion. The development schedule might change or the works themselves. The value of the property could change.
So that's one thing you need to factor in with this kind of investment; the likelihood of change. But here, let's step back and look at new build investment as a strategy in itself.
The Fundamental Principles of Property Investment
When you are looking at new builds, with an eye to investing - whether they are on the market with estate agents, or off-plan and brought to your attention by a property sourcing agent - you should never lose sight of the fundamental principles of property investment.
So, you want to understand the area and be happy that it works for you. You need to understand the rental yield, the capacity for growth, the rental demand and the discount you are getting.
You need to take everything into account to see if a property is going to be right for you.
The truth is, that some new build developments can have quite low rental yields. Some developments I have seen have had yields as low as 3% or 4%. Now, that's far too low for a long-term buy to let strategy. With yields as low as that, and if you are mortgaged, your monthly income is either going to be less than your monthly expenditure or will barely cover it.
You have to check that the sums work in the long-term. Your rental income has to cover your running costs, your maintenance, your management fees. So, with any buy to let property, and not just new builds, you need to make sure that everything is balanced, that you have a contingency factored in, and that you are still able to turn a profit.
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New Build Developments
We, certainly, see a lot of great off-plan new build developments. They are in the right locations, have the right tenant profile and have the right long-term potential for growth.
But I stress again, if you are considering these kinds of properties then, most importantly, you have to ask yourself, will the yields work, given your situation?
You also need to have a look at the developers undertaking the work. What is their reputation like? Do they have a long history, as a company, or are they relatively young? Do they have the right kind of pedigree?
And you need to think about time-scales. So, how long is the development going to take? The truth is, if you are buying a property that's going to be completed in a few months then it's going to be a lot easier to crunch the numbers than if the property isn't going to be ready for a few years. After all, a lot can change in terms of rental demand, house prices and the location in a few years.
The flip side to this is that you can often buy a property at a much better price if you buy earlier on in the development process. So it's a trade-off between gains and risk.
Maintenance and Running Costs
One advantage of investing in new build developments over existing housing stock is that new builds tend to be more energy-efficient and are therefore cheaper to maintain.
The existing, historic housing stock in the UK is great. It's very stable, longstanding and in the right areas, there is a lot of tenant demand.
But, the reality is, that if you buy a typical two-bedroom terrace or three-bedroom semi-detached, if it has not been through a recent refurbishment, the roof might be getting towards the end of its life.
This is not going to be a concern if you are buying a new build.
Then, there will be other problems with older houses such as the electrics, plumbing, the boiler, bathrooms, kitchens or the decoration. These might all be slightly dated.
All these things are fixable but there will be a cost, both financial and with regards to your time. A new build development, however, will not need any of this work doing and could be income generating on day one of your tenancy.
So, if you are considering a new build you need to weigh up the pros and cons. Certainly, new build developments can have lots of potential benefits and if it's the right deal, the right location, the right yield, the right tenant profile, then, absolutely, consider looking at new build developments over existing housing stock.
Snagging
A word of warning, however. While new-build houses or flats may be more energy efficient, have fewer problems and can generally cheaper, in the long run, to maintain, they are unlikely to be in a perfect condition at the point of purchase.
A survey by Shelter conducted a few years ago, found that just over half of all new-build houses have major faults or flaws.
As such, when buying a new-build house it is always a good idea to do a snagging survey of the property. That way you can identify what needs to be done, giving the developers the chance to put things right.
My biggest concern is uncapped service charges/ground rents. How do people get comfortable with this? I have seen properties in city centres pulling in say £6-7k income but with £1500-2000 pa service charges (not even management fees, actual service charge for running the building).
That’s a scary amount of rental income to give away vs a freehold and with inflation it’s technically uncapped. Yet these new builds keep selling like hot cakes. Am I missing something?
It makes sense in London where rental income is c £18k pa, but in lower rent areas surely it doesn’t make sense?
Hi Anthony it’s a valid point and is important to check the service charges and ground rents and make sure they don’t do anything silly like double in value every ‘x’ years or are very high to start with. There will always be a maintenance cost of a building and apartments are no different to houses with having to forecast a possible future cost, the upfront and more established nature of new build apartments maintenance costs make them stand out to existing houses where it is likely more of an unknown, so forecasting like for like deals is very important so you can see what the true yield and return will be.
If it helps we have forecasting sheets and videos in our Fast Track training here –
https://www.propertyinvestmentsuk.co.uk/fasttrack/
Im considering buying a new build flat (already completed, not offplan) in a town centre location , its a 2 bed but has no allocated parking space as seems to be the case with new builds in town centres. Is this still a wise investment?
Hi Kris,
It’s hard to say for definite as there are so many variables.
Things to consider could be
– What is the competition like for other apartments to rent and buy in that area, do they all have parking spaces and is yours unusual, or is no parking not an issue for the local market and is expected
– Do the yields and buy price make sense and work for you
– Whats the reason for sale if it’s a completed new build, how long ago was it completed and any issues that you can see
Here is a good checklist to help get you started
https://www.propertyinvestmentsuk.co.uk/investment-property-checklist/
Hope that helps
It’s not usually a problem if it doesn’t have parking. As you yourself have said, parking is nearly always an optional extra with new builds, and in London, developments are not allowed to offer more than 40% parking, so a full 60% of the flats will not have a parking space to go with them anyway. Check that transport links are very good, however. If you’re going to rent it out, many tenants will not have a car, but they will want good transport links pretty much on the doorstep. One very important point about completed new builds is that they very often lose their shine quickly, i.e. they start looking dated within a couple of years, and new stock comes on the market which only accentuates the difference. Therefore, in my experience, you’re often taking possession of a depreciating asset in new builds, and you’re not getting the benefit of buying offplan with the attendant discounts that you often get for that. In other words, you’re paying top dollar for an asset that is likely to lose value over time. One general disadvantage of new builds is that you can’t add value, as you can with houses, and therefore you can’t remortgage at a higher value six months up the road, as you would be able to do with a house that you’d improved through renovations or extensions. One final point is the – often – huge service charges you have to pay (on top of the ground rent, as you don’t own the freehold as you do with a house) – service charges really eat into your rental return and they can be increased, often by a lot, from one year to the next, thus also lowering the resale value of the property. For these reasons I would stick to offplan apartments and houses. I wouldn’t buy already completed new builds – the guy selling it is probably wanting to make a quick profit on the uplift, and you’re the muggins who’s missed out on that and, as I say, is now lumbered with a depreciating asset. Stay away. There are better options for an investment.
Hi Adiel,
From what we are seeing with new builds, both on personal experience and also data from across the UK, whether or not a new build is a depreciating asset, is very much determined by the local market. If the local market has stayed static or has gone down in value, then like other properties the new builds will too. If the local market has increased in value then like other properties new builds will increase also.
Add to this the context of the purchase prices , ie: if your purchasing at a discount whether it is an existing build or a off plan development then you can lock in value that way.
It all very much comes down to the detail of each deal, but we have seen and continue to do so, some very good new build developments and if you buy with the right fundamentals they have been performing very well
Hope that helps