Off Plan Property Investment
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Introduction to Off-Plan Property Investment
Often, a property developer will look to raise cash by selling off properties still under construction.
These are called off-plan properties.
To attract buyers, a developer will commonly offer an early-bird type deal, meaning buyers can pick up high potential properties for a more reasonable (or more rewarding) rate.
For this reason, many look to benefit from off-plan property investment. Such properties are usually in high demand from buyers. In fact, many residential and student developments sell out well before completion due to such strong off-plan deals.
Is Off Plan Property Investment Suitable For Me?
We often speak to new and experienced property investors who haven’t bought an off-plan property before. Whether they choose to go ahead always depends on the individual in question. It is our role to advise and educate investors as best we can, so that you (and others like you) can make an informed, objective decision. As such, we’ve listed some of the key questions you may want to consider before purchasing off-plan.
Many investors want a property they can buy, get a tenant in immediately, and start earning a rental income.
This is a fine and sensible choice, but one downside is that such properties are usually found on the secondary market (i.e. you’re purchasing from the previous homeowner or landlord), which can be much more expensive than purchasing a brand new property during construction.
For those who can afford to wait for an investment to start delivering a return, off-plan often represents a fantastic opportunity to land a deal in which the long-term benefits significantly outweigh the short-term pain of waiting for completion.
It’s undeniable that off-plan property investment represents a risk.
Unforeseen events can affect construction, which may delay the completion date or, in extremely rare circumstances, end construction altogether.
Of course, this is why it’s important to complete due diligence before any purchase – and there are usually schemes in place to protect investors from construction issues – but if you are quite risk-averse then off-plan property may not be for you.
Please note, keep in mind that in the UK, if a developer is NHBC approved (UK National House-Building Council) then both the development and your deposit are guaranteed, which you can fall back on should there be any issues with completion.
Unless you’re buying in full with cash, you’ll likely need to leverage finance.
Off-plan property can be bought with a mortgage, but mortgage lenders will typically only provide a mortgage offer for up-to six months in advance. However, with an off-plan property the estimated completion date is often more than six months away.
So, an investor needs to be pretty confident they’ll be able to get a mortgage when the time comes.
A good rule of thumb in the industry is that if you have lots of lenders available to you now, the likelihood is you’ll be able to get an offer in the future too. However, this depends on the market conditions and your personal circumstances so we always advise speaking to a specialist mortgage advisor before making any decisions.
Why Invest In Off Plan Property?
If, after considering the questions in the section above, it looks like off-plan property could be a suitable choice for you, then below are some of the advantages investing in off-plan property offers.
Off-plan buyers can choose the most desirable and best located properties within a scheme, meaning they have first-access to properties with sought-after characteristics, such as: a high floor location, a corner unit, proximity to courtyard or communal facilities, unusually large living space, a balcony, or an amazing view.
Such characteristics can affect both rent and tenant demand, leading to higher than average rental yields and a better return-on-investment.
Furthermore, in the future these characteristics may be the difference between obtaining an average or premium price, should an investor wish to sell.
During the construction process, developers will typically request a 25-30% deposit from buyers. This “locks in” the sale, with the remainder to be paid once construction is complete.
In the meantime, an investor can benefit from any growth in property value. For example, if the value is £100,000 and the build timeframe is two years, an investor would put down a 30% deposit of £30,000 to reserve the property and lock in the agreed price. However, the property’s value can increase during this time. Say over the two years the value increases by 5% per annum, then the investor will only pay £100,000 for a property which is now worth £110,000.
The investor now has the opportunity to immediately “flip” the property for £10,000 cash profit.
Developers will often incentivise buyer to purchase off-plan by offering a substantial discount on the price, meaning an investor can often end up paying well below the market rate for a premium property.
Furthermore, the discount achieved will likely outweigh the total rental income that could be generated during the same period if an investor purchased a completed property instead.
So, often it makes more sense to invest in a quality, more desirable scheme at the base price from the developer rather than going for something immediately available, even considering the wait for completion.
To get the best properties in a city, buying off-plan is the way to go.
In recent years, investor attention has shifted from London and Birmingham to Manchester and Liverpool. Supply cannot keep up with demand, meaning that all truly high-quality, city-centre property in convenient locations sells out well in advance of completion.
If you don’t want to be left with an extremely limited range of options to choose from, i.e. buying from investors or owners that want to exit at the time, then it’s smart to buy in advance to get the best choice.
Typically, an off-plan property investor will have the choice to sell anytime after the exchange of contracts.
As we highlighted above, this means the investor can instantly sell the property for profit if the market has improved during construction.
Alternatively, the investor can hold onto the property, monitoring the market to pick the best time to sell, all the while reaping the rewards from a consistent and predictable rental income.
Investors can purchase furniture packs tailored to the unit’s size and layout, meaning the apartment is perfectly furnished and ready to rent on completion.
This will drive tenant interest, allowing investors to target tenants who are happy to pay a premium for convenience and luxury.
Sometimes, a developer will offer a deal whereby investors earn interest on their deposited funds over the course of the construction period.
For example, say an investor pays a deposit of £30,000. This may earn 3% interest per annum. Over a two year construction period, the deposit will have accrued £1,800 in interest, which is taken off the final payment (leaving you with less to pay!).
Where To Buy Off Plan Property?
In recent years, there has been a huge investment in city-centre living by developers keen to leverage the high consumer demand for a mix of luxury, location and affordability.
This has led to a surge in city-centre apartment blocks, typically aimed at young professionals wanting to live in close proximity of work or students in need of private accommodation. Either way, a city centre project is usually a good bet.
This is especially so in cities on the up. For example, many off-plan developments are part of regeneration schemes in cities across the North of England, where investors can snag a property at a good enough price to achieve a profitable rental yield, but also benefit from long-term capital growth.
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Frequently Asked Questions
Below you can find a range of common questions from previous investors. If you require specific details and advice please do not hesitate to contact us today on +44(0)203 627 3987 or via [email protected]
An off-plan property is any property in which the construction is not yet complete.
A property is categorised as off-plan until the moment it is signed as off as finished, so a property which is nearly finished and one that hasn’t even started will both be referred to as off plan. With this in mind, it’s important to pay attention to the estimated completion date.
Yes, you will have to pay a deposit on exchange of contracts and will receive an agreement in principle for your chosen property. When the property gets closer to completion your offer will be formalised.
Investing in an off plan property involves four steps:
- Reserving a property within the development by paying a reservation fee.
- Appointing a solicitor to complete the legal process of purchasing a property and transferring ownership.
- Paying the deposit and exchanging contracts. Usually the deposit is no more than 10% and it can often earn interest throughout the construction period, which is deducted from your final payment.
- Arranging a mortgage to cover the final payment as construction nears completion.
In most cases when purchasing property for investment it is more tax-efficient to purchase through a limited company. There are various further benefits too.
We can assist with the full set up and ongoing management of your company and accounts for a low monthly fee – get in touch with the team for further information.
We can look after all aspects of the investment process – sourcing, consultation, due diligence, company formation, mortgage brokers, site visits, construction updates and property management.
Our role is to advise, educate and present the most suitable off plan property investment opportunities. If you would like to discuss your options with the team you can call us on +44(0)203 627 3987, email us on [email protected] or send us a message below.
All information accurate as of September 2021